What Brands Need to Know About the EU-wide Sustainability Reporting Standards

Kate Nishimura
·7 min read

Brands doing business in Europe will soon be subject to new sustainability reporting regulations—and experts recommend they start doing their homework today.

The Corporate Sustainability Reporting Directive (CSRD), introduced by the European Commission two years ago, will require companies selling products in European countries to adopt and adhere to EU-wide Sustainability Reporting Standards (ESRS). When the legislation is finalized, enterprises will face more stringent non-financial reporting rules centering on Environment, Social and Governance (ESG) issues.

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Companies will be required to disclose information related to emissions and climate impact, based on standards aligned with the Paris climate agreement. They will also be tasked with reporting on water and chemical usage, worker wages and gender pay gaps. The European Commission will adopt the first set of 12 standards common to all companies in June—and they’ll apply to global organizations, not just EU-based brands.

Matthew Clark, shareholder and co-leader of the corporate national practice group at Dentons Cohen & Grigsby law firm, said that it stands to become “really important for companies to get ahead of this today,” rather than waiting until reporting becomes mandated in January 2024. When it comes to ESG reporting, “This is not an area that’s going to go away,” he said, “and it seems as though it will become more stringent over time, not less.”

Size matters

Firstly, companies must do their due diligence to learn if they will be covered by the CSRD.

Non-EU companies will be required to provide sustainability data as a part of their annual management reporting if they have seen a European turnover of more than 150 million euros for the previous two consecutive years, have a Europe-based subsidiary or branch with turnover over 40 million euros per year, or have a “large” European subsidiary. Small-to-medium enterprises (SMEs) will be subject to reporting if they are listed on any EU-regulated market, or stock exchange.

In June, the commission will finalize the information that companies will need to report, and how they will be required to present the information, Clark said.

Executives should be meeting with their finance teams to examine the unique requirements of both parent organizations and subsidiaries. Based on revenue, the directive might not apply to them today, but growth projections could help them determine a timeline for compliance. “If they expect that they’ll be hitting these numbers in the next two to three years…they could quickly find themselves subject to the CSRD and not be prepared,” Clark added. It’s incumbent upon enterprises doing business in the EU to run analysis as their businesses grow, “and the law is going to change on an annual basis,” he said. “There will be additional requirements—there’s no doubt about that.”

“There is no public register” that lists the companies that are covered, and it’s up to organizations to determine their responsibilities or risk being dinged, according to Akshay Sinha, senior advisor for global policy development and Asia-Pacific affairs at Sorini, Samet & Associates. Analysis from financial data firm Refinitiv shows that about 10,400 global, non-EU companies with an EU stock listing—along with more than 100 firms with over 150 million euros in revenue that are not listed in the EU—will be subject to the CSRD. About one-third are American, the group’s insights revealed, meaning that more than 3,000 U.S. firms will be immediately impacted by the rules.

Data points

The CSRD represents a critical component of the EU’s “ESG Web,” which supports the Green Deal’s goal of transitioning Europe into the first climate-neutral continent by 2050, Dentons research showed. Enterprises will be compelled to report on several ESG indicators in a dedicated section of their management report or annual disclosure using a single electronic, machine-readable format, the law firm said.

The process will involve “collecting the information, tabulating it putting it in the required format—and the regulation has quite specific requirements in terms of reporting digitized information,” Sorini’s Sinha said. While most public companies are accustomed to financial audits, auditing sustainability will present a learning curve. “It’s something that companies are going to have to figure out—and getting the information is very tricky.”

Reporting will require traceability across the entire textile and apparel value chain, beyond a company’s owned operations. “This is a very complicated industry, where there is a lot of opacity,” he explained. “You’ve got multiple tiers, different relationships, and you don’t have much information sharing.” Historically, brands maintain relationships with their Tier 1 suppliers, and “even a lot of the big brands may not necessarily have information where their cotton or raw materials come from.”

A significant contingent of companies has been investing more in traceability in recent years because of shifting demands from consumers and shareholders, however, and they may be better positioned when the directive takes effect. “They may not need to come up with something entirely new” when it comes to compiling information on their supply chains, but they will “probably have to increase the breadth and the depth of what they’re already gathering right now,” Sinha believes.

“I think it’s going to be an area for most companies where currently, they might be collecting some of the data, but they’re not collecting all of the data that’s required,” Clark added. What’s more, companies covered by the legislation will have to ensure that what they’ve provided is accurate, verifiable, and organized for public disclosure under the standards of the CSRD.

“They’re also going to have to start to look at their partners,” he added, noting that there may be a “trickle-down impact” across the different tiers of the value chain. Firms may begin to require their suppliers to provide more information to feed into their reporting and add new rules to their vendor guidelines when developing relationships with new suppliers. “We expect the supply chain will continue to feel the impact of these regulations, even if they don’t apply to them directly,” Clark said.

When it comes to penalties for non-compliance, each EU member state will define its own course of action, he added. The European Union Commission has specified that the sanctions must be “effective, proportionate and dissuasive” if a company is found in violation of the CSRD. The member state in which it is doing business much make a public declaration describing the infraction and identifying the guilty party, issue a cease-and-desist order, and take pecuniary penalties against those responsible—though those actions, as of yet, have not been elucidated.

Sinha said the EU regulations may present some overlap with proposed climate legislation in the U.S. Last March the U.S. Securities and Exchange Commission (SEC) revealed a plan to require businesses to disclose information about their Scope 1 direct greenhouse gas (GHG) emissions, along with Scope 2 emissions generated by purchased electricity and other forms of energy. Groups would also be compelled to provide information about certain GHG emissions resulting from “upstream and downstream activities in its value chain (Scope 3).”

The reporting standards, if passed, would be “narrower” than what the CSRD will require in Europe, Sinha said. That means that companies who might have believed that compliance with the SEC law would help them cover their bases for CSRD are likely out of luck. “The SEC requirements, assuming they go through, will probably cover one or two of the environmental criteria” outlined in the CSRD. “There is no law that covers what the EU is demanding” at this time, he said.

Firms should be aware of the timeline for CSRD ratification and implementation, Clark said. The first 12 standards will be ratified in June, and European companies subject to the non-financial reporting obligation will be required to begin making their disclosures at the end of fiscal year 2024. Sector-specific reporting standards are expected to be released in June 2024. In January 2028, European subsidiaries of non-European companies with a turnover of more than 150 million euros in Europe will have to comply with new reporting requirements. “There’s a cost to not being sustainable to our environment—our clients generally recognize that,” Clark said.

This story appears in Rivet’s summer issue. Click here to download the entire issue.

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