Earlier this year the European Commission published a proposal for a Corporate Sustainability Reporting Directive (CSRD). The topic might not sound familiar to the broader public. However, reporting and disclosures of non-financial activity are central for the EU to enable a shift to a carbon neutral economy.
Sustainability finance and practices are gaining considerable traction among the public, especially the millennials and the Generation Z. This is the result of the EU’s push to transit to a greener economy. The EU has been advancing the idea for quite a while and since the Paris Agreement in 2015, the push has been greater also in close contact with the Network for the Greening of the Financial System. Currently, there are multiple regulations on the table, inter alia the Green Deal, the Fit for 55, the Taxonomy Regulation and the Sustainable Finance Disclosure Regulation, as well as the CSRD.
The CSDR will apply to companies listed on the European markets, excluding micro enterprises. However, listed small and medium businesses falling within the scope of the proposal, will have until the 1st of January 2026 to comply with its requirements. The directive seeks different KPIs for financial and non-financial institutions. Whereas, hitherto, it is estimated that roughly about 11,000 European businesses fall under current sustainability reporting regulations, a number which, according to different projections, is foreseen to significantly increase after this directive comes into effect.
There are different branches of regulation and institutions working in parallel tracks to advance the idea of attaining a carbon neutral continent by 2050, including the European Central Bank. To funnel investment into sustainable activities, however, investors and stakeholders need to hinge on reliable and comparable information to minimise information asymmetry, hence the CSRD, which followed the Taxonomy Regulation.
We should also strike the right balance between transparent, reliable information and the need to protect those assets, such as the intangible ones, which are key to sustain a company’s long-term sustainability and competitiveness. It is crucial that the upcoming legislation, including the CSRD, will not be counterproductive and have negative effects on businesses’ competitiveness. Intangible assets such as those related to human capital, intellectual property and research and innovation, represent what entrepreneurs have built with passion and tenacity, and therefore disclosing key and sensitive information should not hamper a company’s long-term economic sustainability.
Turning to environmental, social and governance information, known as ESG factors, reporting relates also to the governance and social factors of an enterprise. In summary, the idea is the democratisation of the financial system, and this can only be attained by transparent, validated, and comparable disclosures. It is crucial for the smooth functioning of private investment to limit the administrative burden on small and medium-sized enterprises.
On the contrary, we must incentivise undertakings to disclose more information to the public without additional costs at this critical juncture, strengthening assistance and funds available to help in the transition. At the European level, this should also be viewed in the context of post pandemic whereby businesses’ profits shrunk, and inflation is cost pushing due to disturbances in the supply chain. Notwithstanding, that it is important to transit to sustainable economic models, this should not come at the expense of crowding out private investment. Hopefully, we are on the right path to create a sustainable economy that preserves prosperity and the environment for future generations.
MEP Josianne Cutajar is a Member of the Industry Committee within the European Parliament