Corporate sustainability reporting: double materiality, impacts, and legal risk

ABSTRACT

Following the enactment of the Corporate Sustainability Reporting Directive and the creation of the European Sustainability Reporting Standards (ESRS rules), the European Union has set a new regime of mandatory corporate sustainability reporting in motion. However, most of the ESRS rules will be mandatory depending on, or subject to, the assessment of double materiality. This article sheds light on the double materiality requirement. More particularly, the analysis focusses on the materiality assessment of the impacts of corporate actions, the challenges involved in such determination, and the associated legal risks. Challenges examined include the legal risk in the company-stakeholders engagement process, the accuracy and completeness of reporting, and the uncertainty about the legal criteria for determining impact materiality. This article recommends (1) that a sound legal strategy guide the company-stakeholders interaction regarding external impacts, (2) that enforcement strategies be designed to accommodate unintentional greenwashing, and (3) that assurance practices for sustainability reporting be expeditiously implemented.

KEYWORDS:

• CSRD
• corporate sustainability reporting
• double materiality
• sustainable finance
• ESG
• compliance

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 J Baumüller and MM Schaffhauser-Linzatti, ‘In Search of Materiality for Nonfinancial Information—Reporting Requirements of the Directive 2014/95/EU’ (2018) 26 NachhaltigkeitsManagementForum 101–11, 103; R Torelli, F Balluchi and K Furlotti, ‘The Materiality Assessment and Stakeholder Engagement: A Content Analysis of Sustainability Reports’ (2020) 27(2) Corporate Social Responsibility and Environmental Management 470–84, 470 (materiality is the driver through which companies can identify and select issues to be included in their reports); M Bossut, I Jürgens, T Pioch, F Schiemann, T Spandel and R Tietmeyer, ‘What Information is Relevant for Sustainability Reporting? The Concept of Materiality and the EU Corporate Sustainability Reporting Directive’ (July 2021) Sustainable Finance Research Platform Policy Brief 5–6 <https://wpsf.de/wp-content/uploads/2021/09/WPSF_PolicyBrief_7-2021_Materiality.pdf> accessed 15 January 2023.

2 Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, (29.6.2013) OJ L182/19, art 2(16) (hereinafter ‘Accounting Directive’).

3 Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups, OJ L330/1 (hereinafter ‘NFRD’).

4 Directive 2022/2464/EU of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting, (16.12.2022) OJ L322/15 (hereinafter ‘CSRD’). Entered into force on 5 January 2023. Members States will have 18 months to transpose this legislation into their national legal regimes.

5 Commission Delegated Regulation (EU) 2023/2772 of 31 July 2023 supplementing Directive 2013/34/EU of the European Parliament and of the Council as regards sustainability reporting standards (OJ L, 22.12.2023) (‘ESRS DR’). The text of ESRS DR has heavily relied on prior drafts produced by of the European Financial Reporting Advisory Group (‘EFRAG’).

6 ibid ESRS DR, Annex I, ESRS 1 General Requirements, para 2 and para 21 (‘The undertaking shall report on sustainability matters based on the double materiality principle as defined and explained in this chapter.’ (Black and indented letters removed)).

7 A more formal approach to the CSRD’s reporting obligation is developed in section II. For the sake of simplicity this article very often utilises the term ‘company’ instead of the term ‘undertakings’ used in the CSRD, the ESRS rules and other EU legislation. The scope of the term ‘undertakings’ is however wider than the scope of the term ‘company’. Yet this distinction makes no difference to the analysis hereby presented.

8 ESRS DR (n 5) Annex I, ESRS 1 General Requirements, s 3.2 para 29 (identifying mandatory information disclosure requirements that must be complied with regardless of materiality evaluation such as the requirements in ESRS 2 General Disclosures).

9 ibid para 2 and para 21.

10 The role of the double materiality assessment became even more prominent following the last-ditch changes introduced by the Commission to the November 2022’s draft ESRS rules produced by EFRAG.

11 ESRS DR (n 5) Annex I, ESRS 1 General Requirements, ss 3.2–3.5.

12 ibid s 3.5 para 47.

13 Impact materiality is a concept already recognised by the reporting standards created by the General Reporting Initiative (GRI), yet such GRI reporting standards have operated only on a voluntary basis, GRI website <https://www.globalreporting.org/how-to-use-the-gri-standards/gri-standards-english-language/> access 8 May 2023. A relevant question is to what extent the burden of those companies that voluntarily complied with GRI standards in the past will increase following the adoption of the CSRD and ESRS rules as far as impact materiality is concerned. Although this article does not address this question, it is a question worth pursuing.

