Reinier advises national and international companies
reinier.russell@russell.nl +31 20 301 55 55Esmée advises on corporate law, contracts and corporate litigation.
esmee.bootsman@russell.nl +31 20 301 55 55Over a quarter of companies are not ready for the sustainability or ESG reporting required from 2025. What rules will companies have to comply with? What requirements are already in place now?
The Corporate Sustainability Reporting Directive (CSRD) requires listed companies in the EU to publish an ESG report. Only a limited number of Dutch companies currently have an ESG report. But why is ESG becoming mandatory? What must be included in an ESG report? For whom will ESG reporting become mandatory?
ESG stands for three important sustainable aspects of a company’s operation: environmental, social and governance. The latter involves how the various bodies withing a company (shareholders, management board and supervisory board) relate to each other.
ESG reporting aims to encourage companies to seek a balance between financial results, corporate transparency, social interests and the environment. This balance would lead to better results for the company and society. In doing so, achieving ESG goals would create long-term added value for portfolio companies, both regarding risk mitigation and value creation for shareholders. ESG reporting is therefore used by investors to determine their long-term investment vision.
For the environmental aspect, the contribution of companies to environmental challenges is considered. Sustainability of companies and their operations plays an important role for this pillar. Good ESG reporting addresses a company’s use of energy, the addressing of climate change, reducing waste, carbon emissions and reducing its carbon footprint. Companies have to describe in the report how they are trying to address these issues. How this is done varies per business type. Manufacturers may reduce pollutant emissions, whereas for an accountant making their office building more sustainable and influencing how employees get to the office (by bike, public transport or car?) may play a more important role.
Businesses play an important role within society. They provide jobs and develop, make and distribute products. Therefore, businesses also have an important role in addressing social problems. They can do so by adjusting their policies on issues of human rights and working conditions. The Directive also explicitly mentions as a goal of ESG reporting the creation of more opportunities for civil society organizations to engage in dialogue with the company about its business practices and their consequences.
The social aspect can be divided into employees, suppliers, consumers/customers and communities. For employees, companies can look at equal pay, a diversity, equity and inclusion (DEI) programme to raise employee awareness, employee work experiences and workplace safety. This varies by organization.
Regarding suppliers, it is mainly important that raw materials and products are supplied without violations of human rights and unsafe working conditions. These obligations can be laid down in the agreements concluded with the suppliers.
Finally, consumers and communities play a role as well. Of importance is consumer satisfaction, the company’s funding of social projects and its support for human rights and work standards. Using these components it is possible to determine how the company operates and its role in society.
Sound business operations are reflected in the way the company is run. The ESG statement therefore also deals with the internal operation of companies. The presence of internal controls, adherence to applicable regulations and company policies are considered. The transparency with respect to paying taxes and complying with the aforementioned pillars are also included. In addition, this pillar means the system of implementation and controls. Is the board monitored and by whom? This is all covered in this pillar.
The Directive requires companies to include an ESG report in their financial statements. The date by which they must comply with this obligation depends on the size of the company. Starting in fiscal year 2024, large companies that are already required to report under the Non-Financial Information Disclosure Decree must include an ESG report. From fiscal year 2025, the obligation will apply to all large companies. Starting from fiscal year 2026, listed SMEs must include ESG reporting.
Non-EU companies may also be required to make an ESG report as of the fiscal year 2027. If EU subsidiaries are covered and the group to which they belong had at least €150 million turnover in the EU at all times in the last two fiscal years, the subsidiaries’ annual reports must indicate how an ESG policy is handled at the group level. The same also applies to branches in a country with more than €40 million in turnover.
The requirement to include ESG reporting will lead to a significant change in business practices and policies. Companies must now pay attention to sustainability in their various processes in addition to doing business and provide written accountability for this.
Pursuant to the Corporate Governance Code, since 1 January 2023, Dutch listed companies have already been required to account for a number of topics in their annual report that are also addressed in ESG reporting.
In addition, the EU is working on a Corporate Sustainability Due Diligence Directive (CSDDD). Under the current concept, companies and especially the management are given a duty of care for sustainable business practices that avoid negative environmental and human rights impacts. Companies and directors can be held liable if they fail to meet this duty. Because the duty of care includes contracts with suppliers and subcontractors, the Directive would have far-reaching implications not only for large companies but also for small and medium-sized enterprises.
Are you, as a company, required to include an ESG report or will you fall under this requirement? Would you like to learn more about legal requirements for your business structure? We will be happy to advise you. You can also contact us for other questions about corporate law. Please contact us:
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