Sustainability Reporting Regulations

CSRD – Corporate Sustainability Reporting Directive

The Corporate Sustainability Reporting Directive (CSRD) establishes a uniform framework for the reporting of non-financial data for companies operating in the European Union. The goal of the directive is to help investors, civil society organizations, consumers, policy makers and other stakeholders take into account the non-financial performance of large companies and thus drive the business world to a more sustainable future. The CSRD revises Directive 2014/95/EU – also called the Non-Financial Reporting Directive (NFRD) – and requires more detailed information on sustainability goals and key figures. The concept of double materiality is anchored in the CSRD. This means that companies must report on the impact materiality of one's own economic activity and the impact of environmental changes on one's own financial materiality. The CSRD is aligned with the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy.

Who is affected?

EU companies are mandated to report in compliance with the CSRD if they meet two of the following three criteria:

  • More than 250 employees and/or

  • Net sales of more than 40M EUR turnover and/or

  • Balance sheet total of more than 20M EUR

Capital market-listed SMEs must implement the CSRD with an extended period and an opt-out option until 2028. Non-EU companies are obliged to submit a sustainability report if a net turnover of €150 million is achieved in the EU and have at least one subsidiary or branch in the EU.

Companies also have the possibility of reporting voluntarily. Simplified reporting standards are being developed for SMEs that do not fall under the directive.

What do companies need to do?

Under the CSRD, companies are obliged to extend their management report with a non-financial statement. The report should be structured based on the guidelines from the European Sustainability Reporting Standards (ESRS), which is being developed by the European Financial Reporting Advisory Group (EFRAG).

In the report, companies are required to disclose existing elements outlined by the NFRD, including:

  • Environmental protection

  • Social responsibility and treatment of employees

  • Respect for human rights

  • Anti-corruption and bribery and

  • Diversity on company boards

As well as new elements including:

  • Double materiality concept: the company’s impact on society and the environment, and the sustainability risks affecting the company

  • Process of selecting material topics for stakeholders

  • Targets and progress of sustainability initiatives

  • Information relating to intangibles (e.g. social, human and intellectual capital)

  • Disclosures in line with Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation.

Additionally, companies must apply a digital ‘tag’ to the reported information, so it is machine readable and feeds into the European single access point envisaged in the capital markets union action plan.

Furthermore, an independent auditor or certifier must ensure that the sustainability information complies with the certification standards adopted by the EU.

Other relevant standards that are expected to be used:

  • PCAF & GHG Protocol: Metrics, Measurement

  • SBTi: Objective

  • PACTA: Climate scenario analysis

When do companies need to report?

The reporting requirements will come into effect over a period of four years starting in 2024. The report itself should be published no later than four months after the end of the indicated financial year.

  • 2025 (covering financial year 2024): Large companies that are currently in scope of the Non-Financial Reporting Directive (NFRD)

  • 2026 (covering financial year 2025): All large companies that are not currently covered by the Non-Financial Reporting Directive (NFRD)

  • 2027 (covering financial year 2026): Capital market-listed SMEs (with opt-out option until 2028), small and non-complex credit institutions, and group-owned insurance companies.

  • 2028 (covering financial year 2027): All companies covered by the CSRD, including Non-EU companies with EU branches or subsidiaries

Sources: https://www.bnw-bundesverband.de/corporate-sustainability-reporting-directive-csrd/#1651836075314-741e4fdc-66d2

https://ec.europa.eu/info/business-economy-euro/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en



EUT – EU Taxonomy

By passing the Green Deal in 2019, the European Union (EU) set the course for more sustainable investments in areas like renewable energy, biodiversity, or circular economy. The ultimate goal is to reach a climate-neutral economy in the EU by 2050, with a reduction of 55% in 2030. To achieve these climate goals, the Green Deal includes an investment plan of 1 trillion euros over the next 10 years. But, despite this huge investment, the EU depends also on the support of the private sector to achieve the Paris climate agreement. That’s where the EU Taxonomy regulation comes in. The goal of the EU Taxonomy regulation is to reorient capital flows to focus on sustainable investments, establish sustainability as a component of risk management, and promote long-term investment and economic activity.

Who is affected?

The EU taxonomy considers different circumstances and obligations for different economic actors. These actors are divided into three groups:

  1. EU and its member states

  2. Financial market participants, including occupational pension providers, that offer and distribute financial products in the EU (including those from outside the EU)

  3. Companies (over 500 employees) that fall under the non-financial reporting directive (NFRD)
    1. This will be revised to companies (over 250 employees) that fall under the corporate sustainability reporting directive (CSDR) starting in 2026. An important note: while the first report is due at the beginning of the reporting year 2026, the report must include disclosures for the reporting year 2025.

