Sustainability reporting

EU Directive on non-financial reporting

The Non Financial Reporting Directive (NFRD) requires some firms to prepare a sustainability report, namely public-interest entities that have more than 500 employees.

The report should contain sustainability-related disclosures that are required to understand a firm's earnings, position, development, and the impact on its operations. The Directive specifies environmental protection, social responsibility and the treatment of employees, respect for human rights and the prevention of corruption and bribery.

According to the European Commission's non-binding guidelines on the presentation of the sustainability reports, climate-related information can be reported in accordance with the recommendations prepared by the Taskforce on Climate-related Financial Disclosure (TCFD) on behalf of the Financial Stability Board.

Proposal to tighten EU Directive on corporate sustainability reporting

A proposal for a new Corporate Sustainability Reporting Directive (CSRD) has been presented to the European Commission. Under this proposal, the current rules will be amended and tightened. For example, the requirements will be extended to include all large companies and all listed companies within the EU (except listed microcompanies). Parent companies in large groups must prepare a sustainability report for the group. Non-EU companies that are listed on a regulated in the market within the EU and EU companies that are subsidiaries in a foreign group will be subject to the regulations.

More detailed reporting requirements and requirements on reporting in accordance with obligatory EU standards will also be introduced. The standards are being prepared by the European Financial Reporting Advisory Group (EFRAG) and will be adopted by the Commission as delegated acts. The standards will specify which information should be reported regarding environmental matters, social matters and corporate governance matters. The Commissions will adopt a first groups of standards no later than 31 October 2022. According to the proposed Directive, the sustainability report must be provided in the directors' report; in other words, it will be part of the annual report.

It will be mandatory for the sustainability report to be reviewed by a third party. The report must be reviewed by either the firm's auditor or another external reviewer.

The new Directive is proposed to be applied to firms for the 2023 calendar year, with the first reporting occasion in 2024. The requirement on small and mid-size listed companies to prepare a sustainability report will apply as of 1 January 2026.

Annual Accounts Act

According to the Annual Accounts Act, sustainability reporting is mandatory for companies the meet more than one of the following conditions:

• The average number of employees in the company for each of the past two financial years has been more than 250.
• The company's reported balance sheet total for each of the past two financial years has been more than SEK 175 million.
• The company's reported net sales for each of the past two financial years has been more than SEK 350 million.

Sustainability factors a first step

For companies subject to rules on sustainability reporting, a natural first step can be to systematically identify sustainability factors (ESG factors) in their own operations and consider how they can be integrated into the management of sustainability risks in relevant processes. With regard to climate aspects, the TCFD's recommendations are a good starting point since they are already integrated into NFRD through non-binding guidelines from the European Commission.