EUROPEAN COMMISSION Brussels, 21.4.2021 COM(2021) 189 final 2021/0104(COD) Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability reporting (Text with EEA relevance) {SEC(2021) 164 final} - {SWD(2021) 150 final} - {SWD(2021) 151 final}



EXPLANATORY MEMORANDUM 1.CONTEXT OF THE PROPOSAL •Reasons for and objectives of the proposal The Non-Financial Reporting Directive (Directive 2014/95/EU, the NFRD), amending the Accounting Directive, was adopted in 2014. Companies within the scope of the NFRD had to report in accordance with its provisions for the first time in 2018 (covering financial year 2017). The NFRD applies to large public-interest entities with an average number of employees in excess of 500, and to public-interest entities that are parent companies of a large group with an average number of employees in excess of 500 on a consolidated basis. The NFRD exempts subsidiaries from its reporting obligations if their parent company does the reporting for the whole group, including the subsidiaries. Approximately 11 700 companies are subject to the reporting requirements of the NFRD. The NFRD introduced a requirement for companies to report both on how sustainability issues affect their performance, position and development (the ‘outside-in’ perspective), and on their impact on people and the environment (the ‘inside-out’ perspective). This is often known as ‘double materiality’. In accordance with the NFRD, in 2017 the Commission published non-binding reporting guidelines for companies. In 2019, it published additional guidelines, on reporting climate-related information. These guidelines have not sufficiently improved the quality of information companies disclose pursuant to the NFRD. The European Commission committed itself to proposing a revision of the Non-Financial Reporting Directive in the European Green Deal and its 2020 Work Programme. The European Green Deal aims to transform the EU into a modern, resource-efficient and competitive economy with no net emissions of greenhouse gases by 2050. It will decouple economic growth from resource use, and ensure that all EU regions and citizens participate in a socially just transition to a sustainable economic system. It also aims to protect, conserve and enhance the EU's natural capital, and to protect the health and well-being of citizens from environment-related risks and impacts. The revision of the NFRD will contribute to the objective of building an economy that works for people. It will strengthen the EU’s social market economy, helping to ensure that it is future-ready and that it delivers stability, jobs, growth and investment. These goals are especially important considering the socio-economic damage caused by the COVID-19 pandemic and the need for a sustainable, inclusive and fair recovery. In line with the Commission’s Sustainable Finance Action Plan, the EU has taken a number of measures to ensure that the financial sector plays a significant part in achieving the objectives of the European Green Deal. Better data from companies about the sustainability risks they are exposed to, and their own impact on people and the environment, is essential for the successful implementation of the European Green Deal and the Sustainable Finance Action Plan. By making companies more accountable for and transparent about their impact on people and the environment, this proposal can also help strengthen relations between business and society. It will also create opportunities for companies, investors, civil society and other stakeholders to radically improve the way sustainability information is reported and used thanks to digital technologies. In December 2019, in its conclusions on the Capital Markets Union, the Council stressed the importance of reliable, comparable and relevant information on sustainability risks, opportunities and impacts, and called on the Commission to consider the development of a European non-financial reporting standard. In its May 2018 resolution on sustainable finance, the European Parliament called for the further development of reporting requirements in the framework of the Non-Financial Reporting Directive (NFRD). In its December 2020 resolution on sustainable corporate governance, it welcomed the Commission’s commitment to reviewing the NFRD, called for an extension of the scope of the NFRD to additional categories of companies, and welcomed the Commission’s commitment to developing EU non-financial reporting standards. The European Parliament also considered that non-financial information published by companies pursuant to the NFRD should be subject to a mandatory audit. The primary users of sustainability information disclosed in companies’ annual reports are investors and non-governmental organisations, social partners and other stakeholders. Investors, including asset managers, want to better understand the risks of, and opportunities afforded by, sustainability issues for their investments, as well as the impacts of those investments on people and the environment. Non-governmental organisations, social partners and other stakeholders want to hold undertakings to greater account for their impacts of their activities on people and the environment. The current legal framework does not ensure that the information needs of these users are met. This is because some companies from which users want sustainability information do not report such information, while many that do report sustainability information do not report all the information that is relevant for users. When information is reported, it is often neither sufficiently reliable, nor sufficiently comparable, between companies. The information is often difficult for users to find and is rarely available in a machine-readable digital format. Information on intangibles, including internally generated intangibles, is under-reported, even though these intangibles represent the majority of private sector investment in advanced economies (e.g. human capital, brand, and intellectual property and intangibles related to research and development). The information needs of users have increased significantly in recent years and will almost certainly continue to do so. There are several reasons for this. One is the growing awareness of investors that sustainability issues can put the financial performance of companies at risk. Another is the growing market for investment products that explicitly seek to conform to certain sustainability standards or achieve certain sustainability objectives. Yet another is regulation, including the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation. As a result of both these regulations, asset managers and financial advisers need more sustainability information from investee companies. Finally, the COVID-19 pandemic is likely to further accelerate the growth in demand for sustainability information from companies, for example regarding the vulnerability of workers and the resilience of supply chains. There is therefore a widening gap between the sustainability information companies report and the needs of the intended users of that information. On the one hand, this means that investors are unable to take sufficient account of sustainability-related risks in their investment decisions. This in turn has the potential to create systemic risks that threaten financial stability. On the other hand, the gap means that investors cannot channel financial resources to companies with sustainable business models and activities. This in turn undermines the achievement of the objectives of the European Green Deal. It also hampers stakeholders’ ability to hold undertakings accountable for the impact they have on people and the environment, creating an accountability deficit liable to undermine the efficient functioning of the social market economy. The current situation is also problematic for companies that have to report. The lack of precision in the current requirements, and the large number of private standards and frameworks in existence, make it difficult for companies to know exactly what information they should report. They often experience difficulties in getting the information they themselves need from suppliers, clients and investee companies. Many companies receive requests for sustainability information from stakeholders in addition to the information they report to comply with current legal requirements. All of this generates unnecessary business costs. The objective of this proposal is therefore to improve sustainability reporting at the least possible cost, in order to better harness the potential of the European single market to contribute to the transition towards a fully sustainable and inclusive economic and financial system in accordance with the European Green Deal and the UN Sustainable Development Goals. The proposal aims to ensure that there is adequate publicly available information about the risks that sustainability issues present for companies, and the impacts of companies themselves on people and the environment. This means that companies from which users need sustainability information should report such information, and that companies should report all information users consider relevant. Reported information should be comparable, reliable and easy for users to find and make use of with digital technologies. This entails changing the status of sustainability information to make it more comparable to that of financial information. The proposal will help reduce systemic risks to the economy. It will also improve the allocation of financial capital to companies and activities that address social, health and environmental problems. Finally, it will make companies more accountable for their impacts on people and the environment, thereby building trust between them and society. The proposal aims to reduce unnecessary costs of sustainability reporting for companies, and to enable them to meet the growing demand for sustainability information in an efficient manner. It will bring clarity and certainty on what sustainability information to report, and make it easier for preparers to get the information they need for reporting purposes from their own business partners (suppliers, clients and investee companies). It should also reduce the number of demands companies receive for sustainability information in addition to the information they publish in their annual reports.

