The world is evolving quickly, and businesses and citizens are becoming more aware of their social and environmental obligations, with this being reflected in the way organisations operate and individuals live their lives. Businesses are supportive of the global sustainability agenda and are committed to finding ways to integrate sustainability into their operations as seamlessly as possible, without disrupting or adding a disproportionate administrative burden to their operations. Increased expectations placed upon businesses by consumers and stakeholders for more transparency on the social and environmental impacts of their activities can no longer be ignored.
It is crucial that businesses embrace the added scrutiny that they face to ensure that they are prepared to weather the challenges of the short term so as to thrive in the long term. Nevertheless, a balance must be struck. Change must be brought about in a proportionate manner, without placing unnecessary administrative and financial burdens on businesses which may disrupt their competitiveness. Businesses need a regulatory framework that allows them to look at their business models and allow them to develop practical capacities to report on their sustainability, without burdening them with unnecessary red tape.
Recently, the European Commission published a proposal for a new Corporate Sustainability Reporting Directive (CSRD). It aims to revise and strengthen the existing sustainability reporting rules, extends the scope, and aims to ensure that companies report reliable and comparable Environmental, Social and Governance (ESG) information.
Strengthening sustainability reporting rules is a welcome initiative, though there are a number of elements in the proposal that are concerning to businesses. An important one is that the CSRD proposal extends the scope of sustainability reporting to publicly listed SMEs and all large companies, as opposed to just listed large companies. This may have the unintended consequence that SMEs may be disincentivised from listing on a regulated market to fall out of the scope of the CSRD. It also creates an uneven playing field for SMEs, since the obligations on listed SMEs are much higher than on non-listed SMEs.
Ensuring that sustainability disclosures are consistent and reliable is essential to meeting the information needs of stakeholders, whilst also providing an element of predictability to businesses. To this end, EU action in adopting standards on sustainability reporting is to be commended, as it would bring about more legal certainty on the type of information companies are expected to report and how this is to be calculated and presented. These standards should be based on globally recognised sustainability reporting standards to ensure that companies already reporting on these standards have an easier transition, while companies that are new to ESG reporting would find it easier to build internal capacity.
The CSRD proposal includes an obligation for companies to cover sustainability reporting in their management report. Caution must be applied here as the principle of sustainability reporting is primarily directed towards informing relevant stakeholders by the actions of a company through the disclosed sustainability information. A standalone sustainability report presents a better opportunity to those stakeholders to extract the required information, rather than having it buried in an extensive management report.
A mandatory assurance obligation is also foreseen in the CSRD proposal. Care must be taken to ensure that ESG information, which often depends on qualitative information and context, is not treated in the same way as financial information, which is more clearly defined. Sustainability information is extensive and extremely diverse, particularly when compared to financial information. Therefore, one needs to ensure that mandatory assurance would not lead to disproportionate burdens and costs when compared to the added value, especially when combined with the detailed reporting requirements.
Thought must also be lent to the costs that are foreseen for the implementation of the CSRD proposal, which are much higher than what has been experienced under the Non-Financial Reporting Directive. At a time when the economy is still reeling from the impact of Covid-19 and companies are trying to rebuild, they should be encouraged to protect cashflow rather than be expected to assume these additional costs.
The proposal also foresees ambitious timelines for companies to report under the new obligations. Proposed timelines do not seem to factor in enough time for implementation and capacity-building following adoption and endorsement of the standards. The introduction of a transition period providing for voluntary reporting for a pre-determined timeframe would be ideal. This would provide the framework for companies to build the required capacity for quality standard reporting until it becomes an obligation
The CSRD is appreciated as being necessary in the long term, and what it tries to achieve is not in dispute. Change must be brought about in a coordinated and proportionate manner, without placing unnecessary administrative and financial burdens on businesses which may disrupt competitiveness.
The specific needs of SMEs must not be forgotten. Additional administrative burden and costs inevitably lead to decreased competitiveness. The introduction of the CSRD should be complemented with the necessary assistance aimed especially towards SMEs to help them in this transition to meet sustainability reporting obligations.
The MBB will ensure to keep the business community in Malta abreast of political and legislative developments at an EU level.
The Malta Business Bureau is the EU-business advisory office of the Malta Chamber of Commerce, Enterprise and Industry and the Malta Hotels and Restaurants Association. The Malta Business Bureau is a partner of the Enterprise Europe Network.
This article was first feature on the Sunday Times on the 5th September 2021.