Organizations are facing ever increasing demands for more extensive corporate reporting and greater transparency from investors, regulators, customers, and other stakeholders. This poses a challenge for organizations due to the pace at which they are being asked to report and ensuring the required data is available and reliable.
By introducing the ambitious Green Deal with the ultimate goal of reaching net zero carbon emissions by 2050, the EU has made a commitment to transforming the European economy and supporting sustainable business models. To achieve this, a clear definition of what is sustainable is required and this is where the EU Taxonomy comes into play.
The EU Taxonomy is a classification system, establishing a list of environmentally sustainable economic activities. It provides companies, investors, and policymakers with definitions of which economic activities can be considered environmentally sustainable. In this way, it is intended to create security for investors, protect private investors from greenwashing, help companies become more climate-friendly and help shift investments to where they are most needed.
The Taxonomy Regulation was published in June 2020 and establishes the basis for the EU taxonomy by stipulating 6 environmental objectives and 4 conditions for an economic activity to be considered sustainable:
Climate change mitigation
Climate change adaptation
Sustainable use and protection of water and marine resources
Transition to circular economy
Pollution prevention and control
Protection and restoration of biodiversity and ecosystems
Supplementing the Taxonomy Regulation, the European Commission adopts Delegated Acts to define the technical screening criteria and create an exhaustive list of sustainable economic activities.
The EU Taxonomy Regulation also introduces new reporting obligations for companies. Amendments to the requirements for non-financial information reporting governed by the Non-Financial Information Reporting Directive (NFRD), and reporting sustainability information under the Corporate Sustainability Reporting Directive (CSRD), oblige companies to publish specific KPIs. For non-financial undertakings, there are 3 KPIs - the proportion of sustainable activities in their turnover, capital expenditure, and operating expenditure, and a number of mandatory qualitative disclosures. For financial undertakings, KPIs vary based on the type of undertaking (bank, insurance, etc.), but are generally based on the Green Asset Ratio, which inform investors and stakeholders on the sustainability of a business and how focused it is on becoming more sustainable.
The scope of the EU Taxonomy Regulation and the obligation to assess the company’s economic activities and report the relevant disclosures will be extended to the same entities that will be obliged to report sustainability information under CSRD. Compliance with the requirements of the EU Taxonomy Regulation will also be subject to limited assurance, which will be mandatory in relation to CSRD.
Recognizing the shortcomings in the existing rules on disclosure of non-financial information, the NFRD, the European Commission has proposed amending the rules by a new directive. The NFRD has not met the expectations of providing investors with coherent, sufficient and comparable information. The CSRD introduces more detailed reporting requirements and broadens the scope of applicable companies. As of 2024, large public interest entities (PIEs) with more than 500 employees will be required to report on the sustainability of their business activities, such as environmental impacts, social impacts, human rights, and governance factors. The scope of the CSRD will be extended to other groups of businesses and will also apply to:
The European Parliament and the EU Council approved the draft CSRD in November 2022 and the final version was published in the Official Journal of the European Union on 16 December 2022. The CSRD entered in force on 5 January 2023. It is currently being implemented into Slovak law (via the Accounting Act and the Statutory Audit Act) and this transposition is expected to be completed by June 2024.
PwC remains committed to helping companies improve their reporting in order to ensure compliance with the required standards and regulations. We also support companies with creating and developing sustainability reporting. Moving beyond managing their compliance and reputational risks, many companies have embraced sustainability reporting as an opportunity to attract investors or consumers, reach new markets, improve their communication, improve access to financing, and prepare for upcoming mandatory reporting requirements in advance.
A sustainability report is a report published by a company or organization about its environmental, social and governance (ESG) impacts. It enables a company to be more transparent about its environmental and societal impacts and the risks and opportunities it faces.
Investors and other stakeholders are requiring companies to disclose more about their sustainability and environmental, social and governance strategies, which increases the importance of sustainability reports.
A sustainability report enables companies to effectively answer a wide variety of questions stakeholders may raise in a single document.
However, creating a sustainability report can be challenging, as it must meet legislative and reporting methodology requirements and have the right balance of information from all three agendas – environmental, social, and governance. Companies must decide how to communicate relevant information and what sustainability information and indicators to report.
In addition to the CSRD and the EU Taxonomy, there is an extensive amount of specific ESG related legislation financial undertakings must comply with. To find out more, visit our web page on ESG in the financial sector.