There are a number of important international initiatives in place. Their aim is to help to achieve the worldwide convergence and harmonisation of sustainability reporting standards. The EU fully supports this ambition. EU companies and investors that operate globally will benefit from such convergence and harmonisation. The Commission supports initiatives by the G20, the G7, the Financial Stability Board and others to generate international commitment to develop a baseline of global sustainability reporting standards that would build on the work of the Task Force on Climate-related Financial Disclosures. The proposals of the International Financial Reporting Standards Foundation to create a new Sustainability Standards Board are especially relevant in this context, as is the work already carried out by established initiatives including the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC), the Climate Disclosure Standards Board (CDSB) and CDP (formerly the Carbon Disclosure Project). This proposal aims to build on and contribute to international sustainability reporting initiatives. EU sustainability reporting standards should be developed in constructive two-way cooperation with leading international initiatives, and they should align with those initiatives as far as possible while taking into account European specificities. This proposal consists of one Directive that would amend four existing pieces of legislation. In the first place, it would amend the Accounting Directive, revising some exiting provisions and adding certain new provisions about sustainability reporting. In addition, it would amend the Audit Directive and the Audit Regulation, to cover the audit of sustainability information. Finally, it would amend the Transparency Directive to extend the scope of the sustainability reporting requirements to companies with securities listed on regulated markets, and to clarify the supervisory regime for sustainability reporting by these companies. •Consistency with existing policy provisions in the policy area The NFRD, together with the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation, are the central components of the sustainability reporting requirements underpinning the EU’s sustainable finance strategy. The purpose of this legal framework is to create a consistent and coherent flow of sustainability information throughout the financial value chain. This proposal builds on and revises the sustainability reporting requirements set out in the NFRD, in order to make sustainability reporting requirements more consistent with the broader sustainable finance legal framework, including the SFDR and the Taxonomy Regulation, and to tie in with the objectives of the European Green Deal. The SFDR governs how financial market participants (including asset managers and financial advisers) should disclose sustainability information to end-investors and asset owners. To be able to fulfil the requirements of the SFDR – and therefore ultimately to be able to meet the needs of end investors including individuals and households – financial market participants need adequate information from investee companies. This proposal therefore aims to ensure that investee companies report the information financial market participants need in order to fulfil their own SFDR reporting requirements. The Taxonomy Regulation sets up a classification system for environmentally sustainable economic activities, with the aim of scaling up sustainable investments and combatting the greenwashing of ‘sustainable’ financial products. It requires companies within the scope of the NFRD to disclose certain indicators about the extent to which their activities are environmentally sustainable according to the taxonomy. These disclosure obligations will be specified by a separate Commission delegated act. These indicators are complementary to the information that companies have to disclose according to the NFRD itself, and companies will have to report them alongside other sustainability information mandated by the NFRD. This proposal aims to ensure that the reporting requirements for companies are consistent with the taxonomy. This will be achieved above all through the proposed sustainability reporting standards. These will take into account the indicators companies have to disclose about the extent to which their activities are environmentally sustainable according to the taxonomy, and the screening criteria and do-no-significant-harm thresholds of the taxonomy. Compared to the NFRD sustainability reporting requirements, the principal novelties of this proposal are: –to extend the scope of the reporting requirements to additional companies, including all large companies and listed companies (except listed micro-companies); –to require assurance of sustainability information; –to specify in more detail the information that companies should report, and require them to report in line with mandatory EU sustainability reporting standards; –to ensure that all information is published as part of companies’ management reports, and disclosed in a digital, machine-readable format. •Consistency with other Union policies This proposal contributes to the completion of the Capital Markets Union, by enabling investors and other stakeholders to access comparable sustainability information from investee companies across the EU. As part of the action plan on the Capital Markets Union (COM(2020) 590 final), the Commission will put forward a legislative proposal to set up an EU-wide digital access platform to companies’ public financial and sustainability information (European Single Access Point (ESAP)). This proposal complements that initiative, by contributing to achieving the objectives of the Digital Finance Strategy for the EU (COM(2020) 591 final), by requiring that reported sustainability information be digitally tagged. This proposal takes into consideration the Commission’s 2021 Work Programme, in particular the forthcoming initiative on sustainable corporate governance, and the Commission’s commitment in the European Green Deal to stepping up action against false green claims and to supporting businesses and other stakeholders in developing standardised natural capital accounting practices in the EU and internationally. This proposal ties in with the Commission’s proposal for strengthening the application of the principle of equal pay for equal work or work of equal value by men and women, through pay transparency and enforcement mechanisms. It also ties in with the proposed directive on improving gender balance on the boards of large EU listed companies by sharing information on companies’ diversity policies. 2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY •Legal basis The proposal’s legal basis rests on Articles 50 and 114 of the Treaty on the Functioning of the European Union (TFEU). Article 50 of the TFEU is the legal basis for adopting EU measures aimed at attaining the right of establishment in the single market in company law. It is also the legal basis for Directives 2013/34/EU, 2006/43/EC, 91/674/EEC, 86/635/EEC, and t is part of the legal basis for Directive 2004/109/EC. Article 50 of the TFEU mandates the European Parliament and the Council to act by means of directives. In addition, Article 114 of the TFEU is a general legal act with the objective of establishing or ensuring the functioning of the single market – in this case, the free movement of capital. Article 114 of the TFEU is included as the legal basis for this directive amending Directive 2004/109/EC.

•Subsidiarity (for non-exclusive competence) The Accounting Directive, as amended by the NFRD, already regulates the disclosure of sustainability information in the EU. Transparency rules are necessary to ensure investor protection and financial stability across the EU. Common rules on sustainability reporting and its assurance ensure a level playing field for companies established in the different Member States. Significant differences in requirements for sustainability reporting and assurance between Member States create additional costs and complexity for companies operating across borders. This is detrimental to the single market. Member States acting alone are not able to ensure the consistency and comparability of sustainability reporting requirements across the EU. In addition, only EU intervention can ensure that rules on sustainability reporting are consistent with other EU laws, including the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation, and with delegated and implementing acts adopted pursuant to those regulations. Sustainability reporting is the subject of increasing interest and regulatory intervention in jurisdictions around the world. The EU must therefore develop a coherent and comprehensive approach to sustainability reporting, in order to be able to engage constructively with its international partners. Compared to individual action by Member States, EU intervention can ensure a significant European contribution to global policy developments, in order to better defend the interests of European companies and other stakeholders. •Proportionality A central element of this proposal is to require certain categories of companies to report according to mandatory sustainability reporting standards. As is the case for financial reporting, common standards are necessary to ensure that reported information is comparable and relevant. Common reporting standards will also greatly facilitate the digitalisation, assurance and enforcement of sustainability reporting. This proposal envisages introducing a requirement to assure reported sustainability information, so that it is reliable. It also envisages requiring companies to digitally tag reported sustainability information. Digital tagging is essential in order to seize the opportunities digital technologies present to radically improve how sustainability information is used. The EU has already introduced a requirement for the digital tagging of financial information. This proposal takes a proportionate approach to determining which companies will be subject to mandatory reporting requirements. It does not impose new requirements on small and medium-sized enterprises (SMEs), except SMEs listed on EU regulated markets. The proposal exempts listed micro-companies from mandatory reporting obligations. The Commission will adopt standards for large companies and separate, proportionate standards for SMEs. The SME standards will be tailored to the capacities and resources of such companies. While SMEs listed on regulated markets would be required to use these proportionate standards, non-listed SMEs – which are the vast majority of SMEs – may choose to use them on a voluntary basis. •Choice of instrument This proposal comprises a Directive that amends provisions of the Accounting Directive, the Transparency Directive, the Audit Directive and the Audit Regulation, thereby ensuring coherence between the relevant provisions of these four instruments. 3.RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS •Ex-post evaluations/fitness checks of existing legislation In April 2021 the Commission published a fitness check of the EU framework for financial and non-financial corporate reporting, together with a mandatory review of certain aspects of the NFRD. The principal conclusion of the fitness check and the review was that the sustainability information companies currently report does not meet the needs of the information’s intended users, and that the Commission should therefore propose a revision of the NFRD. This is consistent with the findings of the impact assessment accompanying this proposal (see below). •Stakeholder consultations The following consultation activities have helped to shape the content of this proposal. –Open online public consultation from March to July 2018, to prepare the fitness check of the EU framework for corporate reporting. –Targeted online consultation from February to March 2019, to help develop guidelines on climate-related reporting. –Targeted online consultation of companies within the scope of the NFRD, carried out for the Commission by external consultants (CEPS) from December 2019 to March 2020. –Online feedback for the Commission’s inception impact assessment for the revision of the NFRD from January to February 2020.

