‘Greenwashing is over’: EU to tighten ESG disclosure requirements for large businesses
The EU has agreed on plans to mandate large businesses to disclose more information relating to their environmental, social and governance (ESG) plans and performance from January 2024.
Tuesday evening (21 June) saw members of the European Parliament and the Governments of EU member states striking a provisional agreement on the new reporting requirements, which have been designed due to rising concerns from regulators that more companies are greenwashing – making inaccurate or unsubstantiated environmental and social claims to appeal to consumers and investors.
The agreement is on a package called the directive on corporate sustainability and due diligence reporting. It would see the mandate introduced in phases, applying to some large businesses from the start of 2024 and expanding to listed SMEs in 2026. In the first instance, the mandate will apply to businesses already covered by the EU’s non-financial reporting directive. This covers all listed and unlisted companies with 250 or more staff and recording turnovers of €40m or more, in all sectors.
Under the mandate, companies will need to disclose the impacts of their activities and supply chains on the environment and on people each year. Reporting will be standardised to help stakeholders compare the performance of different companies.
Firms will also need to measure and disclose their ESG-related risks and opportunities. This includes physical risk (i.e. damage to infrastructure from climate change), regulatory risk (i.e. carbon tax costs), legal risk and reputational risk. Opportunities relating to innovation, improved reputation, regulatory compliance, reduced physical risk and reduced operational will also need to be disclosed.
Disclosures must be externally audited, the EU has confirmed.
A formal vote by EU member states will take place next week to ratify the deal. It is expected to pass without complications. If the deal passes, the new mandate will replace the non-financial reporting directive.
French environment minister Bruno Le Maire, who has led talks on the mandate, said: “This agreement is excellent news for all European consumers. They will now be better informed about the impact of business on human rights and the environment… Greenwashing is over.”
Commenting on the agreement, Richard Howitt, the former chair of the International Integrated Reporting Council (IIRC), said: “I’m delighted that the new text includes mandatory climate transition plans, setting standards for company sustainability reporting and independent audit of the information.
“This is an important next step as the world moves towards standardisation of ESG reporting by business, to back responsible business itself and to step up Europe’s response to the urgent challenges of the climate emergency and the UN Sustainable Development Goals. Congratulations to the French Presidency, to Commissioner McGuinness, Pascal Durand MEP and everyone involved.”
Are companies underprepared?
In related news, a survey of 100 UK-based professionals responsible for ESG strategy creation and reporting has found that two-thirds believe their organisation is not prepared to meet changing ESG reporting mandates.
Conducted by Workiva, the survey found that a major challenge is a lack of good quality data relating to the environmental and social impacts of their organisations’ operations and supply chains. Three-quarters said they do not have confidence in the data currently available to them.
A lack of finance was also identified as a challenge. Most businesses surveyed (63%) had only formally began reporting ESG-related data within the past two years, and reporting and strategy teams were generally small. Finance was found to be more readily available for environment-related factors than social or governance factors. Collectively, the 100 businesses represented were allocating 43% of their ESG finance to environmental topics.
Nonetheless, survey respondents said that some environmental topics are the most challenging to accurately report against, including Scope 3 (indirect) emissions.
Workiva’s head of global ESG Mandi McReynolds said: “Stakeholders are calling for more detailed and uniform data related to ESG. With the recent Sustainable Finance Disclosure Regulation (SFDR) directive in Europe, the ESG disclosure rule proposed by the SEC in the U.S., and the Singapore Exchange’s recommended 27 core ESG metrics, the ESG reporting environment is becoming more complex for organisations,”