Resulting from investors and stakeholders incentive to obtain information on the impact of businesses on people and the environment, combined with the results of industrial effect on environmental change, EU introduced new set of non-financial information reporting requirements for large and listed companies shifting reporting focus from profit-oriented to sustainability-oriented..
Non-EU countries will be affected by this sustainability revolution, as explained in further notes.
Paris agreement is international treaty adopted in 2015 that aims to limit global warming to below 2 degree C above pre industrial levels, with an aspiration to limit the temperature increase to 1.5 degrees Celsius. As EU response to the Paris agreement, EU adopted numerous strategic goals, including reduction in GHG emissions by 2030 by 55% and becoming climate neutral until 2050.
As part of response to the Fit for 55 Package, which represents EU plan to reduce EU greenhouse gas emissions by at least 55% by 2030, in comparison to the 1990 levels, EU adopted Corporate Sustainability Reporting Directive (adopted as of January 2023), which became effective as of January 2024. In accordance with the CSRD all large and listed companies (excluding micro-listed companies) are required to report on social and environmental risks they face and on how their activities impact people and the environment.
The reporting covers three ESG components including:
- E (Environmental Impact) – report on environmental performance
- S (Social Sustainability) – report on labour practices, respect for human rights, community engagement
- G (Governance) -report includes governance structure with review on how sustainability enters decision making process;
First mandatory reports in accordance with CSRD will be applied FY 2024, and set of standards including European Sustainability Reporting Standards (ESRS) published in December 2023 are available for guidance on reporting requirements. Regulations introduce three benchmarks for classification into the large entities subject to the reporting requirements as follows: more than 250 employees, more than 50 million EUR of turnover and more than 25 million EUR in assets. Also, subjects of the CSRD mandatory reporting are non-EU companies generating over 150 million EUR on EU market. From 2025 regulators plan expansion of reporting requirements for additional companies and sectors inclusion.
That this phenomenon which is rewiring economy will not bypass non-EU countries, is forced by introduction of Carbon Border Adjustment Mechanism (CBAM), adopted in October 2023, and effective for period from January 2024. CBAM is a policy tool installed in order to address the issue of carbon leakage, where EU producers face higher costs due to the stringent climate regulations in comparison with the weaker climate policies countries. In accordance with CBAM high GHG emissions industries including: cement, iron & steel, aluminium, fertilisers, electricity and hydrogen, that are exported to the territory of EU have to submit reports regarding GHG emissions during the transition period (period from 2024 until 2026). From 2026 when full implement phase of CBAM begins, imports of the products originating from non-EU countries specified under CBAM special taxation will apply, in order to enhance inclusion of stricter GHG policies in non-EU countries, or level competence by increasing costs of such imports in comparison with producers coming from countries subject to strict environmental policies.