Building Transparency: The EU’s Latest Corporate Sustainability Reporting Directive

Author: Lizi Lezhava

Business Relations and Partnership Projects Manager
UN Global Compact Network Georgia

Sustainability reporting has evolved significantly, embracing a more comprehensive approach centered on Environmental, Social, and Governance (ESG) factors. These pillars now form the basis for assessing a company’s sustainability efforts, moving away from pure profit-driven models to consider broader societal and environmental impacts. The EU’s Corporate Sustainability Reporting Directive (CSRD) represents a crucial step towards fostering transparency and accountability regarding social and environmental issues in the corporate sector.

The CSRD marks a significant shift towards more detailed, rigorous, and standardized sustainability reporting criteria. Its main objective is to address gaps in previous frameworks and combat greenwashing practices. By requiring companies to adopt a “double materiality” approach, considering both financial and impact materiality, the CSRD aims to provide stakeholders with comprehensive insights into a company’s sustainability practices, including associated risks and opportunities.

At its core, sustainability reporting revolves around three key pillars: Environmental, Social, and Governance. These pillars guide the assessment of businesses and investments regarding sustainability. ESG reporting represents a departure from the past focus solely on financial gains, emphasizing a broader range of impacts on people, the planet, and economic considerations.

The journey towards improved sustainability reporting began with the European Commission’s introduction of the Non-Financial Reporting Directive (NFRD) in 2014, aimed at enhancing transparency and accountability for social and environmental concerns. Recognizing the limitations of the NFRD, the EU Commission introduced the CSRD in April 2021 to replace its predecessor. The CSRD addresses gaps in coverage and standardization, ensuring a more robust and transparent reporting framework for European companies.

The CSRD mandates compliance for various organizations, including listed undertakings, large EU-based entities (whether listed or not), and “third-country” entities with significant EU presence. This broad scope ensures comprehensive coverage of entities with significant economic and societal impacts.

To comply with the CSRD, a company must identify its significant sustainability impacts, risks, and opportunities. This involves a “double materiality” assessment, which expands the concept of materiality beyond just financial considerations to include the impact on stakeholders and society. This assessment requires looking at materiality from two angles.

Firstly, financial materiality: This looks at how sustainability issues could affect a company’s financial performance and position in the short, medium, and long term. These issues are considered material if they could influence decisions made by the primary users of the company’s financial reports.

Secondly, impact materiality focuses on the actual or potential impacts on people and the environment linked to the company’s operations and value chain, whether positive or negative.

Financial materiality analysis relies on three key criteria: the issue’s importance, determining whether it poses a detrimental risk or presents an advantageous opportunity, its significance, and the probability of its occurrence. In contrast, impact materiality analysis assesses the impact’s characteristics, whether it is prospective or actualized, its severity (including its importance, extent, and potential remedies), and the likelihood of its emergence.

This dual perspective adds complexity to materiality assessments. They mandate that companies independently assess whether a sustainability matter is material from either a financial or impact perspective. Disclosure is required if a matter is material from at least one of these perspectives. To make these determinations, companies will likely need a deeper understanding of sustainability issues in their value chain to measure and assess both financial and impact materiality.

Furthermore, the CSRD requires independent assurance of sustainability information, integrating it into the management report to ensure coherence between financial and sustainability reporting. This alignment is crucial for providing stakeholders with comprehensive insights into a company’s long-term viability and sustainability practices.

Following the signing of an Association Agreement between the EU and Georgia on June 27, 2014, which took effect on July 1, 2016, significant reforms and adjustments are required within Georgia’s legal, economic, and social frameworks. As part of this process, on June 8, 2016, the Georgian Parliament ratified the Law of Georgia concerning Accounting, Reporting, and Auditing. The legislation mandates that large companies, including Public Interest Entities and those falling under the first and second categories, must compile governance reports for the first time since Georgia’s transition to a market economy. Non-financial reporting entails essential information for evaluating the entity’s impact on environmental conservation, social welfare, employment practices, human rights protection, and efforts against corruption. These reports are to be submitted to the Service for Accounting, Reporting, and Auditing Supervision (SARAS) and subsequently made public starting in 2018.

The law aligns with the criteria outlined in the European directives within the association agreement concerning corporate reporting regulations. While there may be minor differences on specific matters, those are unlikely to significantly impact overall compliance or alter the trajectory of the national corporate reporting system, which is modeled after European standards. Nevertheless, further improvement of the regulatory framework, including the law, is necessary. An initial concern in this regard is the universal application of the law to all business entities, without exception, within the country. Regardless of their scale, privately organized legal entities are subject to the accounting and reporting regulations outlined in the abovementioned law.

In 2023, Georgia gained EU candidacy status, leading to increased responsibilities, including corporate sustainability standards. Having attained candidate status, the EU Commission has published a detailed document on Georgia’s 2023 report, including various recommendations, many focusing on corporate sustainability. Chapter 6, dedicated to company law, emphasizes the need for the country to develop sustainability reporting standards. Consequently, SARAS plans to adopt the non-financial reporting registration developed based on CSRD.

Implementing robust sustainability reporting standards aligns with global trends towards corporate transparency, accountability, and responsible business practices. For countries like Georgia, aligning national regulations with EU directives such as the CSRD is crucial, especially as they move towards EU candidacy and closer integration with European standards. Georgia’s efforts to adopt non-financial reporting regulations and align with the CSRD demonstrate its commitment to promoting sustainable business practices and enhancing transparency in corporate reporting.

In summary, introducing the CSRD signifies a significant milestone in evolving sustainability reporting, promoting increased transparency, accountability, and sustainability practices across European businesses. As companies adapt to this new regulatory landscape, engaging stakeholders and conducting robust materiality assessments will ensure meaningful and impactful sustainability reporting.