ESG, EU-Taxonomy, SFDR, NFRD, CSR, CSRD...

What are the ESG guidelines?

EU-Taxonomy

The EU taxonomy as a general set of rules for climate and environmentally friendly economic activities within the EU provides the framework according to which investments and activities are considered environmentally sustainable on the basis of binding criteria (=6 environmental goals of the EU). Based on these criteria, companies must demonstrate whether and how "green" they are operating and investing. The aim is to stimulate the sustainable transformation of the European economy towards a more resource-efficient and low-emission economy.

The focus is on the following 6 climate/environmental goals:

1. climate protection
2. adaptation to climate change
3. sustainable use and application of water or marine resources
4. pollution prevention and control
5. transition to a circular economy
6. protection and restoration of biodiversity and ecosystems.

An activity is considered taxonomy-compliant if it makes a significant contribution to achieving at least one of these goals and does not significantly compromise any of the other goals. In addition, it must meet international standards, for example with regard to human rights and social issues.

The EU Taxonomy Regulation results in new reporting requirements for companies: Capital market-oriented companies with more than 500 employees must provide qualitative information on the extent to which their economic activities are sustainable in the sense of the taxonomy targets. This initially relates to Goals 1 (climate protection) and 2 (adaptation to climate change). The concrete formulation of goals 3-6 will be completed by the end of 2023.

EU-Disclosure Regulation (SFDR)

Non Financial Reporting Directive (NFRD)

Large and listed companies (with more than 500 employees) are also subject to a reporting obligation on sustainability aspects of their business activities. Until now, the Non Financial Reporting Directive (NFRD), developed as a European directive, regulated these non-financial reporting obligations for EU member states. The version of the NFRD transposed into German law in 2017 is the CSR Directive Implementation Act or the CSR Directive. This regulates the disclosure of non-financial information in a "non-financial" report.

Corporate Sustainability Reporting Directive (CSRD)

From 2024, the NFRD Directive will be expanded by the Europe-wide Corporate Sustainability Reporting Directive (CSRD) and its scope significantly extended. The aim is to implement a uniform standard for non-financial reporting throughout Europe. The extension not only increases the number of companies affected (according to estimates from 11,600 to 49,000), but also the scope and content of the reporting obligation. In future, the companies required to report under the phased introduction of CSRD will have to disclose more comprehensive sustainability information about their business activities than before and in accordance with more uniform standards. The first draft standards are currently being developed by EFRAG (European Financial Reporting Advisory Group).

Another central innovation of the CSRD compared to the NFRD is the so-called double materiality, according to which companies are obliged to report both on the impact of their own business operations on people and the environment and on the impact of sustainability aspects on the company.

The audit requirements for sustainability reporting will also be strengthened with the introduction of the CSRD directive: in the future, more detailed external audits will have to be carried out in accordance with defined auditing standards.

 The CSRD Directive applies

• from January 2024: for companies already subject to NFRD reporting requirements
• from January 2025: for large companies that are not yet subject to NFRD reporting requirements but meet at least two of the following criteria: Balance sheet total > 20 million euros, net sales > 40 million euros, at least 250 employees
• from January 2026: for listed small and medium-sized companies that meet at least two of the following criteria:
  Balance sheet total > 0.35 million euros, net sales > 0.70 million euros, at least 10 employees.

The EU taxonomy and NFRD or CSRD (from 2024) are linked in two areas. On the one hand, NFRD/ CSRD reporting companies are obliged to comply with the requirements from the EU taxonomy. Secondly, the content from the EU taxonomy will be reported together with the NFRD/ CSRD requirements in the non-financial part of the annual financial statements.

The fact that financial market participants rely on data from the invested companies to meet the SFDR requirements means that there is also a close connection between NFRD/ CSRD and SFDR. However, due to the phased implementation of the CSRD Directive, in some cases not all of the required company data is yet available, which makes the rule-compliant implementation of the SFDR more difficult and leads to missing data points.