Promotion Social Dialogue through CSRD reporting

The Corporate Sustainability Reporting Directive (CSRD), EU/2022/2464, was adopted on 14 December 2022. Under this directive, companies meeting at least two of the following criteria - more than 250 employees, a turnover exceeding EUR 50 million, or a total balance sheet above EUR 25 million - are required to disclose information on corporate social responsibility. This marks the first instance where a comprehensive set of Environmental, Social, and Governance (ESG) information is mandated by binding legislation.

CSRD is a key component of a sustainable finance framework introduced by the European Commission in 2018.[1]  This framework aims to channel the necessary funds for the ecological transition across all sectors and has been integrated into the European Green Deal package, designed to adapt industry, agriculture, transport, construction (and others) while aiming to preserve biodiversity, achieve zero pollution, and ensure social cohesion and justice while leaving no one behind.

Data derived from the CSRD  serve as an invaluable source of information and signify a paradigm shift in which European companies are required to incorporate sustainability into their business models and strategies while engaging with stakeholders.

 

Structure of the CSRD Implementation

The Directive transposition deadline was July 6th, 2024, with reporting obligations phased in progressively:

Application of CSRD	Year of reporting	First year of availability of reporting
Enterprises w/more than 500 employees respecting one of the additional criteria: Turnover > 50 M€ Balance sheet > 25 M€	2024	2025
W/>250 employees Turnover CA > 50 M€ Balance sheet > 25 M€	2025	2026
Listed SMEs	2026	2027
Subsidiaries of foreign enterprises with > 250 employees and a turnover of > 150 M€  in Europe	2027	2028

 

For publicly listed companies, ESG reporting will be made available online through the universal registration document, ensuring accessibility for all stakeholders.

What is the Universal Registration Document?

The Universal Registration Document (URD) is a crucial tool for financial and extra-financial communication for companies listed on regulated markets.. It offers comprehensive information on a company's activities, financial condition, and extra-financial or ESG aspects. Under CSRD, ESG information has gained equal importance to financial data. All listed companies in Europe are mandated to publish this document.

CSRD and Social Dialogue

CSRD places significant emphasis on social dialogue by involving social partners in the utilisation of data. CSRD explicitly ensures the promotion of social dialogue under Recital 52, which stipulates that:

“Member States should ensure that sustainability reporting is carried out in compliance with workers’ rights to information and consultation. The management of the undertaking should therefore inform workers’ representatives at the appropriate level and discuss with them relevant information and the means of obtaining and verifying sustainability information. This implies for the purpose of this amending Directive the establishment of dialogue and exchange of views between workers’ representatives and central management or any other level of management that could be more appropriate, at such times, in such fashion and with such content as would enable workers’ representatives to express their opinion. Their opinion should be communicated, where applicable, to the relevant administrative, management or supervisory bodies.”

These rights are outlined in Article 19.5:

“The management of the undertaking shall inform the workers’ representatives at the appropriate level and discuss with them the relevant information and the means of obtaining and verifying sustainability information. The workers’ representatives’ opinion shall be communicated, where applicable, to the relevant administrative, management or supervisory bodies.” 

The objective of this publication is to provide an in-depth understanding of the data and its applications in facilitating a just transition. With comprehensive explanations of the business model, associated risks and opportunities, this publication serves as an invaluable resource for gaining insight into a company, its operating environment, strategic approach, and value chain.

The European Sustainability Standards role in integrating sustainability into corporate strategy.

While CSRD establishes the overarching legal framework, the European Sustainability Reporting Standards (ESRS)  provides the specific framework and methodology for reporting. These standards, adopted in December 2023, outline how CSRD provisions will be implemented.

Although the majority of listed companies are not small or medium-sized enterprises (SMEs) but rather intermediate-sized companies, SMEs that act as subcontractors may still be required to report data. A key innovation of this ESG reporting is its focus on the value chain. Consequently, specific standards for SMEs and sector-specific norms, addressing details not covered by the twelve general standards, are being developed.

ESRS are critical for standardising and enhancing sustainability reporting. Reports prepared under the CSRD will be published alongside financial information in the Universal Registration Document, which is publicly accessible online. In addition to reporting requirements, companies must also ensure that ESG information is verified by a third party.

The ESRS consist of twelve standards, with plans to introduce simplified standards for SMEs and sector-specific standards. The twelve standards are as follows:

• Two transversal standards outline the general principles, emphasising the principle of double materiality, and define the report structure to ensure comparability with other companies (ESRS 1), as well as the minimum data requirements (ESRS 2).
• Five environmental standards incorporate elements from taxonomy regulation, including Climate Change Mitigation and Adaptation, Pollution, Water and Marine Resources, Biodiversity and Ecosystems, and the Circular Economy (Waste Prevention and Recycling). Notably climate standard addresses greenhouse gas (GHG) emissions are across scopes 1, 2 and 3.
• Four social standards, address the entire value chain, covering the company's own workforce, workers within the value chain, affected communities and clients and end users.
• One governance standard outlines business conduct, including anti-corruption measures, purchase policies and whistleblower protection policies.

