EBF Position paper – Corporate Sustainability Due Diligence Directive (CSDD)

EBF SUSTAINABLE FINANCE ROUNDUP ARTICLE

Gianluca Manca, Head of Sustainability at Eurizon Capital, on Corporate sustainability reporting, SMEs and the future of sustainability 

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BRUSSELS, 17 March 2022 – On April 21st, 2021, the European Commission adopted an ambitious and comprehensive package of measures to channel funding towards sustainable activities. This package includes the proposal for a Corporate Sustainability Reporting Directive (CSRD) aiming – over time – to bring sustainability reporting on a par with financial reporting. We sat down with Gianluca Manca, Head of Sustainability at Eurizon Capital, EFRAG Project Task Force member, and Chair of the EBF’s ESG Reporting Task Force to discuss the developments concerning sustainability reporting in the context of the ambitious EU sustainability agenda and the current geopolitical tensions. 

What is the Commission’s objective with its proposal for a Corporate Sustainability Reporting Directive and what does it have to offer compared to its predecessor, the Non-Financial Reporting Directive (NFRD)? 

The EU wants to politically involve the corporate world to foster transparency and ignite virtuous behaviour. In order to do so, the EU has targeted the financial world to be the stimulus and compass of the transition towards a cleaner and better functioning world.  

The NFRD, Taxonomy, Sustainable Finance Disclosure Regulation (SFDR), and the upcoming CSRD (just to name the most widespread) are legislative packages that impact finance heavily in different ways, from Credit Institutions to Asset Managers and Insurers. While the NFRD worked as a tutoring tool for corporations, the upcoming CSRD will change the rules of financing.  

The legislative impetus that we are witnessing in Europe is proof of widespread political awareness which translates into norms, regulations, and legislative pieces. In this context, the newly proposed CSRD (as the future successor to the NFRD) has set within its scope 1) large companies and 2) all companies listed in EU regulated markets (excluding micro enterprises) covering up to roughly 49.000 companies (in the NFRD the scope covered 11700 companies). The proposal envisages two standards: one for large companies and one for listed SMEs, specifying that all those not in scope should report voluntarily (based on the standard for listed SMEs). In fact, the proposed text envisions that the Commission shall adopt delegated acts to provide sustainability reporting standards proportionate to the capabilities and characteristics of small and medium-sized undertakings. 

What are the main concerns related to the proposal to require mandatory reporting from listed SMEs? 

If we weigh and match SMEs capabilities to respond to the directive and the needs of stakeholder’s, including financial institution’s, public authorities and NGOs, we could stumble into a dilemma. On the one hand an excessively simplistic standard might be inadequate to meet the reporting and disclosure requirements of the numerous and diverse stakeholders; on the other hand, an excessively demanding standard might not be feasible, proportionate or cost-effective for SMEs. This starting point has been widely elaborated by committees and parliamentarians whose outcome recently resulted in a compromise text. This text reports numerous amendments that mainly involve the scope of the proposal, also highlighting the need for a list of high-risk small and medium companies.  

In such a scenario, even though the majority of European SMEs would not be subject to any obligatory reporting standards, they would, nonetheless, be impacted as a result of the so called “trickle-down effect”, as large undertakings will have to report on their entire value chain. This effect, therefore, implies that large companies, which are in scope, will require full disclosure from their suppliers to comply with their reporting duties. Hence, the SMEs realm might therefore be split into those who are reporting in compliance with the directive (listed SMEs), those reporting in response to the request of larger clients or financial institutions, those not reporting at all (mainly business-to-consumer enterprises), and those that wish to report voluntarily to explain their sustainability journey and/or approach in light of the commercial or competitive advantage which could result from their positive performance. With these premises the European Financial Reporting Advisory Group (EFRAG), mandated by the European Commission to develop the reporting standards, is working hard to define reporting standards that are adequate and proportionate to allow the sustainability reporting for the widest possible number of SMEs, and not only listed SMEs. 

How can a simplified and voluntary reporting standard benefit smaller companies? 

One of the concepts EFRAG has recently highlighted is that the reporting tool should be envisaged and serve as a facilitator for smaller companies to address their story and their role in the sustainability revolution. Accurate and effective transparency will certainly lead to better market positioning, attractivity at direct client’s level and additional risk control. Companies reporting voluntarily will also be better positioned – satisfying the requests of financial institutions and more likely being subject to quicker assessments and successful financing. 

The invasion of Ukraine has brought our attention to Russia’s role as one of the top global suppliers of fossil fuels. Do you think this will consequently impact the ambitious European sustainability agenda?
The events which are unfolding have certainly impacted the perception of the European sustainability journey. The dramatic Russian invasion of Ukraine is forcing all players to re-evaluate well-established beliefs that were by now embedded in the overall EU strategy, forcing all stakeholders to consider alternative solutions to meet defence and energy needs. In particular, we have come to the realisation that we can no longer rely on instable international relationships for our energy supply and as a consequence this will inevitably influence the approach to investments related to the energy transition as well as the sustainability agenda as a whole. 

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For more information:

Alexia Femia, Policy Adviser, Sustainable Finance a.femia@ebf.eu

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About the EBF:

The European Banking Federation is the voice of the European banking sector, bringing together national banking associations from across Europe. The EBF is committed to a thriving European economy that is underpinned by a stable, secure and inclusive financial ecosystem, and to a flourishing society where financing is available to fund the dreams of citizens, businesses and innovators everywhere