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What do the CSRD and the NFDR mean to your business?

Written by Nathália Cortez
on May 17, 2022

One of the biggest challenges that transnational corporations face is that they operate (and have many suppliers operating) in diverse and complex environments. This makes it especially difficult to address all the risks related to their operations throughout their supply chains. Existing voluntary standards on responsible business conduct have been proven to be inefficient in addressing human rights and environmental risks in such environments. For this reason, the EU has developed a set of directives to achieve the Sustainable Development Goals (SDGs), the EU Target on climate action, and the Paris Agreement Goals.

Several countries within the EU such as the Netherlands, Germany, and France have been adopting internal legal frameworks to address corporate due diligence practices. Having this in mind, the EU has proposed a directive on the topic, the Corporate Sustainability Reporting Directive (CSRD), to broaden the scope of the current Non-financial Reporting Directive (NFRD) and improve corporate governance practices.

How do the CSRD and NFRD aim to improve corporate governance practices?

The CSRD would broaden the scope of the current NFRD to all large and listed companies. It would apply to a) Large (non) European companies with over 500 employees and with a worldwide net turnover >€150 million;  and b) After 2 years the scope would extend to mid-cap (non) European companies in certain sectors with over 50 employees & net turnover of >EUR 40 million (Textiles, Agriculture, Mineral resources). The CSRD would require the standardisation of reported information and provide for it being audited.

The CSRD would complement several regulations already in place, which impose detailed and complex requirements on companies. For example, it underpins the Sustainable Finance Disclosure Regulation (SFDR), which applies to the financial market participants (i.e. portfolio managers and investment funds) who are now required to publish their due diligence policies regarding the adverse impacts of their investments on human rights and sustainability factors.

The reporting disclosure required by the SFRD can be complex and time-consuming. The concept of adverse risks encompasses themes from forced and child labour, health and safety in the workplace, and environmental aspects such as GHG emission, pollution, and biodiversity degradation. With this in mind, the Commission has developed the Taxonomy Regulation and its so-called ‘compass’ to categorise environmentally sustainable investments. The taxonomy is a guiding tool for finance companies to know how to report on the operations of the companies they have invested in, however, the tool makes several links to other legislation such as those within the category of EHS and general principles such as the OECD Guidelines, ILO conventions, and other international instruments on human rights and environment protection.

Several EU directives are incorporated by reference as part of this regulatory net woven by the CSRD in the future and now with the SFRD. Examples include the Directive 2011/36/EU on preventing and combating trafficking in human beings and protecting its victims, the Employers’ Sanctions Directive, and the Conflict Minerals Regulation.

On the proposal side, the EU is currently analysing a proposal for a Regulation on deforestation-free supply chains which focuses on certain commodities and product supply chains, the Commission’s proposal for a new Batteries Regulation, and the future Sustainable Products Initiative (SPI) which aims to revise the current Ecodesign Directive.

How Can Libryo Help?

As observed, the EU is developing several legislations to address the risk mitigation of human rights and environmental risks of transnational companies. Undertakings from all over the world with a connection with the EU, either by financial means or trade, will be impacted in the near future. At this stage, we already see the impact on companies that received financial support from financial institutions based in the EU, to disclose their information on EHS practices, human rights, and climate change, for instance. Libryo can help you understand what you need to disclose in the midst of this growing regulatory complexity and enable screening in terms of the Taxonomy Regulation in a very comprehensive manner.

Libryo helps global businesses know what their legal obligations are in every jurisdiction in which they operate. If you want to find out more about our product, book a demo with us today and see Libryo in action!