New European ESG Law Needs Immediate Attention from Companies

Member Companies need to actively identify their listed securities in the European Union due to a potentially overlooked clause in the Corporate Sustainability Reporting Directive (CSRD).  The new law, which comes into effect in January 2024, could demand these companies to provide an extensive ESG report by 2025, sooner than many anticipated. 

Although the directive is commonly referred to as an “environmental directive,” in reality it addresses a broader spectrum of ESG issues and disclosures. Given the extensive disclosure requirements, companies are advised to conduct a comprehensive evaluation immediately. Recommendations include:

• Issuers: Collaborate with the regional finance team in Europe to identify whether the company or its subsidiaries have any listed debt or equity security in a regulated EU market, like the Luxembourg Stock Market, Euronext Paris, or the Frankfurt Stock Exchange. If they do, the company or its subsidiaries might have to issue a report in 2025. 
  
  
• Scope: Work with finance and legal teams to review the group structure and determine the entities within scope and when the CSRD becomes applicable, as the directive covers both individual entity and consolidated levels in certain scenarios. 
  
  
• Disclose or Delist: Companies identified as issuers for 2025 disclosure must decide between preparing a report or delisting their securities to avoid immediate compliance. 
  
  
• Analysis: For companies opting to publish a report in 2025, a detailed gap and risk analysis is necessary. Even though most U.S. companies already generate some ESG reports, additional disclosures will be needed to meet the CSRD compliance. Experts caution that this analysis might take several months.
  
  
• "Double materiality": The preparation of disclosures under CSRD requires adherence to a "double materiality" standard and sign-off from a third-party auditor. Companies should initiate processes to identify material components of their upstream and downstream value chain.
  
  
• Noncompliance penalties will be decided by individual EU member states once the directive is transposed. Generally, the penalty is expected to be on par with the existing penalties under the EU’s General Data Protection Regulation (GDPR).

Outlook: All EU States are required to transpose the directive into their national law by July. HR Policy Global will provide analysis and updates as each state adopts the directive.