Sustainability reporting in Europe: What you need to know

Sustainability reporting in Europe has jumped in importance, with far more emphasis coming from new laws and standards. It’s now a crucial component of corporate governance both within the European Union (EU and for many companies outside it that do a lot of business within its borders. Vast numbers of businesses are now required to keep closer tabs on their sustainability plans and activity, record it, and report on it in a way that meets international standards. This guide provides an overview of the EU's fundamental rules governing sustainability reporting. Crucially, it also unpacks the many acronyms that apply to corporate sustainability and how they relate to each other. Sustainability reporting in Europe: what are the main rules? In recent years, the EU has developed robust regulations to support its ambitious goals around sustainability. Central to this framework are three things: The Corporate Sustainability Reporting Directive (CSRD) The Non-Financial Reporting Directive (NFRD) The European Sustainability Reporting Standards (ESRS) Who do the rules apply to? Each directive clearly states the kinds of businesses that must follow the new rules. There are subtle differences, but in general, the rules are likely to apply to most larger companies but a much more modest proportion of smaller companies. Meanwhile, they are also likely to apply to many large businesses outside the EU due to the amount of business they do inside the bloc. If you’re a corporate leader unsure whether your business needs to comply with the directives above, do some quick research to make sure. What are the penalties for non-compliance? Most European sustainability reporting rules are “directives.” This means that the EU sets the standards it wishes to achieve, and every member state creates its own laws to achieve those standards. For that reason, penalties can differ across borders. However, the following are extremely common and should be expected: Financial penalties Restrictions on trading or access to funding Reputational risk Exclusion from public processes like grants or procurements Follow-ups with regulators which could suck away capital and staff efforts What do all the EU acronyms mean, and how do they relate to each other? If you feel like you’re drowning in acronyms regarding EU law, don’t worry; you’re not alone. Here are some brief explainers: What is CSRD? CSRD is a directive by the European Union designed to standardise how European companies report on sustainability-related information. It requires companies to disclose detailed information on operating and managing social and environmental challenges. This includes reporting on sustainability risks and opportunities, the impact of the company’s operations on the environment, human rights, and diversity, among other ESG criteria. What is CSDDD? The Corporate Sustainability Due Diligence Directive (CSDDD) requires companies operating within the EU or dealing with EU-based markets to be accountable for their record on human rights and environmental impacts. This includes both internal operations and external value chains. CSDDD essentially covers standards for corporate behaviour, while CSRD covers standards for reporting on most of this behaviour. Both are designed to complement each other. What is ESRS? The European Sustainability Reporting Standards (ESRS) are detailed guidelines that operationalise the requirements of the CSRD. These standards specify what companies must report on, including key performance indicators related to climate change, biodiversity, social issues, and governance. What is NFRD? The Non-Financial Reporting Directive (NFRD) preceded the CSRD and laid the foundation for sustainability reporting in the EU. It required large public-interest companies to disclose information on how they manage social and environmental challenges, such as reducing carbon emissions and promoting diversity in the workplace. NFRD rules will no longer apply once CSRD is in full force. What is ISSB? The International Sustainability Standards Board (ISSB) plays a global role in developing sustainability reporting standards. While not EU-specific, the ISSB’s standards are expected to align with the EU's sustainability efforts, offering a globally consistent approach to financial and non-financial reporting. What is TCFD? The Task Force on Climate-related Financial Disclosures (TCFD) provides a framework for companies to disclose climate-related financial risks. The EU has adopted many of the TCFD’s recommendations, incorporating them into the CSRD and ESRS to ensure that businesses assess and report on the risks and opportunities posed by climate change. Sustainability reporting in Europe: In summary As a corporate leader, your job is to ensure a basic understanding of the above terms and how they relate to each other because it’s very likely you’ll have to follow the rules associated with them. Don’t be alarmed if it all seems too much at first. Many of the modern EU rules around sustainability reporting are designed to help companies streamline compliance in the mid to long-term, so while you might need time and training to find your feet, it will be worth it.

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