Since 2017, companies are required to report on non-financial key performance indicators under the Non-Financial Reporting Directive (NFRD). The information to be reported concerns respect for human rights, treatment of employees and environmental and social matters.
The NFRD applies to large public interest companies with more than 500 employees, including listed companies, banks and insurance companies. The aim of the NFRD is to increase transparency and to support civil society, investors and consumers to evaluate the non-financial performance of large companies. With more than 11,000 companies in scope the NFRD has an important impact on sustainability reporting in the EU.
In order to support the ambitious targets of the EU Green Deal, the European Commission is working on an update of the NFRD. With its work on a new Corporate Sustainability Reporting Directive (CSRD) the European Commission seeks to increase the number of companies that will have to report on non-financial key performance indicators, as well as the information that needs to be reported. The impact on business will be significant and also as tax practitioners, we should monitor this development closely.
How will business be impacted by the CSRD?
The work progress on the CSRD is steady, with a next meeting between the Council and the European Parliament scheduled for May 19 2022 and conclusions expected by the end of June 2022.
A scope enlargement comes as a first certitude: the CSRD perimeter is expected to encompass five times more companies than the current NFRD. The Council wants to extend the scope of sustainability reporting to all large EU companies which have: a payroll exceeding 250 employees, a turnover exceeding 40 million and/or a balance sheet exceeding €20 million total. The Council would even want to go further and include non-EU companies operating in the EU. According to these developments, it becomes clear that the number of companies facing a thorough non-financial reporting on ESG considerations is about to boom.
A second important change concerns the diversity of information to be reported on. The CSRD will bring fundamental changes in reporting practice. The CSRD would require companies to publish an extensive and detailed annual non-financial chapter as part of their management report. Disclosures will be subject to digital tagging and made machine-readable in order to contribute to the single European access point (ESAP) envisaged in the Capital Markets Union Action Plan. The ESAP will be an EU-wide digital platform to companies financial and sustainability information.
When will business be impacted by CSRD?
It is expected that reporting obligations under the CSRD will be introduced in a phased fashion.
A first set of implementing standards concerns reporting obligations for large companies, who according to the European Commission, would have to start reporting under the CSRD in early 2024 for the financial year of 2023. A second set of implementing standards concerns disclosure requirements for listed SMEs, who would have to disclose under the CSRD rules starting from 2026 for financial year 2025. This ambitious timeline is subject to criticism and voices are raised to postpone the entry into force by a year, amongst others by the Council.
Although the legislative proposal is still ongoing, it is the ambition of the European Commission to agree on a final text in the course of 2022, leaving companies with little time to prepare.
What should I do as a tax professional?
This increased transparency on non-financial data will also, directly or indirectly, reveal data that is or can be linked to your tax footprint. It is, for example, expected that reporting under CSRD will to a certain extent be aligned with the GRI standards.
It will also provide data on how sustainability and ESG influence value creation within your organisation, which will inevitably impact the business model and related transfer pricing behind it.
CSRD reporting will also require your organisation to collect data on, for example, your carbon footprint. Data that can then also be (partially) used to assess the impact of green and behavioral taxes within the organisation. Information that is to date often not readily available or centralised. Apart from impact assessment and potential mitigation, it might also help you in communicating meaningful quantitative, but also qualitative, information on the total tax footprint of your organisation in order to narrate and demonstrate how the tax strategy of the company fits the ESG goals.
Finally, with governance as one of the pillars included, it will likely also include tax reporting considerations and a question on the readiness of your tax control framework.
Plenty of reasons to ensure that you understand the data that will need to be reported under the CSRD and are part of those conversations within the organisation.
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