European Commission releases draft directive on sustainability reporting; according to an ASCG study, the number of reporting entities would incur a 30-fold increase in Germany

The European Commission has published today, 21 April 2021, a draft directive  to further develop sustainability reporting. The aim of the legislative proposal is to contribute to the transition to a sustainable and inclusive financial and economic system in line with the European Green Deal and the UN Sustainable Development Goals through improved reporting on environmental, social and governance aspects.

The Commission’s ambitious proposal responds to the increased need for sustainability-related company data. In addition, changes in terminology reflect the increased awareness that sustainability aspects can entail significant risks, but also opportunities for the financial performance of companies. The previous terminology “nonfinancial reporting” is replaced by the term “sustainability reporting”.

The stricter sustainability reporting requirements sought by the Commission will apply to many more companies in the future. According to the results of the ASCG study published in February 2021, the scope proposed by the Commission would increase the number of German entities obliged to report on sustainability aspects by 30 times in the initial phase. This is due to the fact that the proposal for a directive extends the scope to include all large companies, whether they are listed or not and without the previous 500-employee threshold. In addition, the Commission proposes to extend the scope to listed SMEs from 1 January 2026.In its recommendations to the German ministry of justice, the ASCG also advocated an extension of the scope, albeit to a much smaller extent.

The draft directive provides for the Commission to adopt EU standards for sustainability reporting by means of delegated acts. The Commission shall take into account the technical recommendations to be drawn up by EFRAG when adopting these standards. The draft directive defines minimum quality criteria, reporting issues and particular EU requirements to be adhered to. The Commission justifies the need for particular EU standards by means of requiring the inclusion of other EU reporting requirements, such as the EU Taxonomy Regulation or EU Disclosure Regulation. The ASCG study, on the other hand, called for greater consideration of international frameworks.

Furthermore, the legislative proposal requires sustainability reporting to be audited based on a limited assurance level, initially. However, the Commission shall be empowered to adopt specific assurance standards by means of delegated acts. These standards will then form the basis for a future reasonable assurance requirement. In terms of corporate governance requirements, the draft directive outlines the responsibility of the Executive Board and supervisory board for sustainability reporting. The Audit Committee must also monitor the sustainability reporting as well as the related systems and processes.

An overview of the main contents of the proposal for a directive can be found in the ASCG briefing paper (only in German) on the Commission proposal.

ASCG President Georg Lanfermann comments: “The new sustainability reporting proposals released by the Commission show a clear trend towards a level playing field between financial and sustainability-related corporate information. This will lift the profile of corporate reporting in its entirety. The European Commission’s draft directive shows a high degree of ambition by significantly enlarging the scope of reporting entities as well as by already foreseeing the initial application for the 2023 financial year. Moreover, the ASCG would have liked to see in the Commission proposal a more internationally oriented approach to European standard setting. Only a clearly articulated international mindset in standard setting allows German companies to overcome existing complexities in sustainability reporting and helps them to avoid the unnecessary red tape of regional standards without further international use.”