What do companies need to do?

The EU Taxonomy is essentially a framework to classify “green” or “sustainable” economic activities executed in the EU. Previously, there was no clear definition of green, sustainable, or environmentally friendly economic activity, and companies could get away with all sorts of greenwashing mainly because there was no clear guidance for how to conduct green, sustainable, or environmentally friendly economic activity. The EU taxonomy regulation seeks to provide this guidance by outlining a clear definition of when a company is operating sustainably or environmentally friendly. This new form of classification provides a competitive advantage to honestly sustainable businesses because it will be easier for investors and the general public to differentiate between a company that is sustainable and a company that pretends to be sustainable.

In the EU Taxonomy, the idea of sustainability is distilled into six different environmental objectives.

  1. Climate change mitigation

  2. Climate change adaptation

  3. Sustainable use and protection of water and marine resources

  4. Transition to a circular economy

  5. Pollution prevention and control

  6. Protection and restoration of biodiversity and ecosystems

To be classified as a sustainable economic activity according to the EU Taxonomy regulation, a company must contribute to at least one environmental objective, but also must not intrude on the remaining five. Let’s get into it with an example. Say your company is an auto manufacturer that produces electric cars. One of your activities might be the manufacturing of the lithium-ion battery that goes into the automobiles. To classify this specific economic activity as a sustainable activity, we must first determine if the activity is eligible, and then we must check if the eligible activity is aligned.

To determine the eligibility of an activity, we must first and foremost, see if the EU has defined fitting technical screening criteria for the respective activity. The EU Taxonomy activities generally correspond with the NACE code structure, or officially the “Statistical Classification of Economic Activities in the European Community.” This is the industry standard classification system used within the European Union.

If an activity is eligible, then we must determine if the activity is aligned by confirming that it complies with the technical screening criteria developed by the EU Technical Expert Group. These criteria are:

  • The economic activity contributes to one of the six environmental objectives

  • The economic activity does ‘no significant harm’ (DNSH) to the remaining five environmental objectives

  • The economic activity meets ‘minimum safeguards’ such as the UN Guiding Principles on Business and Human Rights to not have a negative social impact

Example A:

  • The activity is "Manufacturing of batteries"

  • The EU has defined technical screening criteria for "Manufacturing of batteries" – therefore it is eligible

  • The activity complies with all questions in the technical screening criteria "Manufacturing of batteries" – therefore it is aligned

Example B:

  • The activity is "Manufacturing of a circuit board"

  • The EU has not defined technical screening criteria for "Manufacturing of a circuit board" – therefore it is not eligible

  • Since it is not eligible and no technical screening criteria exists, it cannot be aligned

After a company has evaluated its economic activities and determined its eligibility and alignment status, then your company must disclose the amount of its income and expenses that can be classified as sustainable. This is done by focusing on three KPIs:

  1. EU taxonomy-compliant share of net turnover

  2. Sum of capital expenditure (CapEx) aligned with the EU taxonomy

  3. Sum of operating expenses (OpEx) aligned with the EU taxonomy

All of these KPIs should be calculated using the same accounting principles that apply to your company's financial statements. First, let’s start with turnover.

Net turnover refers to the amounts derived from the sale of products and services after the deduction of sales rebates, value-added tax and other taxes directly linked to turnover (The Accounting Directive, 2013/34/EU). To calculate the EU taxonomy-compliant proportion of turnover, your company must divide the total EU Taxonomy-aligned turnover by the total net turnover. If your company has an economic activity that contributes to more than one environmental objective, then the respective turnover must be split between each of the objectives to avoid double counting.

CapEx are classified as additions to tangible and intangible assets during the financial year. Including:

  • Property, plant, and equipment (IAS 16)

  • Intangible assets (IAS 38)

  • Investment property (IAS 40, several points)

  • Agriculture (IAS 41)

  • Leases (IAS 16)

To comply with the EU Taxonomy regulation, companies are required to disclose the current (and planned) proportions of their capital expenditure related to assets or processes associated with either taxonomy-aligned economic activities. To calculate the EU taxonomy-compliant proportion of turnover, your company must divide the total CapEx of Taxonomy-aligned activities by the Total Net CapEx. Again, if your company has an economic activity that contributes to more than one environmental objective, then the corresponding CapEx must be split between each of the objectives to avoid double counting.