–Open online public consultation on the revision of the NFRD from February to June 2020. –Targeted online survey of SMEs (SME Panel) on sustainability reporting from March to May 2020. The Commission also organised multi-stakeholder workshops on the materiality concept (November 2019) and the assurance of sustainability information (December 2020), as well as separate consultation meetings with different stakeholder groups in May 2020 (companies, civil society organisations and trade unions). The consultations revealed some differences between users and preparers of sustainability information. Users tend to prefer detailed and comprehensive reporting requirements. Preparers expressed concern about the costs of such requirements, often stated a preference to retain a large degree of discretion about what to report and how to report it. The open public consultation on the NFRD revision nevertheless showed that there was very strong support for mandatory sustainability reporting standards (over 80% of all respondents, including 81% of respondents who are or who represent companies that prepare sustainability reports). Many stakeholders stressed that if the EU develops sustainability reporting standards, it should build on and be consistent with international standard-setting initiatives. Stakeholders also emphasised the need to clarify the obligation to report according to the double materiality perspective. Consultations also showed that there was strong support for measures to ensure the alignment of NFRD sustainability reporting requirements with relevant EU legislation, in particular the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation. Stakeholders have a wide range of views about which categories of companies should be subject to mandatory reporting requirements. Most civil society organisations and trade unions support an extension of the NFRD’s scope to a wide range of companies, including large non-listed companies and SMEs. Many financial institutions and asset managers support the introduction of proportionate reporting requirements for SMEs, especially listed SMEs. Mainstream business associations argued mainly against extending the scope of the reporting requirements. Organisations representing SMEs, and most SMEs themselves, oppose the introduction of mandatory requirements for SMEs but remain open to the idea of proportionate, voluntary standards for them. Various stakeholders group proposed that reporting requirements also apply to non-EU companies. •Collection and use of expertise In preparing this proposal, the Commission took into consideration the recommendations of the task force established by the European Financial Reporting Advisory Group (EFRAG) to explore the possibility of developing European sustainability reporting standards. It also considered the recommendations of the President of EFRAG on possible governance changes to EFRAG if it is asked to develop such standards. The governance of EFRAG would be modified accordingly before EFRAG submits any draft standards to the Commission. In particular, a new sustainability reporting pillar should be created alongside EFRAG’s existing financial reporting pillar. The new pillar should have a robust governance structure and due process reflecting its role of developing standards. It should integrate a broader range of stakeholders than those traditionally involved in financial reporting, including a balanced representation of experts from national authorities, civil society and the private sector. The Commission contracted consultants to collect data on sustainability reporting, including costs, through a survey of companies within the scope of the NFRD. It also contracted consultants to analyse market and current practices in the provision of sustainability data, ratings and research for the financial sector. •Impact assessment The Commission services have drafted an impact assessment for this proposal. The Regulatory Scrutiny Board has given a positive opinion, with reservations, on the draft impact assessment. The impact assessment focused on policy choices in three areas: (1) standardisation – whether to develop EU sustainability reporting standards and require companies to use them; (2) assurance (audit) – whether reported sustainability information should be assured and if so, at what level; and (3) scope – which categories of companies should be subject to the reporting requirements. The preferred policy option identified in the impact assessment would: (1)require all companies within the scope to report in accordance with EU standards; (2)require all companies within the scope to seek limited assurance for reported sustainability information, while including an option to move towards a reasonable assurance requirement at a later stage ; and (3)extend the scope to all large companies, and all companies listed on EU regulated markets except listed micro-companies. The scope would include companies not established in the EU that are listed on EU regulated markets, and the EU subsidiaries of non-EU companies. The preferred option is the best trade-off between two possible courses of action. One is detailed and prescriptive reporting requirements, a strong assurance requirement, and a broad scope – highly effective in meeting users’ needs but more expensive for preparers. The other is less detailed reporting requirements, a less strong assurance requirement, and a narrower scope – less effective in meeting users’ needs but also less expensive for preparers, at least in the short term. The aim is to achieve the best value outcome in terms of objectives and associated costs. The preferred option also allows Member States to authorise independent assurance services providers other than statutory auditors or audit firms to carry out the assurance of sustainability reporting. This is intended to offer companies a broader choice of assurance service providers for the assurance of sustainably reporting. Users will benefit from better access to comparable, relevant and reliable sustainability information from more companies. This will in turn reduce the risks of investment risks in the financial system, increase financial flows to companies that have a positive impact on people and the environment, and make companies more accountable. It will provide savers and investors who want to invest sustainably with the possibility to do so. The proposed option would ensure that approximately 49 000 companies report sustainability information (75% of the turnover of all limited liability companies), compared to the current 11 600 companies (47% of the turnover of all limited liability companies) that are within the scope of the NFRD. All large companies, and all companies listed on EU regulated markets (except listed micro-companies), would be required to apply EU sustainability reporting standards and seek assurance for reported information. By comparison, currently only an estimated 20% of large companies fully apply any sustainability reporting standards today and only 30% seek some form of assurance. The proposed option will have indirect positive effects on respect for fundamental rights, as well as on people and the environment, since more stringent reporting requirements can influence corporate behaviour for the better.

The total estimated costs of the preferred option for preparers are EUR 1.200 million in one-off costs and EUR 3.600 million in annual recurring costs. In addition, preparers will incur costs as a result of the reporting requirements of Article 8 of the Taxonomy Regulation. If the EU takes no action, costs for preparers are in any case expected to increase substantially due to an increase in uncoordinated information demands from users, the absence of consensus about what information companies should report in order to meet users’ needs, and persistent difficulties in obtaining the sustainability information that preparers need for their own reporting purposes from suppliers, clients and investee companies. The unavailability of sufficiently detailed data makes it impossible to calculate the costs that preparers would incur in the absence of new rules. However, it is estimated that the use of standards could lead to annual savings of EUR 24 200-41 700 per company (around EUR 280-490 million per year for the current NFRD population and EUR 1.200-2.000 million per year for the preferred option), if standards completely eliminated the need for additional information requests to preparers. EU companies risk incurring higher reporting costs than non-EU companies if other jurisdictions do not take an approach similar to the approach outlined in this proposal. This could lead to unequal treatment of EU and non-EU companies and therefore be detrimental to the level playing field in the EU Single Market. To mitigate this risk, EU subsidiaries of non-EU companies, as well as any non-EU company with transferable securities listed on an EU regulated market, are covered by the reporting requirements set out in the proposal. •Regulatory fitness and simplification To help ensure investor protection, all companies listed on regulated markets should in principle be subject to the same disclosure rules. SMEs listed on EU regulated markets would therefore have to fulfil the proposed new sustainability reporting requirements. However, the requirements for SMEs listed on EU regulated markets would apply only 3 years after they apply to other companies, to allow for the relative economic difficulties faced by smaller companies as a result of the COVID-19 pandemic. This phasing-in period would also allow listed SMEs to apply the new requirements when reporting and assurance practices for sustainability information have reached a higher degree of maturity. The disclosure requirements of this proposal would not apply to SMEs with transferable securities listed on SME growth markets or multilateral trading facilities (MTFs). In addition, for reasons of proportionality, they would not apply to micro-enterprises listed on EU regulated markets. This proposal does not require other SMEs to report sustainability information. However, non-listed SMEs may decide to use on a voluntary basis the sustainability reporting standards that the Commission will adopt as delegated acts for reporting by listed SMEs. These aim to enable any SME to report information cost-efficiently in response to the numerous requests for information they receive from other companies with whom they do business, such as banks, insurance companies and large corporate clients, and to help define the limits for the information that companies can reasonably expect SMEs in their value chain to provide. Such standards should also help SMEs to attract additional investment and funding, and to participate fully in, and contribute to, the transition to a sustainable economy outlined in the European Green Deal. The SME standards will set a reference for companies that are within the scope of the Corporate Sustainability Reporting Directive regarding the level of sustainability information that they could reasonably request from SME suppliers and clients in their value chains.. This proposal is digital-ready, since it requires companies to digitally tag reported sustainability information in accordance with a digital taxonomy. •Fundamental rights The proposal respects the fundamental rights enshrined, and adheres to the principles stated, in the Charter of Fundamental Rights of the European Union. It will have an indirect positive impact on fundamental rights, given that more stringent reporting requirements can influence corporate behaviour for the better. It should serve to make companies more aware of fundamental rights and positively influence how they identify and manage actual and potential adverse impacts on fundamental rights. It should also increase capital flows to companies that respect fundamental rights, and in general make companies more accountable for their impact on fundamental rights. 4.BUDGETARY IMPLICATIONS The proposal does not have any budgetary implications. Existing budgetary resources will be used for expenditure to fund the development of EU sustainability reporting standards. 5.OTHER ELEMENTS •Implementation plans and monitoring, evaluation and reporting arrangements To monitor progress towards achieving the proposal’s specific objectives, the Commission will explore the possibility of organising periodic surveys of users and preparers, depending on the availability of financial resources. The proposal includes a requirement that the Commission report to the European Parliament and to the Council on the implementation of assurance requirements no later than 3 years after the entry into application of this Directive. The report will be accompanied, if appropriate, by legislative proposals for stricter assurance requirements (‘reasonable assurance’). This proposal does not require an implementation plan. •Explanatory documents (for directives) No explanatory documents are considered necessary. •Detailed explanation of the specific provisions of the proposal Article 1 amends Directive 2013/34/EU (“the Accounting Directive”). Paragraph (1) of Article 1 extends the scope of the Articles of the Accounting Directive on sustainability reporting obligations to credit institutions and insurance companies that according to the Accounting Directive are not limited liability companies or are not deemed to have limited liability, including cooperative banks and mutual and cooperative insurance companies, provided they meet the relevant size criteria.

