By Federica Attianese
On April 29th, 2024, the European Parliament approved the text of the Corporate Sustainability Due Diligence Directive (CSDDD), the new due diligence directive requiring companies to reduce their negative impact on the environment and human rights, and the new Voluntary Sustainability Reporting Standards for non-listed Small and Medium Enterprises (ESRS VSME) are currently undergoing public consultation. Will Europe succeed in its quest to become the first climate neutral continent? What are the most recent reforms towards the achievement of the goal?
The European Green Deal and the NRFD: towards climate neutrality
In recent years, the European Union has initiated a series of reforms to achieve a leading position in the sustainable transition compared to the rest of the world. Through its commitment to climate neutrality to be reached by 2050, and the structural measures linked to the Industrial Green Deal, Europe is working towards the creation of an increasingly sustainable economic and financial system, aimed at making companies aware of and more responsible for their impact on the planet, and at strengthening the competitiveness of European industry itself. In this sense, Directive 2014/95/EU – the Non-Financial Reporting Directive (NRFD) concerning the obligation to disclose non-financial information for large companies – represented a crucial step in this direction. However, it has often been criticised for the lack of detailed guidelines, which has led to several standards, including the GRI Standards (Global Reporting Initiative Standards).
The innovation of CSRD
In this context, the Directive 2022/2464/EU, the so-called CSRD (Corporate Sustainability Reporting Directive), came into being. By amending the NRFD, its main purpose is to extend its scope of application, through widening the number of companies subject to mandatory reporting and defining more stringent requirements on the information to be reported. The modality of drawing up sustainability reports changes too, through five main innovations. The first is the dual materiality analysis, which requires companies to provide material sustainability information both on the impact of their activities on people and the environment (impact materiality), and on how sustainability factors affect them and their results (financial materiality). This analysis must be carried out in accordance with the ESRS (European Sustainability Reporting Standards), established by the EFRAG (European Financial Reporting Advisory Group), aimed at guaranteeing homogeneity in the way it is drawn up. The standards are designed to be interoperable with the GRI Standards, and consistent with both the recommendations of the TCFD and the disclosure requirements issued by the EU Green Taxonomy, the unified classification system for sustainable economic activities in Europe.
The Directive also envisages the so-called ‘assurance obligation’, according to which the review of the sustainability report must be carried out by an accredited statutory auditor, and the obligation to digitise the information in reports, using XHTML and the XBRL markup language. Another important aspect is the placement of sustainability information, which has to be included in the Management Report and not in a separate document, in order to guarantee greater integration between financial and non-financial information. Finally, the integration of ESG aspects along the value chain, whereby companies, when reporting sustainability disclosures, will also have to include information on material impacts, risks and opportunities related to the entire value chain resulting from due diligence activities and materiality analysis.
The novelties and criticisms arising from the CSDD
The CSDDD (Corporate Sustainability Due Diligence Directive) represents a further step in the same direction, a sort of corollary to CSRD, but in which the EU looks at the entire supply chain for the first time, thus extending ESG transparency obligations. The directive aims to make companies more aware of and act responsibly on the social and environmental impacts of their supply chain. The approval process of the text by the European Parliament was far from straightforward and included several changes that received criticism. The new version of the directive states that companies operating in high-risk sectors do not fall within its scope anymore. As a result, certain sectors that are particularly at risk of human rights violations and/or environmental depletion, such as oil, mining, and fishing, are not covered. Furthermore, the legitimacy of trade unions to bring direct actions against companies to enforce their liability in civil law for damages is no longer foreseen. The possibility of authorising trade unions to bring legal remedies to protect individuals harmed by the actions of companies in breach of due diligence obligations is postponed to the member states, when they transpose the CSDDD into their national laws.
What about unlisted SMEs? The importance of VSME Standards
A further tool is the voluntary sustainability reporting standards for non-listed SMEs, or ESRS VSMEs, which are subject to public consultation until 21 May 2024. These standards were developed in parallel with the ESRS LSME, aimed at listed SMEs subject to the CSRD, which will be issued as a delegated act of the European Commission and enter into force on 1 January 2026. The introduction of the ESRS VSMEs aims to offer SMEs a clear guide to improving their sustainable practices in the complex arena of sustainability standards, with the hope of simplifying the regulatory landscape. The principle guiding these standards is proportionality, which ensures a sustainable reporting path that considers the fundamental characteristics of individual entities. More specifically, the ESRS VSME Exposure Draft includes three modules: the basic module, primarily aimed at micro-enterprises and that does not require a materiality analysis; the PAT module, which adds discursive information on policies, actions and objectives and requires a materiality analysis; and the BP Module which identifies additional data that may be required by investors or clients, and which includes a materiality analysis too.
Towards the right direction?
Without a doubt, the EU, through its numerous sustainability reforms, is shaping a regulatory landscape in which companies will increasingly have to integrate social and environmental responsibility into their business practices. The CSRD has already placed important transparency obligations that companies must comply with, and the CSDDD – despite some remaining critical points and the downgrading suffered on the way to approval – is moving in the same direction by expanding its scope. It will be crucial to focus especially on the ESRS VSMEs, which offer unlisted SMEs a very flexible tool to adapt to new requirements without suffering excessive bureaucratic and financial burdens. With an increasing number of regulatory instruments, the future of the EU is therefore hopeful, but it will only be through a joint commitment by both Member States and businesses that the goals can finally be achieved.
About the Author
Federica Attianese is an Italian recent Master’s graduate in Global Studies & EU at the University of Salerno, and is currently volunteering as a Development and Policy Officer at EasySustainability NGO. Attianese holds a Bachelor’s degree in Political Science and International Relations from the University of Salerno, and enhanced her international exposure with two exchange programs, at the University of Granada (Spain) and the University of Bucharest (Romania).
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