OpEx are direct expenditures relating to the day-to-day servicing of assets of the property, plant, and equipment that are necessary to ensure the continued and effective use of such assets (e.g. research and development, building renovation measures, short-term lease, maintenance, and repair).

The OpEx of Taxonomy-aligned activities relates to expenditures that are:

  • related to assets and processes associated with Taxonomy-aligned economic activities, including training and other human resources adaptation needs, and direct non-capitalized costs that represent research and development

  • part of the CapEx plan, or

  • related to the purchase of output from Taxonomy-aligned economic activities and individual measures enabling the target activities to become low-carbon or to lead to GHG reductions, provided that the measures are operational within 18 months (2021/2178/EU).

When a company publishes its EU Taxonomy-aligned share of turnover, it gives a clear picture of where that company currently stands in relation to the EU sustainability goals. It allows investors to determine the percentage of their funds invested in taxonomy-aligned activities. CapEx, on the other hand, gives investors a sense of a company's direction. It allows them to assess the credibility of a company's strategy and it makes it easier to realize whether they agree with your company's strategic approach.

In addition to the three KPIs we discussed, companies shall disclose accompanying qualitative information about the calculation and key elements of KPIs outlined in the Disclosures Delegated Act (2021/2178/EU). This includes your company’s:

  • Accounting policy (i.e., how your company calculated turnover, CapEx, and OpEx and how they allocated each KPI to the corresponding economic activities).

  • Assessment of compliance with the Taxonomy Regulation (i.e., how your company determined the eligibility and alignment of each economic activity in compliance with the technical criteria, and how they avoided double counting).

  • Contextual information about turnover KPI, CapEx KPI, and OpEx KPI (i.e., how your company broke down each of the KPIs including the CapEx plan and any changes).

After your company has determined the EU taxonomy-compliant share or amount of each KPI and compiled the qualitative information, the final step is to craft the report. The report shall be structured using the templates presented in Annex II of the Disclosures Delegated Act.

As you can see, there are many components to keep track of. It might help to illustrate the EU Taxonomy reporting process with an example. Let’s say that a cement company is renovating and adapting two plants counting turnover and capital expenditure as taxonomy-aligned:

A cement company wants to renovate and adapt two of its plants that contribute 50% of its turnover. The renovation of cement facilities includes retrofitting to reach high energy-efficiency levels, increasing the use of blended materials to reduce the clinker-to-cement ratio to below 0.65, and the use of alternative clinkers and binders. The cement production facilities are expected to achieve thermal energy intensity of approximately 3 GJ/t clinker and carbon intensities in line with the taxonomy. A climate risk assessment of the facilities based on climate data indicates that facilities are vulnerable to flooding. Your company decides to increase the capacity of the drainage systems to make them more resilient to flooding. The costs of adapting the facilities are valued at 5M EUR per facility. The overall renovation of the facilities amounts to 500M EUR, which represents 80% of your company’s capital expenditures. Your company seeks to raise funds in the capital market and issues a green bond based on the EU green bond standard, which includes compliance with DNSH criteria for both mitigation and adaptation. The bond will therefore be taxonomy-aligned. Once the works related to climate change mitigation are finalized, your company could claim all turnover generated from those two facilities (50% of your company’s turnover) as well as 80% of its capital expenditures are taxonomy-aligned.

Another scenario can be a corporate that wants to adapt its headquarters to make its entire operations climate-resilient (i.e., they want to count the corresponding capital expenditure as taxonomy-aligned). First and foremost, it is important to note that for the headquarters renovation to be EU Taxonomy-aligned, none of its facilities can serve the purpose of extracting, storing, transporting, or manufacturing fossil fuels. Moving on, your company first conducts a climate risk assessment to analyze potential climate change impacts on its headquarters and other company buildings. The assessment is based on climate data and shows that flooding and extreme heat are the main risks to the headquarters, while also some of the facilities are vulnerable to flooding. Your company then identifies several measures to significantly reduce the identified risk. Among them are measures to provide passive cooling and increasing the capacity of drainage systems. The action plan also includes an impact assessment to ensure that the measures to be implemented are in line with local and regional adaptation efforts and comply with DNSH criteria for buildings. Your company determines that the total cost of the proposed changes is EUR 50 million, for which it seeks several loans over a three-year period. The plan starts with the adaptation of its headquarters with estimated costs of EUR 10 million—the subject of the first loan. This first loan may be followed by further loans or, for example, a EUR 40 million bond in a private placement.

Each of the loans is aligned with the taxonomy criteria, even though one of the loans (e.g., the first loan of 10M EUR) does not in itself reduce all material climate risks to your company's operations; it is a necessary measure in a broader, time-bound plan to adjust your company's overall assets. The lending bank could bundle the loans and thus advertise the EUR 50 million as green and 100% taxonomy compliant.