Paragraph (2) of Article 1 defines certain terms that are necessary for the proposal. It introduces and defines the terms “sustainability matters” and “sustainability reporting”, whereas the existing provisions of the Accounting Directive refer to “non-financial information”. It also defines the terms “independent assurance services provider” and “intangibles”. Paragraph (3) of Article 1 replaces Article 19a of the Accounting Directive, which specifies the sustainability reporting requirements for certain companies. The proposal amends Article 19a as follows: –It modifies the personal scope of the reporting requirements, extending their application to all large companies and all companies with securities listed on EU regulated markets, except micro-companies. In order to alleviate the reporting burden for listed SMEs, they are to start reporting in accordance with this Directive 3 years after its entry into application. –It clarifies the principle of double materiality, removing any ambiguity about the fact that companies should report information necessary to understand how sustainability matters affect them, and information necessary to understand the impact they have on people and the environment. –It specifies in greater detail the information that companies should disclose. Compared to the existing provisions, it introduces new requirements for companies to provide information about their strategy, targets, the role of the board and management, the principal adverse impacts connected to the company and its value chain, intangibles, and how they have identified the information they report. –It specifies that companies should report qualitative and quantitative information, forward-looking and retrospective information, and information that covers short, medium and long-term time horizons as appropriate. –It requires all companies within its scope to report in accordance with European sustainability reporting standards, and allows listed SMEs within its scope to report in accordance with sustainability reporting standards specific for SMEs. –It removes the possibility for Member States to allow companies to report the required information in a separate report that is not part of the management report. –It requires exempted subsidiary companies to publish the consolidated management report of the parent company reporting at group level, and to include a reference in its legal-entity (individual) management report to the fact that the company in question is exempted from the requirements of the Directive. Paragraph (4) of Article 1 introduces three new provisions, Articles 19b, 19c and 19d, into the Accounting Directive, on sustainability reporting standards. Article 19b empowers the Commission to adopt EU sustainability reporting standards by means of delegated acts and specifies the requirements for their adoption. Firstly, it specifies minimum quality criteria that information reported in accordance with the standards would have to meet. Secondly, it identifies the topics standards should cover. Thirdly, it identifies certain instruments and initiatives that the Commission should take particular account of when deciding the content of the delegated acts, including certain EU legislation, and the work of global standard-setting initiatives for sustainability reporting. It also requires the Commission to adopt a first set of standards by 31 October 2022. This set of standards should specify information that companies should report about all sustainability matters and all reporting areas listed in Article 19a(2). These delegated acts should at least specify the information that companies should report to serve the needs of financial market participants subject to the disclosure requirements of Regulation (EU) 2019/2088. A second set of standards should be adopted at the latest by 31 October 2023. This set of standards should specify complementary information that companies should report about sustainability matters and reporting areas listed in Article 19a(2) where necessary, and information specific to the sector in which a company operates. Finally, Article 19b requires the Commission to review the standards at least every 3 years to take account of relevant developments, including developments in international standards. Article 19c requires the Commission to adopt sustainability reporting standards for small and medium sized companies by 31 October 2023. Article 19d requires companies to prepare their financial statements and their management report in a single electronic reporting format in accordance with Article 3 of Commission Delegated Regulation (EU) 2019/815 and to mark-up sustainability information as and when specified in that Regulation. Paragraph (5) of Article 1 amends Article 20 to require listed companies subject to this provision to include a reference to gender in the description of the diversity policy applied in relation to the company’s administrative, management and supervisory bodies. It also amends Article 20 to allow listed undertakings subject to Article 20 to comply with the requirements it sets out in points (c), (f) and (g) by including the necessary information as part of their sustainability reporting. Paragraph (6) of Article 1 amends Article 23 of the Accounting Directive, clarifying that the exemption regime for consolidated financial statements and consolidated management reports operates independently from the exemption regime for consolidated sustainability reporting. This means that a company can be exempted from consolidated financial reporting requirements, but not from consolidated sustainability reporting requirements. This is the case if the company’s ultimate parent company prepares consolidated financial statements and consolidated management reports in accordance with EU law, or equivalent requirements if it is a non-EU country, but does not prepare consolidated sustainability reports in accordance with EU law, or equivalent requirements if it is a non-EU country. Paragraph (7) of Article 1 replaces Article 29a of the Accounting Directive so that all the sustainability reporting requirements of Article 19a apply as appropriate to parent companies that report on a consolidated basis for the whole group. Paragraph (8) of Article 1 amends Article 30 of the Accounting Directive in order to align it with the new sustainability reporting requirements. Firstly, it is amended to require Member States to ensure that within 12 months after the balance sheet date, companies publish their duly approved annual financial statements and management report in the electronic format prescribed in the new Article 19d. Secondly, it is amended to require that if an opinion on sustainability reporting is given by an independent assurance services provider other than the statutory auditor, this opinion be published together with the annual financial statements and management report. Finally, it is amended to require Member States to ensure that management reports containing sustainability reporting are made available to the relevant officially appointed mechanism referred to in Directive 2004/109/EC of the European Parliament and of the Council (the Transparency Directive), without delay, following their publication. It specifies that if companies that prepare sustainability reporting are not listed on EU regulated markets, the relevant officially appointed mechanism should be one of the officially appointed mechanisms of the Member State where the company in question has its registered office. This is necessary for the inclusion of the sustainability information disclosed by companies in the European Single Access Point which will be established as announced in action 1 of the action plan on the Capital Markets Union. Paragraph (9) of Article 1 amends Article 33 of the Accounting Directive, aligning the collective responsibility of the members of the administrative, management and supervisory bodies of a company with the revised sustainability reporting requirements. In particular, it requires administrative, management and supervisory bodies to ensure that the company in question has reported in accordance with EU sustainability reporting standards, and in the digital format required, and deletes the reference to the currently allowed separate report for sustainability reporting. Paragraph (10) of Article 1 amends Article 34 of the Accounting Directive with regard to the assurance of sustainability reporting. In particular, it requires the statutory auditor to perform a limited assurance engagement on a company’s sustainability reporting, including on the compliance of the sustainability reporting with the reporting standards, on the process carried out by the company to identify the information reported pursuant to the standards, on the mark-up of sustainability reporting, and on the indicators reported pursuant to Article 8 of the Taxonomy Regulation. In addition, it allows Member States to allow any independent assurance services provider accredited in accordance with Regulation (EC) No 765/2008 of the European Parliament and of the Council to provide an opinion on sustainability reporting on the basis of a limited assurance engagement. It also requires Member States to ensure that consistent requirements are set out for all persons and firms, including statutory auditors and audit firms, who are allowed to provide the opinion on the assurance of sustainability reporting. Paragraph (11) of Article 1 amends Article 49 of the Accounting Directive, laying down the conditions for empowering the Commission to adopt the delegated acts on sustainability reporting standards referred to in the new Article 19b. It requires the Commission to take account of the technical advice of the European Financial Reporting Advisory Group (EFRAG) when preparing those acts, provided it is developed with proper due process, public oversight and transparency, and with the expertise of relevant stakeholders, and that it is accompanied by cost-benefit analyses, which will facilitate the adoption of standards by the Commission. This paragraph also requires the European Securities and Markets Authority (ESMA) to provide an opinion on the technical advice provided by EFRAG before it adopts standards. This opinion shall be provided within two months from the date of receipt of the request from the Commission. This is a reasonable period as ESMA will be involved in EFRAG’s work, and will therefore be familiarised with the content of EFRAG’s technical advice before it is submitted to the Commission. The Commission is also required to consult the Member State Expert Group on Sustainable Finance, the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), the European Environment Agency (EEA), the European Union Agency for Fundamental Rights (FRA), the European Central Bank, the Committee of European Auditing Oversight Bodies and the Platform on Sustainable Finance before adopting standards. Where any of those bodies decide to submit an opinion, they shall do so within two months from the date of being consulted by the Commission. Paragraph (12) of Article 1 amends Article 51 of the Accounting Directive, specifying the minimum types of sanctions and administrative measures that Member States should provide for in the case of infringements of the national provisions transposing the sustainability reporting requirements of the Accounting Directive. Article 2 amends Directive 2004/109/EC (the Transparency Directive). Paragraph (1) of Article 2 introduces and defines the term “sustainability reporting”, necessary for the proposal.

