In April 2021, the European Commission launched a proposal for a Corporate Sustainability Reporting Directive (CSRD) to replace the existing Non-Financial Reporting Directive (NFRD). With this ambitious set of measures, Europe aims to make Environmental, Social, and Governance (ESG) reporting more transparent to increase sustainable investment in Europe. The EU Taxonomy Regulation is also being further developed with a classification system that allows companies and financial market participants to identify sustainable economic activities. This new EU Taxonomy will not be a stand-alone regulation and will be included in future non-financial reporting.

An enhanced framework for sustainable activities: evolving from NFRD to CSRD

Walter: "The EU Taxonomy is a science-based classification of economic activities that contribute to ESG objectives.  The classification is part of the reporting requirements for companies that fall under the scope of the NFRD - and soon under the CSRD as well. The EU Taxonomy comes into effect as of January 2022, and already covers the 2021 financial year. Fortunately, this is a transition year, which means organizations won't have to report on the full taxonomy yet, but will be required to do so from 2023 onwards. On a separate note, a number of specific reporting rules will apply towards financial sector entities. Moreover, the EU Taxonomy is still in a stage of further development, with an initial focus on climate-related economic activities.”

Steven: "The CSRD can be seen as the successor to the NFRD, which prescribes how public interest organizations should report on sustainability information. The introduction of the CSRD will cause a significant shift in the European reporting landscape. The way the proposal is currently drafted, the CSRD will come into force as of the 2023 financial year. The Directive should improve the sustainability reporting of organizations and lead to more transparency, as well as comparability of data. This should give investors and other stakeholders more certainty in making economic decisions based on accurate sustainability information and data.

“The CSRD will cover not only public interest organizations but also large, unlisted companies," Steven continues. "Under the current NFRD guidelines, more than 10,000 companies have to report at a European level today. With CSRD, we expect a fivefold increase in the number of European companies that will have to comply with the new directive. In Belgium, we even expect the number of companies in scope of the CSRD to be ten times higher than under the current NFRD. The reporting requirements will become more extensive and stringent," affirms Steven. "Under the NFRD, for example, companies have to base their reporting on an internationally recognized framework. The CSRD, on the other hand, will require companies to meet more rigorous standards, including reporting in accordance with the EU Sustainability Reporting Standards." 

Towards more transparent and reliable reporting

Steven: “The goal of CSRD is clear: more transparent and reliable non-financial data. Over time, we will move toward increased standardization in reporting on non-financial information, as is already happening with financial data, with standards like IFRS. Financial reporting has been around for about 200 years, while non-financial reporting is only a few decades old, so we still have a long way to go, which will accelerate with the new taxonomy and the CSRD. The European Commission intends to move towards equivalent reporting so that investors, financial markets, their participants, and other stakeholders have a good basis on which to make their decisions. For companies, this is an important incentive to make a real sustainable transformation.”

“Until now, nobody could define exactly what was sustainable and what was not. There were vague aspects that sometimes led to initiatives that were sustainable in name only. You need a solid legal foundation if you want sustainable investments and financial products to grow beyond their longstanding niche market. By making use of the new EU taxonomy, everyone is finally speaking the same language," Walter clarifies. 

A step-by-step introduction to taxonomy

Walter: "Reporting is the final step in the process, where you publish the result of your taxonomy analysis. For corporates, the taxonomy ranks the different economic activities of a company. First, one needs to look at whether an activity falls within the scope of regulation. If so, a second step analyzes whether the activity can effectively be qualified as sustainable (i.e. taxonomy-aligned). Currently, the climate is high on the agenda so, naturally, it will be the focus during fiscal year 2021. Starting in fiscal year 2022, the eligibility and alignment test should also be made with respect to other environmental goals: water, circular economy, pollution prevention, and biodiversity protection. Moreover, the EU taxonomy is a living document, meaning that the criteria are set to be periodically evaluated. This will be necessary to move to zero-carbon within one generation. By regularly reviewing the criteria, the taxonomy can evolve with technological innovations and a changing context. However, this also means that benchmarking against the EU Taxonomy will be a constant exercise."

Preparation is everything: building roadmaps to fill in gaps

Steven: “Companies need to take steps in the short-term to prepare for the implementation of CSRD.  Specifically, they need to integrate sustainability and reporting into their business operations and governance structure. Corporate executives also need to consider that sustainability reporting must be a part of the annual report, and that this therefore impacts director liability. Companies should also identify the gaps in their current reporting and develop a roadmap to fill in these gaps. Finally, companies need to set up reporting processes, systems, and structures to enable robust and accurate reporting of non-financial data.”

“This transition will be very intensive, especially for companies that are not reporting on sustainability at all today,” Steven remarks. “Nevertheless, it is important that - despite the short time frame – they make the necessary preparations to be able to comply with the strict reporting standards in time. Because, starting with financial year 2023, companies covered by the CSRD will have to obtain (limited) assurance on their sustainability reporting from an independent third party."

Walter: "Lastly, the CSRD and the EU Taxonomy will also impact the way companies organize their activities. Companies will have to appoint a person in charge to ensure that the guidelines are respected in all work processes. This requires education, training, and perhaps additional manpower. These extra efforts pay off, because it will enable companies to position themselves more prominently towards a rapidly growing number of sustainable investors and other stakeholders who attach great importance to sustainability. In that respect, it is without a doubt a unique opportunity for companies and financial market participants to think strategically about sustainability."

Are you ready for the transition? How KPMG is assisting our clients

Walter: "We are already working on readiness assessments for our clients in connection with the EU Taxonomy. In doing so, we are assessing where they find themselves in the regulatory framework and what steps they need to take to be compliant with the new regulations.”

Steven: "We always closely follow the latest developments in sustainability reporting. We help our clients to prepare to the maximum extent. We assist them in setting up and shaping their reporting and in identifying and analyzing the gaps in their current reporting compared to international frameworks and (European) regulations. Furthermore, we support our clients in evaluating the maturity of their processes, systems, and data, as well as provide assurance on their reported sustainability information and indicators."


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