2022 will be an important year for sustainability reporting and the associated requirements for companies. As a general trend, the scope of the regulations is increasing and will create additional challenges and obstacles for organizations of all sizes. In this blog, we discuss the important changes and provide you with an overview of which rules and regulations you should know about.
After a long wait, the EU Taxonomy came into force on January 1st, 2022. All companies affected by the new rules of the taxonomy have to assess their economic activities from this year on and identify which activities are eligible under the EU Taxonomy ("eligibility"). Although the actual assessment ("alignment"), including technical screening and other measures, of the identified activities for all affected companies has been postponed until 2023 (or 2024, depending on the type of the company), it is still recommended to start reporting sustainable key figures as soon as possible. Due to the additional time granted, there are no excuses for companies to be unprepared towards the rule changes.
What is the Taxonomy Climate Delegated Act? The EU Taxonomy lays the groundwork for the first "green list" of the EU to give sustainable economic activities a classification system. More information from the EU can be found here.
The Corporate Sustainability Reporting Directive (CSRD) will arguably bring the most important changes this and in the upcoming years. The CSRD will replace and expand the Non-Financial Reporting Directive (NFRD). Aside from the requirements for more comprehensive and accurate reporting and disclosure of sustainability information, the CSRD introduces a number of changes and updates to the previous directive. To name a few examples, companies will have to link financial and non-financial metrics, consider double materiality (inside-out and outside-in perspective), include detailed supplier and supply chain information, and anchor ESG (Environmental, Social, Governance) criteria deeper into their organization. According to EU estimates, more than 50,000 European companies will be affected by the expanded scope of the regulation. The CSRD will rely on more detailed ESG data to create better transparency for investors, stakeholders and decision-makers. In a nutshell, the Corporate Sustainability Reporting Directive aims at making the sustainability reporting of companies more comprehensible, comparable and transparent.
Although SMEs will not yet be directly affected by the CSRD in 2022, they should expect an increase in inquiries from larger customers and partners regarding ESG parameters. In the future, smaller and medium-sized companies will also have to comply with a more simplified form of sustainability reporting. More information on the CSRD and NFRD of the EU can be found here.
And while we're on the subject of EU directives, January 1, 2022, also marks the start of the first reference period of the Sustainable Finance Disclosure Regulation (SFDR). Although the EU Commission confirmed last November that the required technical standards will be delayed, companies will still have to record and monitor principal adverse impacts (PAI). With the aim to create better comparability on environmental, social and governance (ESG) objectives, investors will benefit by having a more meaningful overview of sustainable opportunities and risks.
Sustainability continues to be a wild jungle of guidelines such as the CSRD, SFDR and Taxonomy, as well as countless existing impact and reporting frameworks such as the Global Reporting Initiative (GRI), the UN Sustainable Development Goals (SDGs) and more. The IFRS Foundation plans to change this. During COP26, the UN's international congress on climate change in 2021, the IFRS Foundation announced its plans to establish an International Sustainability Standards Board (ISSB). The intention is to harmonize existing standards and create a globally recognized framework for high-quality, comparable and meaningful sustainability reporting. While the first ISSB standards are not expected until the second half of 2022, all companies are well advised to already start looking at the existing information and to be implementing dedicated sustainability processes now. It is better to start small and pragmatic today than to run after market requirements tomorrow.
The new German Supply Chain Act, or more precisely the Supply Chain Due Diligence Act ("Lieferkettensorgfaltspflichtengesetz"), creates the legal framework for better environmental and human rights protection along international supply chains. The bill, which was passed by the German parliament on June 11, 2021, imposes specific requirements on companies to comply with due diligence obligations for direct and indirect suppliers. These include human rights, working conditions and social factors as well as questions on the use of certain pollutants, the disposal of waste and other ecological dimensions. Companies with more than 3,000 employees are already affected now and must prepare for 2023 - all companies with more than 1,000 employees must assume responsibility for their indirect and direct suppliers latest starting in 2024. Regardless, the German Supply Chain Act will also indirectly affect small companies which make up a large portion of the supply chains of larger corporations. If you are looking for more information on this topic, you can find our guide to the Supply Chain Act here.
2022 brings a lot of changes in the area of sustainability reporting. We understand that new EU directives and updated requirements can be challenging when dealing with environmental, social and economic dimensions within your organization. With our Codio Impact platform, we allow you to effortlessly collect, manage and use sustainable data for (external) reporting. To add, we make sure that you are prepared for new and upcoming changes in regulation, while following leading standards such as the GRI. We are happy to support you on your sustainability journey, let's start today!