Paragraph (2) of Article 2 amends Article 4 of the Transparency Directive, in order to take into consideration the sustainability reporting part of the regulated information to be drawn up and published under its provisions. Firstly, it is amended in order to require that the annual financial report includes statements made by the people responsible for financial reporting in the issuer that to the best of their knowledge, the management report is prepared in accordance with sustainability reporting standards as required by Directive 2013/34/EU, where appropriate. The requirement to include sustainability reporting in the management report, as a result of the amendments introduced by this Directive, obviates the need to modify Article 4(2)(b) of Directive 2004/109/EC. Secondly, the references to provisions of the Accounting Directive and Directive 2006/43/EC (the Audit Directive) are updated as regards the requirement to audit financial statements in accordance with Article 34(1) of the Accounting Directive, and to state whether the auditor or audit firm has identified material misstatements in the management report, and as regards the requirement to disclose the audit report, including the opinion on the assurance of sustainability reporting. Finally, the references to provisions of the Accounting Directive as regards the preparation of the management report are updated and amended to require sustainability reporting. These amendments enable the extension of the sustainability reporting requirements to companies listed on EU regulated markets, except micro-companies, including non-EU issuers. They also clarify the legal mandate national competent authorities have to supervise sustainability reporting. Paragraph (3) of Article 2 amends Article 23(4) of the Transparency Directive in order to empower the Commission to adopt measures to establish a mechanism for the determination of the equivalence of sustainability reporting standards used by non-EU issuers and to take the necessary decisions on such equivalence. Any decisions on the equivalence of sustainability reporting standards used by non-EU issuers will be independent from equivalence decisions concerning financial reporting standards. Paragraph (4) of Article 2 introduces Article 28(d) in the Transparency Directive to require the European Securities and Markets Authority (ESMA) to issue guidelines for national competent authorities in order to promote supervisory convergence of sustainability reporting. The ESMA Regulation (Regulation (EU) No 1095/2010) identifies the Transparency Directive as one of the Union legislative acts that define ESMA’s scope of action. Article 3 amends Directive 2006/43/EC (the Audit Directive). Paragraph (1) of Article 3 amends Article 1 of the Audit Directive, its subject matter, in order to include the assurance of annual and consolidated sustainability reporting, where carried out by the statutory auditor or audit firm carrying out the statutory audit of financial statements. Paragraph (2) of Article 3 amends and inserts certain definitions, necessary for the proposal, in Article 2 of the Audit Directive. It amends the definitions of ‘statutory auditor’ and ‘audit firm’ in order to take into account their potential work in assuring sustainability reporting, where applicable. It also introduces and defines the term ‘assurance of sustainability reporting’ and ‘sustainability reporting’. Paragraphs (3)–(7) of Article 3 amend Articles 6-11 of the Audit Directive, containing the rules on the approval, continuing professional education and mutual recognition of statutory auditors and audit firms, in order to ensure that statutory auditors have the necessary level of theoretical knowledge of subjects relevant to the assurance of sustainability reporting and the ability to apply such knowledge in practice. Paragraph (7) of article 3 amends Article 14, which contains the rules on the procedures that competent authorities should set out for the approval of statutory auditors from a different Member State. It is amended to ensure that where the Member State decides that the applicant seeking approval should be subject to an aptitude test, this test also covers the statutory auditor's adequate knowledge of the laws and regulations of the host Member State relevant to the assurance of sustainability reporting. Paragraph (8) of article 3 introduces Article 14a which comprises a grandfathering clause to ensure that approved statutory auditors can continue carrying out statutory audits and can carry out audits of sustainability reporting once the amended legal requirements apply. Member States should ensure that already approved statutory auditors acquire the necessary knowledge in sustainability reporting and the assurance of sustainability reporting via the continuing education requirement of Article 13 of the Audit Directive. Paragraph (9) of Article 3 amends Article 24b to adapt the rules on the organisation of the work of the auditor to include references to their work on the assurance of sustainability reporting. In particular, it is amended in order to require that the key audit partner(s) is/are actively involved in carrying out the assurance of sustainability reporting; that when carrying out the assurance of sustainability reporting, the statutory auditor devotes sufficient time to the engagement and assigning sufficient resources to enable them to carry out their duties appropriately; that the client account record specifies the fees for the assurance of sustainability reporting; and that the audit file includes information on the assurance of sustainability reporting, where carried out by the statutory auditor. Paragraph (10) of Article 3 amends Article 25 to require Member States to put adequate rules in place to prevent the fees for the assurance of sustainability reporting from being influenced or determined by the provision of additional services to the audited entity, or being based on any form of contingency. Paragraph (11) of Article 3 inserts Article 25b to extend Audit Directive rules on the professional ethics, independence, objectivity, confidentiality and professional secrecy required of auditors of financial statements to their work on the assurance of sustainability reporting. Paragraph (12) of Article 3 inserts Article 26a, requiring Member States to require auditors to carry out assurance engagements of sustainability reporting in accordance with assurance standards adopted by the Commission and to apply national assurance standards, procedures or requirements unless the Commission has adopted an assurance standard covering the same subject-matter. It empowers the Commission to adopt assurance standards by means of delegated acts in order to set out the procedures that the auditor shall perform in order to draw its conclusions on the assurance of sustainability reporting, including engagement planning, risk consideration and response to risks, and the type of conclusions to be included in the audit report. It also requires auditors to base their opinion on sustainability reporting on a reasonable assurance engagement should the Commission use the option to adopt standards for reasonable assurance. Paragraph (13) of Article 3 inserts Article 27a in order to extend the rules on the statutory audit of a group of companies to the assurance of consolidated sustainability reporting, where carried out by the statutory auditor. Paragraph (14) of Article 3 amends Article 28 in order to require the statutory auditor(s) or the audit firm(s) carrying out the assurance of sustainability reporting to present its/their results in the audit report, and to prepare the report in accordance with the requirements for assurance standards adopted by the EU or Member State concerned. In particular, the audit report should specify the annual or consolidated sustainability reporting and the date and period they cover. It should identify the sustainability reporting framework applied in their preparation. It should include a description of the scope of the assurance of sustainability reporting and identify the assurance standards in accordance with which the assurance of sustainability reporting was conducted. Finally, it should include the statutory auditor’s opinion on sustainability reporting. Paragraph (15) of Article 3 amends Article 29 of the Audit Directive concerning the system for the quality assurance review of statutory auditors and audit firms in order to ensure that quality assurance reviews take place for the audits of sustainability reporting and that the people who carry out quality assurance reviews have appropriate professional education and relevant experience in the assurance of sustainability reporting. Paragraph (16) of Article 3 inserts Article 30g in order to clarify that the investigations and sanctions regime for statutory auditors and audit firms carrying out statutory audits also apply to audits of sustainability reporting. Paragraph (17) of Article 3 inserts Article 36a in order to clarify that the provisions on public oversight and regulatory arrangements between Member States as regards statutory audits also apply to the assurance of sustainability reporting. Paragraph (18) of Article 3 inserts Article 38a in order to clarify that the provisions on the appointment and dismissal of statutory auditors and audit firms as regards statutory audits also apply to the assurance of sustainability reporting. Paragraph (19) of Article 3 amends Article 39 in order to clarify the tasks of the audit committee for the assurance of sustainability reporting. In particular, the audit committee should inform the administrative or supervisory body of the audited entity of the outcome of the assurance of sustainability reporting and explain how the audit committee contributed to the integrity of sustainability reporting and what the role of the audit committee was in that process. It should monitor the sustainability reporting process, including the digital reporting process, and the process carried out by the company to identify the information reported according to the relevant sustainability reporting standards and submit recommendations or proposals to ensure its integrity. It should monitor the effectiveness of the company's internal quality control and risk management systems and, where applicable, its internal audit, regarding the sustainability reporting of the audited entity, including its digital reporting as will be required under the amended Accounting Directive, without breaching its independence. Finally, it should monitor the assurance of the annual and consolidated sustainability reporting, and review and monitor the independence of the statutory auditors or the audit firms.

