The European Commission (EC) has proposed new sustainable reporting rules that would greatly expand the number of companies forced to disclose information on ESG issues.
European lawmakers said this week they plan to extend non-financial disclosure rules to large, unlisted companies and also bring in lighter requirements for small and medium-sized enterprises (SMEs).
The changes mean around 50,000 companies will have to follow ‘detailed EU sustainability reporting standards’, a rise from 11,000 under the current system, according to the EC.
The proposals are contained in the Corporate Sustainability Reporting Directive (CSRD), which is being brought in to replace the existing Non-Financial Reporting Directive. The move follows criticism that the current rules do not cover enough companies and the quality of information being disclosed is poor.
‘Large and listed companies will have to report what they do on sustainability: their impact on the environment, how they treat employees and their respect for human rights,’ said Valdis Dombrovskis, the EC’s executive vice president, at a press conference on Wednesday.
‘Smaller listed companies will have to report as well. But they will be subject to different and [more] simplified standards. This ensures they still appear on the radar of investors looking to fund sustainable activities.’
The new reporting standards will be developed by the European Financial Reporting Advisory Group (EFRAG), a private organization supported by the EU. Earlier this year, it released a report commissioned by the bloc that sets out a suggested roadmap for the development of ‘comprehensive’ sustainability disclosure standards.
The CSRD would also require limited audit assurance for sustainability information. The EC says it will encourage member states to allow assurance services from firms other than traditional financial auditors.
For SMEs, the EC proposes ‘separate, proportionate standards’ of disclosure given the growing importance of sustainability information for all companies when seeking financing. It says, however, that the rules for SMEs would come in three years after requirements for other companies to support businesses as they recover from the Covid-19 pandemic.
The disclosure standards would be mandatory for SMEs listed on an EU-regulated market, while private SMEs need follow them only on a voluntary basis.
EuropeanIssuers, a lobby group for public companies, has broadly welcomed the new directive but called on the SME rules to be compulsory for unlisted as well as listed firms. The proposed changes risk ‘disincentivizing companies from going public and could increase de-listings,’ it says in a statement. ‘EuropeanIssuers further believes that the commission’s plan would privilege private equity compared with public markets.’
The group also says disclosure requirements should be extended to non-EU companies offering services in the bloc to avoid the creation of an ‘unfair’ playing field.
The EC says talks will now take place to produce a final legislative text based on the proposals. It anticipates the first round of new disclosure rules could come into effect for reports published in 2024, focusing on the 2023 financial year.
Meanwhile, EFRAG will begin drafting the sustainability reporting standards. The organization aims to have a draft ready by the middle of 2022, says the EC.