14 ESRS DR (n 5), Annex I, ESRS 1 General Requirements, s 3.4 para 46; CSRD (n 4) recital 29.

15 NFRD (n 3) art 1(1) (replacing art 19a(1) of the Accounting Directive).

16 Baumüller and Schaffhauser-Linzatti (n 1) 105–10.

17 European Commission, ‘Guidelines on Reporting Climate-Related Information’ 4409 final (July 17, 2019), 6–7 (hereinafter ‘2019 Guidelines’).

18 ibid.

19 ibid paras 6–8.

20 ibid.

21 ibid.

22 ibid.

23 ibid.

24 ibid. Also, section III of this article.

25 CSRD (n 4) art 1(4) (replacing art 19(a)(1) Accounting Directive). This reporting obligation can also be met following a consolidated sustainability reporting basis, CSRD (n 4) art 1(7) (replacing art 29(a) Accounting Directive).

26 Section III of this article. Also, CSRD (n 4) recital 29; ESRS DR (n 5), Annex I, ESRS 1 General Requirements, Objective section, para 2 and section 3, para 21.

27 CSRD (n 4), art 1(4) (replacing art 19(a)(1) Accounting Directive).

28 CSRD (n 4) art 2(2)(b) (adding art 2(17) to the Accounting Directive). Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability related disclosures in the financial services sector (OJ L317, 9.12.2019) (hereinafter ‘SFDR’), art 2(24) defining sustainability factors in terms of environment, society, employee matters, respect for human rights, anti-corruption and anti-bribery matters.

29 ESRS DR (n 5), Annex I, ESRS 1 General Requirements, Appendix A, Application Requirement (AR) 16.

30 ibid Appendix A, AR 16.

31 Ibid Annex I, section 1.1, paras 4–11.

32 ibid Appendix A, AR 16.

33 ibid, Annex I, ESRS 1 General Requirements, para 2, para 21 and para 29. For a more extensive elaboration, read the introductory sections in the ESRS DR (n 5).

34 ibid.

35 ibid s 1.3 and s 3.3 para 27.

36 ibid s 1.3 and s 3.

37 ibid s 3.5 para 49 (black and indented letters removed).

38 ibid s 3.5 para 47.

39 ibid s 3.5 para 48.

40 ibid s 3.1 para 22(b) (straight brackets added).

41 ibid s 3.5 para 31. EFRAG, ‘Implementation Guidance - Draft EFRAG IG 1 – Materiality Assessment’ December 2023 (non-authoritative implementation guidance for public feedback), s 2 and s 3. See section IV.C of this article.

42 ibid s 3.4 paras 43–44 and Appendix A.

43 ibid s 3.1 para 22(a).

44 ibid s 3.1 para 24 (black letters removed).

45 ibid s 3.4 para 43.

46 ibid.

47 ibid.

48 ibid.

49 ibid s 3.4 para 45 and Appendix A.

50 ibid s 3.4 para 46 and Appendix A. According to EFRAG, this mechanism for the prioritisation of impacts borrows from the due diligence processes as defined in the UN Guiding Principles on Business and Human Rights and in the OECD Guidelines for Multinational Enterprises, ibid s 3.4 para 45 and s 4 paras 59–60.

51 ESRS DR (5) Annex I, ESRS 1 General Requirements, s 3.2 para 31; EFRAG (41) ss 2.2–2.3 and s 3. See section IV.C of this article.

52 EFRAG, ‘Draft European Sustainable Reporting Standards’ Cover Letter, 22 November 2022, 2.

53 As of June 2023, the ISSB produced two sets of standards, namely the IFRS S1 and IFRS S2. IFRS website, ‘ISSB issues inaugural global sustainability disclosure standards’, 26 June 2023, https://www.ifrs.org/news-and-events/news/2023/06/issb-issues-ifrs-s1-ifrs-s2/ accessed 25 August 2023.

54 ISSB, IFRS S1 - General Requirements for Disclosure of Sustainability-related Financial Information, June 2023, Objective, para 1; Also, IFRS website, ‘IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information’, https://www.ifrs.org/issued-standards/ifrs-sustainability-standards-navigator/ifrs-s1-general-requirements/ accessed 25 August 2023.

