International regulations are developing at a rapid pace
Published: 4 May 2022
Additional sustainability-related EU regulations are being introduced in Sweden
The EU has decided to introduce new rules on sustainability reporting, which primarily concern financial market participants and larger companies. Regulation (EU) 2019/2088 of the European Parliament and of the Council on sustainability-related disclosures in the financial services sector (the "Disclosure Regulation") and Regulation (EU) 2020/852 of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (the "Taxonomy Regulation"). It is also introducing new criteria for classifying activities as “environmentally sustainable”. An important part of the new rules is that companies are to concentrate on more sustainable investments. The new rules will be important for reforming the financial market in terms of sustainability and improving access to data and the possibility of pricing climate risks. The new rules will probably also help to reduce the possibility of so-called greenwashing, which is when companies try to create an image of their activities as environmentally friendly, for example, through marketing that exaggerates individual environmental efforts.
At present, the Non-Financial Reporting Directive (NFRD, 2014/95/EU) applies, which requires some larger companies to report on environmental and social sustainability factors in a sustainability report. The NFRD was incorporated into Swedish law through the Annual Report Act (ÅRL), which states that companies shall provide information on sustainability.  Those covered by the sustainability reporting requirement in accordance with the Annual Report Act (1995:1554) are companies that meet at least two of the following three criteria: (1) more than 250 employees, (2) turnover in excess of SEK 350 million and (3) a balance sheet total in excess of SEK 175 million. ,  The Annual Report Act addresses the following areas: the environment (for example the use of energy, water and land), social conditions and personnel (gender equality, working conditions, health and safety), respect for human rights and counteracting corruption.
Recently, the EU introduced a new regulation, the Disclosure Regulation, which requires transparency on sustainability information for financial market participants (such as UCITS, insurance companies and financial advisers), among others.  Disclosure requires companies to make information available to investors and other stakeholders. The Disclosure Regulation entered into force as of March 2021. It requires financial market participants to present harmonised sustainability-related disclosures on the activities they finance.
In January 2022, the EU Taxonomy Regulation enters into force. The EU’s taxonomy of sustainable investments contains detailed regulations to assess whether a business can be defined as environmentally sustainable. This makes it possible to identify and compare different investments on the basis of how well they contribute to a sustainable economy.
Towards a common international standard for climate-related reporting
In order for investors and lenders to be able to manage the risks of climate change and fund the transition to a less fossil-based economy, they need access to accurate and comparable information. It is therefore positive that a global standard for sustainability reporting is being developed at a rapid pace. See “Sustainability-related reporting”, IFRS Foundation. Retrieved 29 October 2021. One important cornerstone of sustainability reporting is the work that the TCFD, commissioned by the G20, produced in 2017. The TCFD was set up by the Financial Stability Board, which issues recommendations in the financial area. The TCFD is an international working group with the task of developing recommendations for more effective climate-related financial reporting. Compliance with the recommendations is voluntary and they are aimed at both financial and non-financial corporations and other organisations. Companies that wish to comply with the TCFD recommendations should report their own direct greenhouse gas emissions as well as indirect emissions, for example, from the company's customers. They should also describe the targets they set to manage climate-related risks and report how well they are meeting these targets.
In conjunction with the UN climate conference COP26 in November, the IFRS Foundation 2021 launched a management structure for sustainability reporting which, based on the TCFD recommendations, will develop a standard for how companies should report climate-related information. See ”Global sustainability disclosure standards for the financial markets”, IFRS Foundation. Retrieved 3 November 2021. The IFRS’s new sustainability reporting must be in accordance with the IFRS financial reporting standards. At present, all listed companies in the EU are obliged to apply IFRS financial reporting standards, while others may do so voluntarily. The IFRS Foundation is currently working on the development of a harmonised global sustainability standard. This means that it wishes to achieve a uniform and comparable global standard for how companies report sustainability information. The IFRS Foundation has announced that it intends to have a sustainability standard ready in 2022.
Work is under way within the EU on a new Corporate Sustainability Reporting Directive (CSRD). It will replace the existing EU Non-Financial Reporting Directive (NFRD). The CSRD covers all large companies and listed companies in the EU. Large companies have: a balance sheet total exceeding EUR 20 million, turnover exceeding EUR 40 million or over 250 employees. The CSRD means three things compared to the NFRD. Firstly, more companies will be subject to the requirement for sustainability reporting within the EU. However, we do not expect this to have a significant impact on Swedish companies, since the requirement in Swedish legislation already covers a wider range of companies than the current EU directive. Secondly, it introduces a third party audit requirement (auditor). Thirdly, harmonised disclosure standards are also being introduced to improve comparability. The CSRD is planned to enter into force in 2023, with the first reporting of sustainability information for major companies in 2024. For small and medium-sized enterprises (SMEs), this means those companies that fall outside the definition of large companies but that are listed on the stock exchange, first reporting is planned for 2026. SMEs will also have lower reporting requirements, as the CSRD is based on proportionality.
At present, neither the design of the IFRS sustainability standard nor the CSRD’s disclosure requirements have been decided, but both will be based on existing sustainability frameworks such as the TCFD. In the case of climate-related information, the requirements of the two different frameworks should ultimately be similar. Table 2 provides an overview of these sustainability standards.
|NFRD||ÅRL||CSRD||IFRS sustainability reporting||TCFD|
|Companiesincluded||Public interest entities with more than 500 employees.||More than one of:Employees >250Assets >SEK 175 millionTurnover >SEK 350 millionApplies to all large companies, including public interest entities.||All large companies and all listed companies (except listed micro enterprises)||All (listed) companies that use IFRS||Optional|
|Number of companies1||EU27: about 11,600(47% of the turnover of all limited companies)||About 1,600||EU27: 49,000(75% of the turnover of all limited companies)||About 29,000.||1,505|
|Quality assurance (audit)||No||No||Yes||?||No|
|Implementation2||2014||2017||Planned for 2023||Planned for 2022||2017|
|Jurisdiction||EU||Sweden||EU||Global, not US||Global|
Note. 1 The number of companies for the NFRD and CSRD is from the Commission’s CSRD proposal (April 2021), ÅRL estimate from KPMG (2019), IFRS from IFRS.org and TCFD estimate for 2020 from spglobal.com. 2 IFRS Foundation.