Managing growing number of EU sustainability regulations could cause ‘headaches’, warns Ferma

Ferma has told Commercial Risk it is concerned that interaction between the EC’s recently announced Corporate Sustainability Due Diligence Directive (CSDD) and forthcoming Corporate Sustainability Reporting Directive (CSRD) could cause “headaches” for risk managers, as they try to help their companies deal with the two regulations.

However, the European risk management federation believes the EC’s growing focus on sustainability is good news for risk managers in general, and will provide them with the opportunity to add real value and become more involved in setting sustainability strategies.

The EC laid out its proposals for the CSDD in late February. The directive aims to foster sustainable and responsible corporate behaviour throughout global value chains. Companies will be required to identify and, where necessary, prevent, end or mitigate adverse impacts of their activities on human rights and the environment. The directive could come into force as early as 2025 but may well take longer.

It aims to make sure that big European companies and those in high-risk industries take a leading role in mitigating human rights and environmental risks across their value chains, while supporting small companies to do the same.

Meanwhile, the CSRD has been in the pipeline for much longer and may start affecting sustainability reporting from 2024.

The reporting directive takes over from what was the Non-Financial Reporting Directive. So, what was once called non-financial reporting is now called sustainability reporting. The due diligence directive, meanwhile, aims to push businesses to mitigate human rights and environmental impacts in their value chains, as well as integrate sustainability into corporate governance, explained Ferma.

The EC wants them to work hand in hand to boost sustainability. As Ferma’s sustainability committee chair Valentina Paduano explained: “When looking forward as to how the two will interact, it is important to have in mind two key aims of the European Commission: transparency and accountability. Starting with transparency, one of the aims with the CSRD is to bring about more transparent reporting on sustainability matters. This transparency requirement under CSRD is complemented by the CSDD’s requirement for companies to better manage the risks they pose in terms of human rights and the environment. Or, put another way, the CSDD is aiming at making companies more accountable to their stakeholders when it comes to human rights and environmental risks.”

But Ferma fears the fact that the CSDD and CSRD do not have the same scope may cause a “headache” for businesses and their risk managers.

“The CSDD broadly speaking has in its scope around 18,000 companies that have essentially more than 250 employees and more than €40m in turnover. The scope for CSRD is wider, since it will cover all listed companies and will directly capture certain SMEs. The CSDD will do that only indirectly through the value chain, which is still significant,” said Paduano.

“Another point is that the CSRD reporting obligations may come into play as soon as 2024 (covering 2023 activities), whereas with CSDD the political discussions at EU level might take longer, so the two sets of requirements may not impact companies at the same time. And then there is the point about how CSDD will interact with various pieces of national legislation across the EU. In short, there is a lot still to be discussed and considered,” added the risk manager.

But despite issues that clearly need to be ironed out, the EC’s mounting focus on sustainability risk management offers Ferma members and other European risk managers a real opportunity, she continued.

“You could say that CSRD and CSDD elevate sustainability risk management to a higher profile, but it’s also true that regulations in other sectors, notably for financial services firms, mean there is a lot of focus on sustainability from a risk perspective. At this stage, and from our own analysis, it certainly seems that there is a key role to be played by risk managers in contributing to shaping their organisations’ sustainability strategy more holistically, as well as for the compliance with these various pieces of legislation,” said Paduano.

To help shed light on some of these issues, Ferma is hosting a masterclass on the CSRD on 31 March, and will work with its members throughout the coming months and years to transmit more practical information about how risk managers fit into the sustainability picture.

The CSRD webinar will focus on some of the issues that will face risk managers dealing with the new rules, which Ferma clearly believes will have a big impact on their role and opportunities.

“A big change with the CRSD is that there will be an EU Sustainability Reporting Standard developed by the European Financial Reporting Advisory Group, which will determine the standard to which companies in the EU must report their sustainability information. For risk managers in particular, we envisage that their input will be required to a much greater extent than before in producing company sustainability reporting,” said Paduano.

“At the heart of CSRD is the concept of double-materiality reporting, meaning that companies have to report about how sustainability issues affect their business and about their own impact on people and the environment. Risk managers will be key here,” she added.

You can sign up for Ferma’s CRSD webinar here.

Back to top button