Companies are not required to disclose all data but should provide information deemed relevant to their business model, based on a "materiality" analysis (see below).

What are the indicators for social standards.

The four social standards encompass various stakeholders throughout the value chain:  including workers upstream and downstream of the value chain. The first one, “Own Workforce” is the most comprehensive one and addresses several critical areas, including respect for human rights; fundamental freedoms; democratic principles and standards established in key human rights instruments; employment figures; precarious employment; fair wages; social protection; health and safety; training; collective bargaining coverage; and social dialogue. The term "own workforce " refers to both employees with a direct employment contract and all self-employed or temporary workers engaged by the company. This definition aims to address the issue of false self-employment, where individuals may not receive the same level of social protection as directly employed staff. The three following standards, Workers in the Value Chain, Affected Communities and Consumers and End-User are narrative and do not require quantitative data.

The Principle of Double Materiality

A key feature of the CSRD approach is the principle of double materiality. In the context of accounting, materiality pertains to significant elements related to environmental or social impacts that must be reflected in financial accounts. Simple materiality focuses solely on factors that influence a company's financial performance. In contrast, double materiality extends beyond this scope to assess how a company's operations impact its social or environmental ecosystem, even when these impacts do not have an immediate financial impact.

This principle suggests that companies and financial institutions must consider both:

1. The internal effects of environmental factors on their financial results (e.g., the cost of wastewater treatment for a paper mill or the financial impact of a storm).
2. The external impacts of their activities on society and the environment (e.g., water pollution as a negative externality or the construction of a water purification plant as a positive externality).

In essence, double materiality encompasses two perspectives:

• The impact of ESG issues, such as climate change, on an organisation’s financial performance (external or financial materiality).
• The effect of the organization’s activities on ESG matters in a material way (inside out or impact materiality).

Under CSRD, reporting integrates finance and ESG considerations by evaluating both the environmental and social impacts of a company's activities, including those within its value chain, as well as their financial significance. Consequently, the sustainability report holds equal importance to the financial report. This integration underscores the necessity of including sustainability reporting in mandatory consultations related to strategy, economics, finance and social policy.

Involve stakeholders in materiality analysis:

The ESRS mandate the inclusion of stakeholders in the assessment of the significance of impacts, risks and opportunities as they relate to the company’s strategy and business model.

Stakeholders potentially impacted by company policies encompass a broad spectrum, including employees and other workers, suppliers, customers and end-users. Additionally, this group extends to the value chain, including, subcontractors, local communities and vulnerable populations, as well as shareholders, public authorities, regulators, and supervisory authorities.

The ESRS emphasises the importance of stakeholder consultation. As outlined in Article 19.5. the rights to information and consultation provide an opportunity for social partners to present their perspectives on sustainability issues across the value chain.

Utilising information provided by ESRS for information and consultation rights. 

The information supplied under ESRS is intended to be consistent across all EU member states, given that the delegated act is directly applicable under national law. In contrast, CSRD operates as a directive necessitating individual transposition by each Member State. This can lead to variations in the implementation of provisions across different countries, impacting aspects such as social rights, sanctions, and third-party assurance processes.

France was the first country to transpose the CSRD into national law. French social legislation mandates three annual compulsory information and consultation sessions for works councils within each company. The transposition includes ESG information in these consultations, which covers strategy, economic and financial conditions, and social issues. France’s legal framework provides extensive consultation rights and access to a broad spectrum of social information. While the CSRD introduces progress in terms of public accessibility of information, such as pay disparities, much of the social information remains confidential under traditional frameworks. Notably, CSRD requires reporting at the group level, whereas French works councils receive information at the enterprise level.  Consequently, consultations at the group level and within European Works Councils (EWC) are of particular importance, in addition to corporate level consultations.

Quote from Recommendations for the Transposition of the Corporate Sustainability reporting Directive from ETUC :

The ETUC recommends the transposition legislation should explicitly reference key EU Directives and their respective national transposition:

• Directive 2002/14/EC of the European Parliament and of the Council of 11 March 2002 establishing a general framework for informing and consulting employees;
• Directive 2009/38/EC of the European Parliament and of the Council of 6 May 2009 on the establishment of a European Works Council;
• Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European Company with regard to the involvement of employees;
• Council Directive 2003/72/EC of 22 July 2003 supplementing the Statute for a European Cooperative Society with regard to the involvement of employees.

Audit, assurance, control and sanctions

CSRD does not stipulate specific sanctions. Instead, it is through the transposition process that European Union Member  determine the applicable measures. Nevertheless, it is mandatory for sustainability data to undergo internal auditing by an audit committee and to be certified by an external auditor or an independent third-party organization (ITO).

[1] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52018DC0097