As part of the European Green Deal, the European Commission is pushing also for more comprehensive non-financial disclosures under the proposed Corporate Sustainability Reporting Directive (CSRD). In this context, ground-breaking work has been done by the Task Force on Climate-related Financial Disclosures (TCFD). Over the past four years, the TCFD has reported on the progress that companies from various sectors have made in reporting their climate-related financial risks under the 11 TCFD disclosure recommendations published in 2017. At the same time, TCFD has been monitoring efforts in other jurisdictions to introduce TCFD-aligned reporting frameworks. The most recent 2021 Status Report lists the proposed CSRD as a TCFD-aligned reporting requirement, which would lead to disclosures of climate-related financial risks by nearly 50,000 large companies with a presence in the EU.
In April 2021, the European Commission published its Sustainable Finance and EU Taxonomy, a comprehensive package of measures to improve the flow of capital towards sustainable activities across the entire EU. The CSRD proposal, one of three instruments listed in the package, is aimed specifically at improving the flow of sustainability information in the corporate world very much like TCFD disclosure framework. Unlike TCFD, however, the CSRD proposal expands the scope of disclosures envisaged by TCFD in terms of their content as well as reach.
In terms of the content of proposed reporting, companies subject to the CSRD will have to report on criteria that go beyond climate-related financial information. The CSRD proposal encompasses requirements to report on environmental protection, treatment of employees, respect for human rights, anticorruption and bribery, and many others. It also introduces a concept of double materiality, pursuant to which companies must disclosure both, how sustainability issues can affect their business, and how their business impacts sustainability of society and the environment.
In terms of its reach, the CSRD proposal extends the EU's sustainability reporting requirements to all large companies and all listed companies, currently amounting to approximately 50,000 corporate entities with an EU presence. In addition, the EU Commission envisages developing proportionate reporting standards for listed small and medium enterprises (SMEs), which will be also available for non-listed SMEs to use on a voluntary basis.
As such, the framework introduced by CSRD will bring EU corporate non-financial disclosures closer to all-encompassing ESG-aligned reporting, rather than purely climate-related disclosures. It is expected that work on the first draft of the sustainability reporting requirements will be ready by mid-2022. If it passes the EU legislative process without major delays, the new sustainability reporting regime could apply in early 2023 requiring large companies to comply for the first time in their 2024 annual report, covering the 2023 financial year.