55 Ibid ISSB, Objective, para 3.

56 ISSB, IFRS S2 – Climate-Related Disclosures, June 2023, Objective, para 1.

57 EFRAG (n 52) 2.

58 GRI (n 13) GRI 1: Foundations 2021, Glossary, term: material topics.

59 ibid term: impact.

60 GRI (n 13) (see how the GRI reporting for individual topics, e.g., GRI 11: Oil and Gas Sector, links material topics with the UN Sustainable Development Goals). The SDGs have been created by the Resolution A/RES/70/1 adopted by the UN General Assembly on 25 September 2015.

61 GRI (n 13) GRI 1: Foundations 2021, Glossary, term: sustainable development / sustainability (citing: World Commission on Environment and Development, Our Common Future, 1987).

62 The GRI has explicitly acknowledged the consistency of its objectives with those stated in the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. Such instruments set out expectations for responsible business conduct, and so does the GRI reporting. GRI (13) GRI 1: Foundations 2021, s 1.1; ESRS DR (n 5), ESRS 1, Annex I, General Requirements, s 3.4 paras 45–46, s 4 para 59 and Appendix A.

63 ESRS DR (n 5), Annex I, ESRS 1 General Requirements, s 3.3 paras 37–38.

64 ibid s 3.3 para 38.

65 Communication from the Commission, OJ (C 2019) 1, 4. Similarly, 2019 Guidelines (n 17) 7 (‘These two risk perspectives already overlap in some cases and are increasingly likely to do so in the future. As markets and public policies evolve in response to climate change, the positive and/or negative impacts of a company on the climate will increasingly translate into business opportunities and/or risks that are financially material.’)

66 ESRS DR (n 5), Annex I, ESRS 1 General Requirements, s 3.3 para 38.

67 J Baumüller and K Sopp ‘Double Materiality and the Shift from Non-Financial to European Sustainability Reporting: Review, Outlook and Implications’ (2022) 23(1) Journal of Applied Accounting Research 8–28, 22.

68 IOSCO, ‘Report on Sustainability-Related Disclosures’, Final Report, FR04/21, June 2021, 25 (straight brackets added).

69 Arguments for and against the double materiality approach have been developed in E Faber, ‘Comptabilité d’entreprise: Exiger que la materialité s’etende au-delà du domaine économique est en réalité simpliste’, Le Monde newspaper, 10 October 2023; F Ducoulombier, ‘On the Triple Illusion of Double Materiality’ 10 October 2023, EDHEC – RISK Climate Impact INSTITUTE, https://climateimpact.edhec.edu/triple-illusion-double-materiality (accessed on 03 January 2024); IPE ‘Viewpoint: A response to ISSB’s Faber’s ‘triple illusion’ criticism of double materiality’ (by Frédéric Ducoulombier) 13 October 2023; D Raith, ‘The Contest for Materiality. What Counts as CSR?’ (2022) 24(1) Journal of Applied Accounting Research 134–48.

70 CSRD (n 4) recital 9; H B Christensen, L Hail and C Leuz, ‘Mandatory CSR and sustainability reporting: economic analysis and literature review’ 26 Review of Accounting Studies 1176–1248 (2021) 1210–18 (examining the incentives path from corporate disclosure to change in corporate conduct).

71 CSRD (n 4) recital 9; 2019 Guidelines (n 17) 6–7.

72 M Bradford, J B Earp, D S Showalter and P F Williams ‘Corporate Sustainability Reporting and Stakeholder Concerns: Is There a Disconnect?’ (2017) 31(1) Accounting Horizons 83–102, 93 (identifying a ‘potentially significant disconnect between the business view of sustainability as an instrument to achieve economic goals and the stakeholder view of sustainability as an end in itself.’).

73 See, for example, the approach to impacts adopted in GRI standards which are ultimately concerned with the impacts of company activity on sustainable development, GRI (n 13).

74 S Jørgensen, A Mjøs and LJT Pedersen, ‘Sustainability Reporting and Approaches to Materiality: Tensions and Potential Resolutions’ (2022) 13(2) Sustainability Accounting Management and Policy Journal 341–61, 357.

75 Christensen et al (n 70) 1186 (claiming that addressing negative externalities from corporate activity is one of the primary motivations for corporate sustainability reporting using double materiality).