When do companies need to report?

The reporting requirements will come into effect over a period of four years starting with the financial year 2021. The report itself should be published no later than four months after the end of the indicated financial year.

  • 2022 (covering financial year 2021): Large companies that are currently in scope of the Non-Financial Reporting Directive (NFRD)

  • 2026 (covering financial year 2025): Companies that fulfill two out of the following three criteria:

    • a) On average more than 250 employees,

    • b) Balance sheet of more than 20 million euros,

    • c) Turnover of more than 40 million euros.

Sources:

https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/200309-sustainable-finance-teg-final-report-taxonomy_en.pdf

https://ec.europa.eu/info/publications/sustainable-finance-renewed-strategy_en

https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/200309-sustainable-finance-teg-final-report-taxonomy_en.pdf

https://ec.europa.eu/info/publications/sustainable-finance-renewed-strategy_en


SFDR – Sustainable Finance Disclosure Regulation

The EU Sustainable Finance Disclosure Regulation (SFDR) is a set of rules which require asset managers and other financial market participants to provide information about how they deal with negative impacts that their investments may have on the environment and society. This mandated transparency will allow investors to better compare the sustainability performance of financial products and reduce greenwashing within the industry.

The SFDR was introduced by the European Commission along with the Taxonomy Regulation and the Low Carbon Benchmarks Regulation as a result of the European Commission’s Action Plan on Sustainable Finance.

Sources:

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32019R2088

EUSCA – EU Supply Chain Act

The European Supply Chain Act (EUSCA) requires businesses operating in the European Union to address negative human rights impacts and negative environmental impacts of their business activity along the entire supply chain. The act shall contribute to promoting a fairer and more sustainable global economy.

Who is affected?

  • All large companies operating in the EU with 500+ employees and with a net turnover of at least 150M EUR

  • Companies in high-risk sectors with 250+ employees and a net turnover of at least 40M EUR, (e.g. textile and leather industries, agriculture and forestry, fisheries and mining)
    • These companies are allowed a two-year transitional period

  • Small and medium-sized enterprises, while not directly affected by the law, are indirectly affected if they are a supplier to a large company

What violations are outlined in the act?

If a supplier with whom a company works on a regular basis violates any of the human rights or environmental protection goals covered by the Supply Chain Act, then the company can be held civilly liable. These violations include:

  • Forced labor

  • Child labor

  • Inadequate health and safety at work

  • Environmental violations such as greenhouse gas emissions, pollution, or the destruction of biodiversity or ecosystems

What do companies need to do?

  1. Identify actual (or potential) negative impacts on human rights and the environment and take appropriate measures to mitigate them

  2. Integrate supply chain due diligence procedures into the company’s policies

  3. Establish a procedure for complaints and ensure everyone along the supply chain can access it

  4. Information on the fulfillment of a company’s due diligence obligations must be provided publicly in the company’s annual report

  5. Control and monitor the effectiveness of these measures within the company

  6. Companies with annual turnover over 150M EUR must align their internal policies with the Paris Agreement’s goal of limiting the planet’s warming to 1.5 degrees Celsius

Source:

https://ec.europa.eu/commission/presscorner/detail/en/ip_22_1145

CSR-RUG – CSR-Richtlinie-Umsetzungsgesetz

The CSR-RUG regulation is based on the EU policy 2014/95/EU which requires large companies to publish their non-financial information. The regulation went into effect at the beginning of 2017.

Who is affected?

  • Capital-market oriented companies and insurance companies as well as credit institutions with at least 500 employees

  • Revenues are at least 40 Mio. €

OR

  • Balance sheet amounts to at least 20 Mio. €.

What do companies need to do?

The companies need to report their non-financial information which includes key figures for the following areas:

  • Environmental aspects

  • Social aspects

  • Respect for human rights

  • Anti-corruption measures

  • The undertaking’s business model

What standards can be used?

The CSR-RUG does not require a specific standard to be used for reporting. Available options for affected companies are the DNK (Deutscher Nachhaltigkeitskodex; engl. The Sustainability Code), GRI, UN Global Compact, EMAS or ISO 26000.

Source:

https://www.deutscher-nachhaltigkeitskodex.de/de-DE/Home/DNK/CSR-RUG#:~:text=Das%20CSR%2DRichtlinie%2DUmsetzungsgesetz%20fordert,Bestechung%20(%C2%A7%20289c%20HGB).

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