EU requires audited sustainability disclosure of international companies

June 23, 2022

New directive to enforce more detailed and accessible sustainable reporting

Large European and non-European companies will be required to report on sustainability issues as the European Council and European Parliament have agreed on more detailed sustainable reporting requirements.

The new rules will apply to all large companies, those with over 500 employees, and all companies listed on regulated markets within the EU and in turn those companies will be responsible for their subsidiaries.

For non-EU companies, the requirements will apply to those that generate a net turnover of €150 million within the EU and have at least one subsidiary or branch there.

The expanded scope will take the companies currently covered from 11,600 to 49,000.

Read Minerva’s previous coverage of the CSRD

The announcement comes as a provisional agreement has been made on the corporate sustainability reporting directive (CSRD).

The CSRD also introduces a certification requirement for sustainable reporting and requires companies to include their sustainable report in a dedicated section of their company management reports. Furthermore, these reports will have to be independently audited.

Minerva data reveals both UK and US companies lag behind the EU when it comes to external auditing of their sustainability reporting. Though there has been a global trend toward increasing external audits of sustainability reports, the EU remains the unrivalled leader with only about 10% of companies conducting audits internally.

The CSRD is intended to address the existing shortcomings of the 2014 non-financial reporting directive (NFRD), which was “of insufficient quality to allow it to be properly taken into account by investors”.

In comparison to the mixed reception of the NFRD eight years ago, the CSRD is already being broadly welcomed.

Bruno le Maire, the French minister for economic affairs, finance and industry digital sovereignty, commented: “This agreement is excellent news for all European consumers. They will now be better informed about the impact of business on human rights and the environment.”

He continued: “This means more transparency for citizens, consumers and investors. It also means more readability and simplicity in the information provided by companies, who must play their full part in society. Greenwashing is over. With this text, Europe is at the forefront of the international race to standards, setting high standards in line with our environmental and social ambitions.”

The new rules will come into force on 1 January 2024 for companies that are already subject to the non-financial reporting directive.

They will come into force on 1 January 2025 for those who are not presently subject and 1 January 2026 for SMEs, small and non-complex credit institutions and captive insurance undertakings.

These new rules come at a time of global debate over sustainability reporting standards. Inconsistencies in what constitutes materiality and enterprise value will be something the EU must balance in their approach. Aligning with well-established and accepted standards for sustainability reporting and auditing, such as those published by the Global Reporting Initiative, will be crucial.

Other global standards such as the latest proposal from the International Sustainability Standards Board have been criticised for such shortcomings.

External validation is a key component of Minerva’s Say on Sustainability rating service. The Minerva rating framework provides an assessmentof the governance and disclosure quality of any given company, not their performance. Companies are given an absolute score based on the quality of their disclosures and overall sustainability governance. All data is sourced from company primary disclosures including annual reports, integrated reports, CSR reports, company websites.

The above graph is based on 2011 observations (UK – 251, EU – 1005, and US – 755) over 2 years.

Last Updated: 24 June 2022