76 ibid 1181 (‘Shareholders could have non-monetary preferences and, hence, care about a company’s (negative) impact on the environment or society even when this impact does not have (immediate) financial consequences (as is the case with externalities such as CO2 emissions’). For an examination of treatment of sustainability preferences of investors under MiFID II, see F E Mezzanotte, ‘Recent Law Reforms in EU Sustainable Finance: Regulating Sustainability Risk and Sustainable Investments’ (2023) 11(2) American University Business Law Review 215–76, 252–56.

77 ESRS DR (n 5), Annex I, ESRS 1 General Requirements, s 3.3 para 38 and Appendix A, ARs 6–7.

78 ibid.

79 EFRAG (n 41) para 5 and para 15.

80 European Commission, Communication from the Commission to the European Parliament, The European Council, The Council and the European Economic and Social Committee and the Committee of the Regions (European Green Deal), Brussels, 11.12.2019 COM(2019) 640 final.

81 EU Commission, ‘Action Plan: Financing Sustainable Growth’ Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions (Brussels, 08 March 2018 COM(2018) 97) 2.

82 European Commission Press Release, ‘Commission welcomes political agreement on rules enforcing human rights and environmental sustainability in global supply chains’ Brussels, 14 Dec 2023, https://ec.europa.eu/commission/presscorner/detail/en/ip_23_6599 (accessed on 03 January 2024). Further information on the draft Corporate Sustainability Due Diligence Directive, see https://commission.europa.eu/business-economy-euro/doing-business-eu/corporate-sustainability-due-diligence_en (accessed on 03 January 2024).

83 ESRS DR (n 5) Annex I, ESRS 1 General Requirements, s 3.5 para 47 (‘The scope of financial materiality for sustainability reporting is an expansion of the scope of materiality used in the process of determining which information should be included in the undertaking’s financial statements’ (Black and indented letters removed)).

84 ibid s 3.1 para 24 and Appendix A, AR 8 and AR 9.

85 ibid s 4 (due diligence requirements).

86 ibid s 4 para 59; Annex I, ESRS 2 General Disclosures, s 4 (impact, risk, and opportunity management).

87 ESRS DR (n 5) Annex I, ESRS 1 General Requirements s 3.1 para 22(a) (defining affected stakeholders).

88 ibid. See more generally, CSRD (n 4) recital 9.

89 ESRS DR (n 5) Annex I, ESRS 1 General Requirements s 3.1 para 22(a).

90 Section III of this article.

91 ESRS DR (n 5) Annex I, ESRS 1 General Requirements, Appendix A, AR 9 (the ESRS rules use the phrase ‘shall consider’ when referring to the reporting company’s engagement with stakeholders in impact determination and evaluation). The phrase ‘shall consider’ sets out an expectation but not a prescription, ibid para 18. Note, for example, that information disclosure on the company-stakeholders engagement is prescriptive, yet this prescription refers only to disclosure without imposing a conduct requirement to engage, ESRS DR (n 5) Annex I, ESRS 2 General Disclosures, IRO-1, para 53 ‘The undertaking shall disclose the following information: (…) (b) an overview of the process to identify, assess, prioritise and monitor the undertaking’s potential and actual impacts on people and the environment, informed by the undertaking’s due diligence process, including an explanation of whether and how the process: (…) III. includes consultation with affected stakeholders to understand how they may be impacted and with external experts; (…)’).

92 Sustainability-related lawsuits in US Federal Courts have been entered relying on a wide range of statutory provisions. However, success has been limited, see D Hackett, R Demas, D Sanders, J Wicha and A Fowler, ‘Growing ESG Risks: The Rise of Litigation’ (2020) 50 Envtl. L. Rep. 10849; C M Ajax and D Strauss, ‘Corporate Sustainability Disclosure in American Case Law: Purposeful or Mere “Puffery”?’ (2018) 45 Ecology Law Quarterly 703.

93 ESRS DR (n 5) Annex I, ESRS 1 General Requirements, Appendix A, AR 7.

94 ibid, Annex II Glossary of Terms (the author has not found a definition of the term ‘nature’).

95 EFRAG has recently proposed approaches to these issues in EFRAG, ‘Implementation Guidance - Draft EFRAG IG 1 … ’ (n 41) s 5.4.

