EU ESG reporting regulations will impact UK and US companies
The European Commission is influencing business behaviour through the Sustainable Finance Agenda. UK and US companies will be affected by the ESG reporting regulations if they have subsidiaries in Europe.
US companies not only need to prepare themselves for the proposed Securities and Exchange Commission1 (SEC) Environmental, Social and Governance (ESG) reporting disclosures but should also ensure they are readying themselves for the impact of the international ESG reporting requirements such as the Corporate Sustainability Reporting Directive2 (CSRD).
Within the EU, CSRD is expected to impact nearly 50,000 entities. This is far more than are affected under the current EU reporting requirements. CSRD, which entered into force on 5 January 2023, requires all large companies and all listed companies (except listed micro-enterprises) to disclose information on their risks and opportunities arising from social and environmental issues and on the impacts of their activities on people and the environment.
EU subsidiaries of UK and US companies will be expected to provide substantial ESG disclosures, demonstrating the robustness of their ESG strategy, targets, KPIs and progress, as well as the ESG performance of their products/services and value chain.
One of the requirements of CSRD is to complete a double materiality assessment to determine the priority topics for a company’s ESG strategy and reporting. This type of assessment involves stakeholder mapping and engagement, determining the impact of ESG on the organisation and the impact the company has on the ESG topic. In addition, the financial impact of ESG is also considered.
Climate change is a good example of this inside-out approach, where the impact of climate change on the company is assessed, for example flooding and supply chain disruption. The company would also need to consider their contribution to climate change e.g. use of fossil fuels, production of single-use plastic, use of their products and advice provided to clients.
CSRD also imposes mandatory assurance for reported sustainability information. This is likely to be conducted by a company’s financial auditors if they have the correct skills and experience.
The first set of companies under the scope will have to apply the standards in the fiscal year 2024, with reports published in 2025.
Next steps
Given the short timescales, we would recommend conducting a double materiality assessment urgently and, in the meantime, reviewing current ESG strategy, targets and KPIs against CSRD requirements and wider international reporting requirements. We would also recommend reviewing the current system in place to track ESG data and ensure data is being tracked robustly at a subsidiary level.
Author: Nicola Stopps, CEO, Simply Sustainable