Paragraph (20) of Article 3 amends Article 45 in order to align the requirements for the registration and oversight of non-EU auditors and audit entities with the new scope of the Directive, covering the assurance of sustainability reporting. Paragraph (21) of Article 3 amends Article 48a in order to set out the conditions for the exercise of the delegation of powers to the Commission to adopt assurance standards for sustainability reporting pursuant to Article 26a(2). Article 4 amends Regulation (EU) No 537/2014 (the Audit Regulation). Paragraph (1) of Article 4 amends Article 5 of the Audit Regulation to prohibit the provision of consulting services for the preparation of sustainability reporting in the time periods specified in Article 5 of the Audit Regulation, when statutory auditors or audit firms carrying out the statutory audit are also carrying out the assurance of sustainability reporting. Paragraph (2) of Article 4 amends Article 14 in order to require statutory auditors and audit firms to annually inform the competent authority in question of which revenues, among the revenues from non-audit services, were generated from the assurance of sustainability reporting. Article 5 requires Member States to transpose Articles 1 to 3 of the Directive by 1 December 2022, and to ensure that its provisions apply to companies for the financial year starting on 1 January 2023 or during calendar year 2023. Article 6 sets out the date of entry into application of the amended provisions of Regulation (EU) No 537/2014 (the Audit Regulation) on 1 January 2023. . 2021/0104 (COD) Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability reporting (Text with EEA relevance) THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 50 and 114 thereof, Having regard to the proposal from the European Commission, After transmission of the draft legislative act to the national parliaments, Having regard to the opinion of the European Central Bank, Having regard to the opinion of the European Economic and Social Committee, Acting in accordance with the ordinary legislative procedure,

Whereas: (1)In its communication on the European Green Deal adopted on 11 December 2019, the European Commission made a commitment to review the provisions concerning non-financial reporting of Directive 2013/34/EU of the European Parliament and of the Commission. The European Green Deal is the European Union’s new growth strategy. It aims to transform the Union into a modern, resource-efficient and competitive economy with no net emissions of greenhouse gases by 2050. It also aims to protect, conserve and enhance the Union's natural capital, and protect the health and well-being of citizens from environment-related risks and impacts. The European Green Deal aims at decoupling economic growth from resource use, and ensuring that all regions and citizens of the Union participate in a socially just transition to a sustainable economic system. It will contribute to the objective of building an economy that works for the people, strengthening the EU’s social market economy, helping to ensure that it is future-ready and that it delivers stability, jobs, growth and investment. These goals are especially important considering the socio-economic damage caused by the COVID-19 pandemic and the need for a sustainable, inclusive and fair recovery. In its proposal of 4 March 2020 for a European Climate Law, the European Commission proposed to make the objective of climate neutrality by 2050 binding in the Union. (2)In its Action Plan: Financing Sustainable Growth the Commission set out measures to achieve the following objectives: reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth, manage financial risks stemming from climate change, resource depletion, environmental degradation and social issues, and foster transparency and long-termism in financial and economic activity. The disclosure by undertakings of relevant, comparable and reliable sustainability information is a prerequisite for meeting those objectives. The European Parliament and the Council adopted a number of legislative acts as part of the implementation of the Action Plan on Financing Sustainable Growth. Regulation (EU) 2019/2088 of the European Parliament and of the Council governs how financial market participants and financial advisers are to disclose sustainability information to end investors and asset owners. Regulation (EU) 2020/852 of the European Parliament and of the Council creates a classification system of environmentally sustainable economic activities with the aim of scaling up sustainable investments and combatting greenwashing of financial products that unduly claim to be sustainable. Regulation (EU) 2019/2089 of the European Parliament and of the Council, complemented by Commission Delegated Regulations (EU) 2020/1816, (EU) 2020/1817 and (EU) 2020/1818, introduces environmental, social and governance (‘ESG’) disclosure requirements for benchmarks administrators and minimum standards for the construction of EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks. Regulation (EU) No 575/2013 of the European Parliament and of the Council requires large institutions which have issued securities that are admitted to trading on a regulated market to disclose information on ESG risks from 28 June 2022. The new prudential framework for investment firms set by Regulation (EU) 2019/2033 of the European Parliament and of the Council and Directive (EU) 2019/2034 of the European Parliament and of the Council contains provisions concerning the introduction of an ESG risk dimension in the supervisory review and evaluation process (SREP) by competent authorities, and contains ESG risks disclosure requirements for investment firms, applicable from 26 December 2022. The Commission has also announced a proposal on a European Green Bond Standard in its Work Programme for 2021, following up on the Action Plan on Financing Sustainable Growth. (3)On 5 December 2019, in its conclusions on deepening the Capital Markets Union, the Council stressed the importance of reliable, comparable and relevant information on sustainability risks, opportunities and impacts, and called on the Commission to consider the development of a European non-financial reporting standard. (4)In its resolution on sustainable finance of 29 May 2018, the European Parliament called for the further development of non-financial reporting requirements in the framework of Directive 2013/34/EU. In its resolution on sustainable corporate governance of 17 December 2020, the European Parliament welcomed the Commission’s commitment to review Directive 2013/34/EU and expressed the need to set up a comprehensive Union framework on non-financial reporting that contains mandatory Union non-financial reporting standards. The European Parliament called for the expansion of the scope of the reporting requirements to additional categories of undertakings and for the introduction of an audit requirement. (5)On 25 September 2015, the UN General Assembly adopted a new global sustainable development framework: the 2030 Agenda for Sustainable Development (the ‘2030 Agenda’). The 2030 Agenda has at its core the Sustainable Development Goals and covers the three dimensions of sustainability: economic, social and environmental. The Commission communication of 22 November 2016 on the next steps for a sustainable European future linked the Sustainable Development Goals to the Union policy framework to ensure that all Union actions and policy initiatives, both in and beyond the Union, take those goals on board at the outset. In its conclusions of 20 June 2017, the Council confirmed the commitment of the Union and its Member States to the implementation of the 2030 Agenda in a full, coherent, comprehensive, integrated and effective manner, in close cooperation with partners and other stakeholders. (6)Directive 2014/95/EU of the European Parliament and the Council amended Directive 2013/34/EU as regards disclosure of non-financial information by certain large undertakings and groups. Directive 2014/95/EU introduced a requirement on undertakings to report information on, as a minimum, environmental, social and employee matters, respect for human rights, and anti-corruption and bribery matters. With regard to these topics, Directive 2014/95/EU required undertakings to disclose information under the following reporting areas: business model, policies (including due diligence processes implemented), the outcome of the policies, risks and risk management, and key performance indicators relevant to the business. (7)Many stakeholders consider the term ‘non-financial’ to be inaccurate, in particular because it implies that the information in question has no financial relevance. Increasingly, however, the information in question does have financial relevance. Many organisations, initiatives and practitioners in this field refer to ‘sustainability’ information. It is therefore preferable to use the term ‘sustainability information’ in place of ‘non-financial information’. Directive 2013/34/EU should therefore be amended to take account of this change in terminology. (8)The ultimate beneficiaries of better sustainability reporting by undertakings are individual citizens and savers. Savers who want to invest sustainably will have the opportunity to do so, while all citizens should benefit from a stable, sustainable and inclusive economic system. To realise these benefits, the sustainability information disclosed in undertaking’s annual reports first has to reach two primary groups (‘users’). The first group of users consists of investors, including asset managers, who want to better understand the risks and opportunities that sustainability issues pose to their investments and the impacts of those investments on people and the environment. The second group of users consists of organisations, including non-governmental organisations and social partners, that wish to better hold undertakings to account for their impacts on people and the environment. Other stakeholders may also make use of sustainability information disclosed in annual reports. The business partners of undertakings, including customers, may rely on this information to understand, and where necessary report on, the sustainability risks and impacts through their own value chains. Policy makers and environmental agencies may use such information, in particular on an aggregate basis, to monitor environmental and social trends, to contribute to environmental accounts, and to inform public policy. Few individual citizens and consumers directly consult undertaking’s reports, but they may use such information indirectly such as when considering the advice or opinions of financial advisers or non-governmental organisations. Many investors and asset managers purchase sustainability information from third party data providers, who collect information from various sources, including public corporate reports. (9)There has been a very significant increase in demand for corporate sustainability information in recent years, especially on the part of the investment community. That increase in demand is driven by the changing nature of risks to undertakings and growing investor awareness of the financial implications of these risks. That is especially the case for climate-related financial risks. Awareness of the risks to undertakings and to investments resulting from other environmental issues and from social issues, including health issues, is also growing. The increase in demand for sustainability information is also driven by the growth in investment products that explicitly seek to meet certain sustainability standards or achieve certain sustainability objectives. Part of that increase is the logical consequence of previously adopted Union legislation, notably Regulation (EU) 2019/2088 and Regulation (EU) 2020/852. Some of the increase would have happened in any case, due to fast-changing citizen awareness, consumer preferences and market practices. The COVID-19 pandemic will further accelerate the increase in users’ information needs, in particular as it has exposed the vulnerabilities of workers and of undertaking’s value chains. Information on environmental impacts is also relevant in the context of mitigating future pandemics with human disturbance of ecosystems increasingly linked to the occurrence and spread of diseases. (10)Undertakings themselves stand to benefit from carrying out high quality reporting on sustainability matters. The growth in the number of investment products that aim to pursue sustainability objectives means that good sustainability reporting can enhance an undertaking’s access to financial capital. Sustainability reporting can help undertakings to identify and manage their own risks and opportunities related to sustainability matters. It can provide a basis for better dialogue and communication between undertakings and their stakeholders, and can help undertakings to improve their reputation. (11)The report on the review clause of the Non-Financial Reporting Directive (Directive 2014/95/EU), and its accompanying fitness check on corporate reporting, identified problems as to the effectiveness of that Directive. There is significant evidence that many undertakings do not disclose material information on all major sustainability-related topics. The report also identified