Since the sustainable development goals of the UN 2030 Agenda for Sustainable Development and the affirmation and commitment to these goals in the European Commission's communication of November 22 2016, the EU has been working on a legislative package aimed at corporate sustainability and the safeguard and promotion of human rights.
Environmental, social and governance (ESG) reporting was no exception. Following the introduction of the Non-Financial Reporting Directive (Directive 2014/95/EU) implemented in Portugal in 2017, and more recently, the EU's proposal on the Corporate Sustainability Reporting Directive, ESG reporting is no longer an option for some companies.
Non-Financial Reporting Directive
The Directive 2014/95/EU sets the rules on disclosure of non-financial and diversity information relating to the ESG areas (environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery, and diversity on company boards) by certain large EU public-interest companies in their annual reports. The Accounting Directive 2013/34/EU is amended by this directive.
Large public-interest corporations (approximately 11,700 EU companies) are companies with more than 500 employees, including listed entities, insurance companies and banks.
The Non-Financial Reporting Directive (NFRD) had two main purposes: make available non-financial information to stakeholders and investors to determine the companies' value creation and risks, and encourage society to take responsibility for social and environmental concerns.
Companies are required by the directive to report, for example, on the business development, performance, impact, and position in relation to a predefined list of non-financial issues, and to disclose their annual and sustainability reports. The description of the company's business model and policies, the results of those policies, the associated risks, and non-financial performance indicators, are some examples of what should be included in the disclosure.
Decree-law 89/2017, of July 28 2017, incorporated this directive into Portuguese law. The Portuguese legislator went even further: the issuers of shares admitted to trading on a regulated market located or operating in Portugal have to disclose in the annual corporate governance report a description of the diversity policy applied by the company regarding its management and supervisory bodies, namely in terms of age, gender, qualifications and professional background, the objectives of this policy, how it was applied and the results in the reference period.
On February 2 2021, the Portuguese Securities Market Commission (CMVM) published a voluntary model report for compliance with the duty to disclose non-financial information by companies issuing securities admitted to trading on a regulated market, which seeks to standardise the information on the ESG existing legal duties in favour of investors and the development of the national market.
Proposal for a Corporate Sustainability Reporting Directive
A proposal for a Corporate Sustainability Reporting Directive (CSRD) was adopted by the European Commission (EC) on April 21 2021. This proposal amends Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No. 537/2014, and intends to replace the current NFRD, by adjusting its reporting requirements.
The proposal simplifies and brings sustainable reporting on par with financial reporting, aiming to standardise sustainability-related disclosures. The new directive will apply not only to EU-based companies but also to non-EU-based companies that have a subsidiary in the EU.
The proposal changes the companies covered by the disclosure, broadening its scope (covering approximately 49,000 companies), including all companies listed on regulated markets (except micro-enterprises that have a turnover or total assets of less than 2 million or that employ less than 10 individuals) and all large public-interest companies with at least two of the following requirements: 250 or more employees; €40 million in net turnover; €20 million in assets.
The concept of ‘double materiality’ gained prominence: reporting not only on the impact of sustainability matters on the companies’ value, but also the impact that these have on the environment, people, and the economy.
Additionally, the proposal for CSRD introduces the requirement of third-party audit of report information and requires that statutory auditors report annually to the competent authority (yet to be defined by local law) on which revenues, among non-audit services revenues, have been generated from the assurance of sustainability reporting. Also, the proposal specifies in more detail the information that companies must disclose and presents new and more complete reporting requirements. Among others, companies are to provide information on their strategy, business model, targets and engagement of board and management.
In addition, the envisaged CSRD introduces a requirement to include sustainability information in the management report and obliges the verification of annual and consolidated sustainability reports when performed by the statutory auditor that audits the respective financial statements. Furthermore, companies will be obliged to report in accordance with the EU’s mandatory sustainability reporting standards and the proposal for CSRD includes the mandatory reporting in digital format according to the European Single Electronic Format Directive.
It is expected that the European Commission will adopt delegated acts regarding sustainability reporting standards by October 31 2022, and that the new disclosure requirements become effective as of January 2023, with companies starting reporting with new standards in 2024.
This new directive will substantially increase the number of companies covered by the disclosure obligation in Portugal (from a few dozen to more than 1000 companies) and those companies will be able to benefit from the simplification of the reporting procedure: a ‘one-stop shop’ for ESG non-financial reporting requirements.
Diana Ribeiro Duarte
Partner, Morais Leitão
E: drd@mlgts.pt
Sofia Araújo Matias
Trainee lawyer, Morais Leitão
