The Sustainability Report

As part of the European Green Deal, companies will need to adopt a new format for non-financial reporting: the “Corporate Sustainability Report” (literal translation of the draft CSRD Directive of April 21, 2021, which has not yet been validated). Starting January 1, 2023, this report will replace the Non-Financial Performance Statement (NFPS), whose content is defined by the European Directive 2014/95/EU.

Two key texts within the body of regulations, currently being validated at the EU level, define the scope of this sustainability report:

• The CSRD Directive, which aims to elevate sustainability information to the same level as financial information;
  The Taxonomy Regulation, which establishes a classification system for sustainable economic activities.

What are the main changes introduced by this future Directive?

Which Companies Are Affected?

The CSRD (to be applied for fiscal years starting on January 1, 2023) is expected to concern more than 50,000 companies in Europe (compared to the 11,000 currently covered by the NFPS).

• All listed companies will be subject to this, with no thresholds applied.
• For non-listed companies:
   
  • The employee threshold will decrease from 500 to 250 employees.
  • Two of three thresholds will require companies to publish a Corporate Sustainability Report, regardless of which: the number of employees, total revenue exceeding €40 million, or total assets exceeding €20 million. The number of employees is no longer a determining criterion.
  • SAS (Simplified Joint-stock Companies) will be subject to this, in addition to certain unlisted companies (SA, SCA, mutuals, cooperatives).
  • For associations, SGAM (French mutual insurance groups), and public companies, we are waiting for the transposition of the directive into French law.
• The Commission proposes to differentiate the expected standards for large companies and adopt distinct, proportional standards for SMEs. Non-listed SMEs could use these standards on a voluntary basis, with a deadline extended until 2026.

An Increasing Link Between Non-Financial and Financial Information

As part of this effort for a common language, the Green Taxonomy (applied for fiscal years starting January 1, 2021) will require companies to integrate ESG factors into their management practices by producing “green” financial ratios (green revenue, green Capex, green Opex).

The company will need to present a "double materiality" in its sustainability report, i.e., the impact of the environment on its activity through financial materiality ("outside-in"), and the impact of its activity on the environment through environmental and social materiality ("inside-out").

This will also involve introducing tagging on several indicators, including for non-listed companies, within a single European access point.

An Enriched CSR Report

Companies will need to enhance their CSR report, notably by demonstrating:

• The clear integration of sustainable development goals into the company’s overall strategy,
• The level of involvement of governance bodies in defining, implementing, and overseeing this strategy,
• How the company considers the expectations and interests of its stakeholders and involves them in the strategy and sustainability performance of the company, within a structured and regular dialogue,
• The CSR due diligence process across its entire value chain.

These elements must be framed in both a retrospective and a forward-looking perspective. The business model must, in particular, present the resilience strategy defined by the company to address its most material CSR risks.

A Strong Focus on the Reliability of Non-Financial Data

The trend is clearly moving towards the production of integrated reports, the establishment of sustainable accounting, and the reconfiguration of financial and non-financial information into an integrated format. It is crucial to note the increasing strategic importance of internal controls over this data to ensure its reliability.

The texts also foresee mandatory third-party verification (though some questions remain unresolved):

• Certification of ratios related to the green taxonomy starting from fiscal year January 1, 2021, for the two climate change mitigation and adaptation objectives (companies will need to report on the other four objectives starting in 2022). It is imperative that companies currently subject to the NFPS and those subject to the CSRD in the future immediately produce the Green Taxonomy indicators and anticipate the SFDR indicators that will apply to them.
• Verification by an accredited statutory auditor (OTI CAC) by COFRAC, opening up to non-CAC OTI (nominations and supervision procedures?) and statutory auditors (training and supervision procedures?). More information on NFPS audits.
• A gradual shift from limited assurance to reasonable assurance?

Timeline and Practical Details

The implementation timeline is ambitious: the CSRD Directive must be transposed into national law by December 1, 2022, and the Corporate Sustainability Report will apply starting with the fiscal year from January 1, 2023, for publication in 2024. In the immediate future, the European Parliament and Council will work on negotiating a final legislative text based on the Commission’s proposal published on April 21, which has already been subject to intense lobbying. This lobbying will likely continue for the new round aimed at establishing the new European ESG reporting framework expected by businesses.

EFRAG will be responsible for developing the standardization norms, in constructive cooperation with major international initiatives:

• Largely based on the framework developed by France’s pioneering approach to CSR regulation (Article 225 of the NRE Law 2002, Grenelle II 2011, Article 173 of the ECV Law 2015, Duty of Care 2017, NFPS 2018, Pacte Law 2019), which will serve as a standard for other European countries to align with.
• As well as the standardization work led by major international organizations: GRI (Global Reporting Initiative), SASB (Sustainability Accounting Standards Board), IIRC (International Integrated Reporting Council), CDSB (Climate Disclosure Standards Board), CDP (Carbon Disclosure Project).

RSM, a leading player in the verification of non-financial data reliability, can support you on all fronts of your CSR reports, whether in the design, production, pre-audit, or verification phases of CSR information.