as significant problems the limited comparability and reliability of sustainability information. Additionally, many undertakings from which users need sustainability information are not obliged to report such information. (12)In the absence of policy action, the gap between users’ information needs and the sustainability information reported by undertakings is expected to grow. This gap has significant negative consequences. Investors are unable to take sufficient account of sustainability-related risks and opportunities in their investment decisions. The aggregation of multiple investment decisions that do not take adequate account of sustainability-related risks has the potential to create systemic risks that threaten financial stability. The European Central Bank and international organisations such as the Financial Stability Board have drawn attention to those systemic risks, in particular in the case of climate. Investors are also less able to channel financial resources to undertakings and economic activities that address and do not exacerbate social and environmental problems, which undermines the objectives of the European Green Deal and the Action Plan on Financing Sustainable Growth. Non-governmental organisations, social partners, communities affected by undertakings’ activities, and other stakeholders are less able to hold undertakings accountable for their impacts on people and the environment. This creates an accountability deficit, and may contribute to lower levels of citizen trust in businesses, which in turn may have negative impacts on the efficient functioning of the social market economy. The lack of generally accepted metrics and methods for measuring, valuing, and managing sustainability-related risks is also an obstacle to the efforts of undertakings to ensure that their business models and activities are sustainable. (13)The report on the review clause of Directive 2014/95/EU, and its accompanying fitness check on corporate reporting, also recognised a significant increase in information requests for information about sustainability matters to undertakings in an attempt to address the existing information gap. In addition, ongoing expectations on undertakings to use a variety of different frameworks and standards are likely to continue and may even intensify as the value placed on sustainability information continues to grow. In the absence of policy action to build consensus on the information that undertakings should report, there will be significant increases in costs and burden for reporting undertakings and for users of such information. (14)The growing gap between users’ information needs and the current reporting practices of undertakings makes it more likely that individual Member States will introduce increasingly divergent national rules or standards. Different reporting requirements in different Member States would create additional costs and complexity for undertakings operating across borders and therefore undermine the single market, and would undermine the right of establishment and the free movement of capital across the Union. Those different reporting requirements also make reported information less comparable across borders, undermining the capital markets union. (15)Articles 19a and 29a of Directive 2013/34/EU apply to large undertakings that are public-interest entities with an average number of employees in excess of 500, and to public-interest entities that are parent undertakings of a large group with an average number of employees in excess of 500 on a consolidated basis, respectively. In view of the growth of users’ needs for sustainability information, additional categories of undertakings should be required to report such information. It is therefore appropriate to require all large undertakings and all undertakings listed on regulated markets, except micro undertakings, to report detailed sustainability information. In addition, all undertakings that are parent undertakings of large groups should prepare sustainability reporting at group level. (16)The requirement that also large non-listed undertakings should disclose information on sustainability matters is mainly driven by concerns about the impacts and accountability of such undertakings, including through their value chain. In this respect, all large undertakings should be subject to the same requirements to report sustainability information publicly. In addition, financial market participants also need information from those large non-listed undertakings. (17)The requirement that undertakings not established in the Union but with securities listed on regulated markets should also disclose information on sustainability matters responds to the needs of financial market participants for information from such undertakings in order to understand the risks and impacts of their investments, and to comply with the disclosure requirements laid down in Regulation (EU) 2019/2088. (18)Considering the growing relevance of sustainability-related risks and taking into account that small and medium-sized enterprises (SMEs) listed on regulated markets comprise a significant proportion of all listed undertakings in the Union, in order to ensure investor protection it is appropriate to require that also those SMEs disclose information on sustainability matters. The introduction of this requirement will help to ensure that financial market participants can include smaller listed undertakings in investment portfolios on the basis that they report the sustainability information that financial market participants need. It will therefore help to protect and enhance the access of smaller listed undertakings to financial capital, and avoid discrimination against such undertakings on the part of financial market participants. The introduction of this requirement is also necessary to ensure that financial market participants have the information they need from investee undertakings to be able to comply with their own sustainability disclosure requirements laid down in Regulation (EU) 2019/2088. SMEs listed on regulated markets should, however, be provided with sufficient time to prepare for the application of the requirement to report sustainability information, due to their smaller size and more limited resources, and taking account of the difficult economic circumstances created by the COVID-19 pandemic. They should also be given the possibility to report according to standards that are proportionate to the capacities and resources of SMEs. Non-listed SMEs can also choose to use these proportionate standards on a voluntary basis. The SME standards will set a reference for undertakings that are within the scope of the Directive regarding the level of sustainability information that they could reasonably request from SME suppliers and clients in their value chains. (19)Directive 2004/109/EC of the European Parliament and of the Council applies to all undertakings with securities listed on regulated markets. In order to ensure that all undertakings with securities listed on regulated markets, including third country issuers, fall under the same sustainability reporting requirements, Directive 2004/109/EC should contain the necessary cross-references to any requirement on sustainability reporting in the annual financial report.

(20)Article 23(4), first subparagraph, point (i), and Article 23(4), fourth subparagraph of Directive 2004/109/EC empower the Commission to adopt measures to set up a mechanism for the determination of equivalence of information required under the Directive, and for the establishment of general equivalence criteria regarding accounting standards, respectively. Article 23(4), third subparagraph, of Directive 2004/109/EC also empowers the Commission to take the necessary decisions on the equivalence of accounting standards that are used by third-country issuers. In order to reflect the inclusion of the sustainability requirements in Directive 2004/109/EC, the Commission should be empowered to establish a mechanism for the determination of equivalence of sustainability reporting standards applied by third-country issuers of securities. For the same reason, the Commission should also be empowered to take the necessary decisions on the equivalence of sustainability reporting standards that are used by third-country issuers. Those amendments will ensure consistent equivalence regimes for sustainability reporting obligations and for financial reporting obligations regarding the annual financial report. (21)Articles 19a(3) and 29a(3) of Directive 2013/34/EU currently exempt all subsidiary undertakings from the obligation to report non-financial information where such undertakings and their subsidiary undertakings are included in the consolidated management report of their parent undertaking, provided this includes the required non-financial information. It is necessary, however to ensure that sustainability information is easily accessible for users, and to bring transparency about which is the parent undertaking of the exempted subsidiary undertaking which is reporting at consolidated level. It is therefore necessary to require those subsidiary undertakings to publish the consolidated management report of their parent undertaking and to include a reference in their management report to the fact that they are exempted from reporting sustainability information. That exemption should also apply where the parent undertaking reporting at consolidated level is a third country undertaking reporting sustainability information in accordance with the requirements of this Directive or in a manner equivalent to EU sustainability reporting standards. (22)Article 23 of Directive 2013/34/EU exempts parent undertakings from the obligation to prepare consolidated financial statements and a consolidated management report where those undertakings are subsidiaries of another parent undertaking that complies with that obligation. It should be specified, however, that the exemption regime for consolidated financial statements and consolidated management reports operates independently from the exemption regime for consolidated sustainability reporting. An undertaking can therefore be exempted from consolidated financial reporting obligations but not exempted from consolidated sustainability reporting obligations where its ultimate parent prepares consolidated financial statements and consolidated management reports in accordance with Union law, or in accordance with equivalent requirements if the undertaking is established in a third country, but does not prepare consolidated sustainability reporting in accordance with EU law, or in accordance with equivalent requirements if the undertaking is established in a third country. (23)Credit institutions and insurance undertakings play a key role in the transition towards a fully sustainable and inclusive economic and financial system in line with the European Green Deal. They can have significant positive and negative impacts via their lending, investment and underwriting activities. Credit institutions and insurance undertakings other than those that are required to comply with Directive 2013/34/EU, including cooperatives and mutual undertakings, should therefore be subject to sustainability reporting requirements provided that they meet certain size criteria. Users of that information would thus be enabled to assess both the impacts of these undertakings on society and the environment and the risks arising from sustainability matters that these undertakings could face. To ensure coherence with the reporting requirements of Council Directive 86/635/EEC on the annual accounts and consolidated accounts of banks and other financial institutions, sustainability reporting Member States may choose not to apply sustainability reporting requirements to credit institutions listed in Article 2(5) of Directive 2013/36/EU of the European Parliament and of the Council. (24)The list of sustainability matters on which undertakings are required to report should be as coherent as possible with the definition of ‘sustainability factors’ laid down in Regulation (EU) 2019/2088. That list should also correspond to the needs and expectations of users and undertakings themselves, who often use the terms ‘environmental’, ‘social’ and ‘governance’ as a means to categorise the three main sustainability matters. The list of sustainability factors laid down in Regulation (EU) 2019/2088 does not explicitly include governance matters. The definition of sustainability matters in Directive 2013/34/EU should therefore be based on the definition of ‘sustainability factors’ laid down in Regulation (EU) 2019/2088, but with the addition of governance matters. (25)Articles 19a and 29a of Directive 2013/34/EU require reporting not only on information ‘to the extent necessary for an understanding of the undertaking's development, performance, position’, but also on information necessary for an understanding of the impact of the undertaking’s activities on environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters. Those articles therefore require undertakings to report both on how various sustainability matters affect the undertaking, and on the impacts of the activities of the undertaking on people and the environment. That is referred to as the double-materiality perspective, in which the risks to the