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EU sustainability reporting and assurance rules move closer

Author: ICAEW Insights

Published: 16 Mar 2022

MEPs vote in favour of a common text on the Corporate Sustainability Reporting Directive including provisions requiring companies to employ a statutory auditor to express an opinion on sustainability reporting.

Two important milestones in the legislative scrutiny of EU proposals aimed at beefing up disclosure of non-financial information have been reached, with EU member states coming to a common position on the draft Directive in late February, with the European Parliament following this week. 

The legal proposals seek to address shortcomings in the existing non-financial reporting rules, seen as potentially hindering the transition to a sustainable economy. MEPs on the key Legal Affairs Committee voted overwhelmingly in favour of a common text on the Corporate Sustainability Reporting Directive (CSRD) and supported the opening of inter-institutional discussions with the Council and Commission. 

MEPs voted to amend the scope of the Commission’s original proposals, to exclude listed SMEs while including large non-EU companies operating in the internal market. The agreed text calls on the Commission to establish additional reporting criteria for companies in high-risk sectors – textiles, agriculture, mining and minerals – while suggesting a one-year delay to the date of application, with the first public reports due in 2025 on 2024 data. 

MEPs also narrowly voted in favour of provisions which would require companies to employ a statutory auditor other than the one carrying out the audit of financial statements to express an opinion on sustainability reporting.

The first reading position adopted by the Competitiveness Council addresses a number of similar issues, including changes to reduce burdens for smaller listed companies while also pushing back the timetable by a year. 

The European Commission published the CSRD proposal on 21 April 2021. It stipulates that companies that are listed or with more than 250 employees will have to translate their environmental, social and governance policy into standardised and certified information documents, in a move to increase corporate accountabilityprevent divergent national standardsandease the transition to a sustainable economy

Mandatory assurance of sustainability information is also foreseen, with ‘reasonable assurance’ provisions due to come into effect six years after adoption of the final legal text. The CSRD also paves the way for mandatory EU sustainability reporting standards, currently being developed by European Financial Reporting Advisory Group (EFRAG) and due to be eventually adopted as secondary legislation by the European Commission.

Under the existing Non-Financial Reporting Directive, large listed companies, banks and insurance companies with more than 500 employees are required to publish reports on the policies they implement in relation to: environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery.

The positions of the Council and Parliament will now need to be reconciled, with ‘trilogue’ negotiations, including the Commission, due to start in the spring. There are strong expectations that the legislation will be adopted fairly quickly. 

Dr Nigel Sleigh-Johnson, ICAEW’s Director of Audit and Corporate Reporting, commented: “ICAEW is closely monitoring the debate over these important proposals. The publication by businesses of consistent, high quality information on sustainability-related issues, and – importantly – the provision of appropriate assurance over that information, is a key element of the drive towards a net-zero economy.” 

Pascal Durand MEP, leading the Parliament’s work on the proposals, said the CSRD was “a further step in the evolution of our business model and investment practices. The balanced compromise supported by a large majority of political groups should ensure the EU is well equipped to maintain our legal, competitive, environmental and social standards and values, and to negotiate at international level so that they do not disappear or get absorbed into global systems of lower standards.”

Bruno Le Maire, French Minister for Economic Affairs, Finance and Recovery, said the adoption of a common position by EU countries on the text marks a further decisive step in the development of a European regulatory framework for sustainable finance. “This means greater transparency for citizens, consumers and investors so that businesses can play their full part in society. This is the end of greenwashing. Today, Europe is setting the rigorous non-financial reference standards of tomorrow, in line with our environmental and social ambitions.”

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