Regulatory agenda ESG: What developments are moving the market?

In the area of sustainability reporting, the range of legal changes and associated reporting requirements is constantly increasing. Nowadays, hardly any company can ignore terms such as CSRD, ESRS, EU taxonomy, etc., and early and targeted prepa­ration for the upcoming reporting requirements is indispensable if only to maintain competitiveness and avoid damage to the company's image. The imple­men­tation of the requirements, such as the establishment of processes, the determination of respon­sible persons or the selection of tools for data collection, requires an amount of time that should not be underestimated. First of all, decision-makers need to know exactly what reporting requirements their own company will have to meet in the future. In the following, we would therefore like to give you a brief overview of the current regulatory developments and the players involved. 

 

The main driver of ESG regulation in Europe is the European Union. In the European Green Deal, the strategy for a sustainable transformation of the economy and society presented in 2019, the EU has set itself the ambitious overarching goal of reaching climate neutrality in 2050. Extensive investments are needed to achieve the goals of the Green Deal. As part of this, the EU has implemented various models to ensure that investments are made precisely where the EU has identified the greatest benefit in terms of the relevant goals. 

 

On November 10, 2022, the European Parliament adopted the Corporate Sustainability Reporting Directive (CSRD), which will successively replace the previously applicable Non-Financial Reporting Directive (NFRD or CSR-RUG). As of January 1, 2024 (reporting in 2025), large companies that have already fallen within the scope of the NFRD will initially be affected by the new directive. You can read the exact dates of the staggered effective dates here.  

The CSRD mainly includes the following changes:  

First-time application: FY 2024 for companies already reporting under NFRD/CSR-RUG 

With the aim of creating comparability and transparency, uniform sustainability reporting standards (European Sustainability Reporting Standards – ESRS) were drawn up on behalf of the EU in a working group specially established by the European Financial Reporting Advisory Group (EFRAG). According to the CSRD, these standards are to be applied by the companies concerned in their sustainability reporting. The final drafts of the sector-agnostic ESRS were submitted to the EU Commission on November 22, 2022, with adoption scheduled for June 2023. The ESRS are structured as follows: 

First-time application: FY 2024 for companies already reporting under NFRD/CSR-RUG (concurrent with first-time application of CSRD). 

 

The Task Force on Climate-related Financial Disclosures (TCFD) is an initiative of the Financial Stability Board (FSB) and has developed four recommendations related to governance, strategy, risk management, and metrics and targets for assessing and managing relevant climate-related risks and opportunities. The TCFD focuses mainly on the impact of climate change on businesses and the resulting financial risks. The TCFD recommendations and guidance are in turn taken into account in the development of European (ESRS) and international (ISSB) sustainability reporting standards.   

The EU Taxonomy is a classification system for “green” investments and came into force on January 1, 2022. The aim of the taxonomy is to steer future investments into sustainable economic activities and thus make an important contribution to achieving climate neutrality by 2050. To this end, the regulation stipulates that companies falling within the scope of the CSRD must disclose the proportion of their revenue, capital expenditure (CapEx) and operating expenditure (OpEx) associated with environmentally sustainable economic activities as defined by the EU taxonomy. In addition to the EU Taxonomy which focuses on environmental aspects, the introduction of a Social Taxonomy for the classification of socially sustainable economic activities is planned.   

First-time application: FY 2021 for companies already reporting under NFRD/CSR-RUG 

With the German Supply Chain Due Diligence Act (LkSG), the German legislator has included a completely new catalog of traffic safety obligations in the German legal framework. The protected goods of the LkSG are essentially to be assigned to the areas of human rights, employee protection and environmental protection. If companies fail to comply with their due diligence obligations, they face legal consequences such as company and turnover-related fines and exclusion from public contracts. Thus, the first steps towards corporate criminal law are taken. The economic consequences of non-compliance, such as damage to reputation, should also not be underestimated.  

First-time application: FY 2023 for companies with more than 3,000 employees in Germany 

The new reporting requirements impose additional tasks on management boards and supervisory bodies. For example, the CSRD includes specific disclosure requirements on sustainable corporate strategy and on the role played by the management board and supervisory board in the sustainable orientation of the company. In addition, the monitoring obligation is extended. In the future, supervisory boards will therefore be expected to have detailed knowledge of sustainability aspects to ensure an appropriate and realistic assessment of the company's actions.