undertaking and the impacts of the undertaking each represent one materiality perspective. The fitness check on corporate reporting shows that those two perspectives are often not well understood or applied. It is therefore necessary to clarify that undertakings should consider each materiality perspective in its own right, and should disclose information that is material from both perspectives as well as information that is material from only one perspective. (26)Articles 19a(1) and 29a(1) of Directive 2013/34/EU require undertakings to disclose information about five reporting areas: business model, policies (including due diligence processes implemented), the outcome of those policies, risks and risk management, and key performance indicators relevant to the business. Article 19a(1) of Directive 2013/34/EU does not contain explicit references to other reporting areas that users of information consider relevant, some of which align with disclosures included in international frameworks, including the recommendations of the Task Force on Climate-related Financial Disclosures. Disclosure requirements should be specified in sufficient detail to ensure that undertakings report information on their resilience to risks related to sustainability matters. In addition to the reporting areas identified in Articles 19a(1) and 29a(1) of Directive 2013/34/EU, undertakings should therefore be required to disclose information about their business strategy and the resilience of the business model and strategy to risks related to sustainability matters, any plans they may have to ensure that their business model and strategy are compatible with the transition to a sustainable and climate-neutral economy; whether and how their business model and strategy take account of the interests of stakeholders; any opportunities for the undertaking arising from sustainability matters; the implementation of the aspects of the business strategy which affect, or are affected by sustainability matters; any sustainability targets set by the undertaking and the progress made towards achieving them; the role of the board and management with regard to sustainability matters; the principal actual and potential adverse impacts connected with the undertaking’s activities; and how the undertaking has identified the information that they report on. Once the disclosure of elements such as targets and the progress towards achieving them is required, the separate requirement to disclose the outcomes of policies is no longer necessary. (27)To ensure consistency with international instruments such as the UN Guiding Principles on Business and Human Rights and the OECD Due Diligence Guidance for Responsible Business Conduct, the due diligence disclosure requirements should be specified in greater detail than is the case in Article 19a(1), point (b), and Article 29a(1), point (b) of Directive 2013/34/EU. Due diligence is the process that undertakings carry out to identify, prevent, mitigate and remediate the principal actual and potential adverse impacts connected with their activities and identifies how they address those adverse impacts. Impacts connected with an undertaking’s activities include impacts directly caused by the undertaking, impacts to which the undertaking contributes, and impacts which are otherwise linked to the undertaking’s value chain. The due diligence process concerns the whole value chain of the undertaking including its own operations, its products and services, its business relationships and its supply chains. In alignment with the UN Guiding Principles on Business and Human Rights, an actual or potential adverse impact is to be considered principal where it measures among the greatest impacts connected with the undertaking’s activities based on: the gravity of the impact on people or the environment; the number of individuals that are or could be affected, or the scale of damage to the environment; and the ease with which the harm could be remediated, restoring the environment or affected people to their prior state. (28)Directive 2013/34/EU does not require the disclosure of information on intangibles other than intangible assets recognised in the balance sheet. It is widely recognised that information on intangible assets and other intangible factors, including internally-generated intangibles, is underreported, impeding the proper assessment of an undertaking’s development, performance and position and monitoring of investments. To enable investors to better understand the increasing gap between the accounting book value of many undertakings and their market valuation, which is observed in many sectors of the economy, adequate reporting on intangibles should be required. It is therefore necessary to require undertakings to disclose information on intangibles other than intangible assets recognised in the balance sheet, including intellectual capital, human capital, including skills development, and social and relationship capital, including reputation capital. Information on intangibles should also include information related to research and development. (29)Articles 19a(1) and 29a(1) of Directive 2013/34/EU do not specify whether the information to be reported is to be forward looking or information about past performance. There is currently a lack of forward-looking disclosures, which users of sustainability information especially value. Articles 19a and 29a of Directive 2013/34/EU should therefore specify that the sustainability information reported shall include forward-looking and retrospective, and both qualitative and quantitative information. Reported sustainability information should also take into account short, medium and long-term time horizons and contain information about the undertaking’s whole value chain, including its own operations, its products and services, its business relationships, and its supply chain, as appropriate. Information about the undertaking’s whole value chain would include information related to its value chain within the EU and information that covers third countries if the undertaking’s value chain extends outside the EU. (30)Articles 19a(1) and 29a(1) of Directive 2013/34/EU require undertakings to include in their non-financial reporting references to, and additional explanations of, amounts reported in the annual financial statements. Those Articles do, however, not require undertakings to make references to other information in the management report or to add additional explanations to that information. There is currently thus a lack of consistency between non-financial information reported and the rest of the information disclosed in the management report. It is necessary to lay down clear requirements in this regard. (31)Articles 19a(1) and 29a(1) of Directive 2013/34/EU require undertakings to provide a clear and reasoned explanation for not pursuing policies in relation to one or more of the matters listed, where the undertaking does not do so. The different treatment of disclosures on the policies that undertakings may have, compared to the other reporting areas included in those articles, has created confusion among reporting undertakings and has not helped to improve the quality of the reported information. Therefore, there is no need to maintain this different treatment of policies in the Directive. The standards will determine what information needs to be disclosed in relation to each of the reporting areas mentioned in Articles 19a and 29a. (32)Undertakings under the scope of Articles 19a(1) and 29a(1) of Directive 2013/34/EU may rely on national, Union-based or international reporting frameworks, and where they do so, they have to specify which frameworks they relied upon. However, Directive 2013/34/EU does not require undertakings to use a common reporting framework or standard, and it does not prevent undertakings from choosing not to use any reporting framework or standards at all. As required by Article 2 of Directive 2014/95/EU, the Commission published in 2017 non-binding guidelines for undertakings under the scope of that Directive. In 2019, the Commission published additional guidelines, specifically on reporting climate-related information. The climate reporting guidelines explicitly incorporated the recommendations of the Task Force on Climate-related Financial Disclosures. Available evidence indicates that those non-binding guidelines did not have a significant impact on the quality of non-financial reporting by undertakings under the scope of Articles 19a and 29a of Directive 2013/34/EU. The voluntary nature of the guidelines means that undertakings are free to apply them or not. The guidelines can therefore not ensure on their own the comparability of information disclosed by different undertakings or the disclosure of all information that users consider relevant. That is why there is a need for mandatory common reporting standards to ensure that information is comparable and that all relevant information is disclosed. Building on the double-materiality principle, standards should cover all information that is material to users. Common reporting standards are also necessary to enable the audit and digitalisation of sustainability reporting and to facilitate its supervision and enforcement. The development of mandatory common sustainability reporting standards is necessary to progress to a situation in which sustainability information has a status comparable to that of financial information. (33)No existing standard or framework satisfies the Union’s needs for detailed sustainability reporting by itself. Information required by Directive 2013/34/EU needs to cover information relevant from each of the materiality perspectives, needs to cover all sustainability matters and needs to be aligned, where appropriate, with other obligations under Union law to disclose sustainability information, including obligations laid down in Regulation (EU) 2020/852 and Regulation (EU) 2019/2088. In addition, mandatory sustainability reporting standards for Union undertakings must be commensurate with the level of ambition of the European Green Deal and the Union’s climate-neutrality objective for 2050. It is therefore necessary to empower the Commission to adopt Union sustainability reporting standards, enabling their rapid adoption and ensuring that the content of sustainability reporting standards are consistent with the Union’s needs. (34)The European Financial Reporting Advisory Group (EFRAG) is a non-profit association established under Belgian law that serves the public interest by providing advice to the Commission on the endorsement of international financial reporting standards. EFRAG has established a reputation as a European centre of expertise on corporate reporting, and is well placed to foster coordination between European sustainability reporting standards and international initiatives that seek to develop standards that are consistent across the world. In March 2021, a multi-stakeholder task force set up by EFRAG published recommendations for the possible development of sustainability reporting standards for the European Union. Those recommendations contain proposals to develop a coherent and comprehensive set of reporting standards, covering all sustainability matters from a double-materiality perspective. Those recommendations also contain a detailed roadmap for developing such standards, and proposals for mutually reinforcing cooperation between global standard-setting initiatives and standard-setting initiatives of the European Union. In March 2021, the EFRAG President published recommendations for possible governance changes to EFRAG if it were to be asked to develop technical advice about sustainability reporting standards. These recommendations include offsetting up within EFRAG a new sustainability reporting pillar while not significantly modifying the existing financial reporting pillar. When adopting sustainability reporting standards, the Commission should take account of technical advice that EFRAG will develop. In order to ensure high-quality standards that contribute to the European public good and meet the needs of undertakings and of users of the information reported, EFRAG’s technical advice should be developed with proper due process, public oversight and transparency, accompanied by cost benefit analyses, and be developed with the expertise of relevant stakeholders. To ensure that Union sustainability reporting standards take account of the views of the Member States of the Union, before adopting the standards the Commission should consult the Member State Expert Group on Sustainable Finance referred to in Article 24 of Regulation (EU) 2020/852 on EFRAG’s technical advice. The European Securities and Markets Authority (ESMA) plays a role in drafting regulatory technical standards pursuant to Regulation (EU) 2019/2088 and there needs to be coherence between those regulatory technical standards and sustainability reporting standards. According to Regulation (EU) No 1095/2010 of the European Parliament and of the Council, ESMA also plays a role in promoting supervisory converge in the enforcement of corporate reporting by issuers whose securities are listed on EU regulated markets and who will be required to use these sustainability reporting standards. Therefore, ESMA should be required to provide an opinion on EFRAG’s technical advice. T