96 ESRS DR (n 5) Annex I, ESRS 2 General Disclosures, IRO-1, para 53.

97 S Silva, A K Nuzum and S Schaltegger, ‘Stakeholder Expectations on Sustainability Performance Measurement and Assessment. A Systematic Literature Review’ (2019) 217 Journal of Cleaner Production 204–15, 212; Bossut et al (n 1) 8–10.

98 Bradford et al (n 72) 97; Torelli et al (n 1) 470–84.

99 A I Muchmore, ‘Uncertainty, Complexity, and Regulatory Design’ (2016) 53 Hous. L. Rev. 1321, 1338–39.

100 ibid 1338.

101 ibid 1346–47.

102 ibid.

103 ESRS DR (n 5) Annex I, ESRS 1 General Requirements s 7.2; V Harper Ho, ‘Climate Disclosure Line-Drawing & Securities Regulation’ SSRN Working Paper 4339497, 22–28 (discussing estimations of climate risk in reporting and litigation risk in the context of the SEC’s proposed climate-related reporting rules).

104 The ESRS rules also utilise the term ‘obscuring’ to characterise problems of information in the context of financial materiality and sustainability reporting, ESRS DR (5) Annex I, ESRS 1 General Requirements s 3.5 para 48.

105 European Securities and Markets Authority (ESMA), ‘Progress Report on Greenwashing’ ESMA30-1668416927-2498, 31 May 2023, 11.

106 Moodaley and Telukdarie (n 55) s 2.2. Also, T P Lyon and A W Montgomery, ‘The Means and End of Greenwash’ (2015) 28(2) Organization & Environment 223–249.

107 European Securities and Markets Authority (ESMA), ‘ESMA prioritises the fight against greenwashing in its new Sustainable Finance Roadmap’ <https://www.esma.europa.eu/press-news/esma-news/esma-prioritises-fight-against-greenwashing-in-its-new-sustainable-finance> accessed 9 May 2023.

108 ESMA (n 105) 20–21 and 30–39.

109 ibid 12 (black letters omitted).

110 ibid 12–13.

111 ESRS DR (n 5) Annex I, ESRS 1 General Requirements, s 3.4 para 43, s 5, and Appendix A.

112 EOPIA, ‘Opinion to the European Commission on EFRAG’s Technical Advice on European Sustainability Reporting Standards’ EIOPA-BoS-23-016, 26 January 2023, para 3.8.4; E Aliakbari and S Globerman, ‘The Impracticality of Standardizing ESG Reporting’ in Collected Essays. ESG: Myths and Realities, Fraser Institute, April 2023, 8–10 (arguing that the complexity of reporting scope 3 greenhouse gas emissions may generate a problem of multiple counting ‘resulting in a misleading measurement of aggregate carbon emissions.’ citing multiple sources).

113 Siemens website, https://www.siemens.com/global/en/company/sustainability/sustainablesupplychain.html accessed 03 January 2024.

114 Unilever website, https://www.unilever.com/files/8c652127-8ea5-4db0-bedb-f03a37637285/unilever-s-supply-chain.pdf accessed 03 January 2024.

115 ESRD DR (n 5), Annex I, ESRS 1 General Requirements, s 1.2 paras 12–13 and ESRS 2 General Disclosures.

116 Accounting Directive 2013/34/EU (n 2) art 2(16).

117 Baumüller and Schaffhausen-Linzatti (n 1) (explaining that the since the Accounting Directive did not explicitly define what type of users are included in the definition of financial materiality, market actors have relied on financial regulatory standards to so define, such as the International Financial Reporting Standards (IFRS) rules).

118 Referring to the legal test of materiality in securities fraud claims brought under the Securities and Exchange Act of 1934, section 10(b), and the Securities and Exchange Commission’s Rule 10b-5 (SEC Rule 10b-5), see C B Cooper, ‘Rule 10b-5 at the Intersection of Greenwash and Green Investment: The Problem of Economic Loss’ (2015) 42 B.C.Envtl. Aff. L. Rev. 405.

119 It is worth noting that in securities fraud claims materiality is only one of the conditions for the existence of securities fraud. Other criteria, such as the requirement for scienter, reliance, economic loss and causation, must also be established, Cooper (n 118) 414–22 and 423–25. Redress is based on economic loss. Even if greenwashing conduct may cause economic and non-economic loss to investors, it is not apparent that courts will accept non-economic loss as basis for granting remedies in favour of, or compensate, investors, ibid, 427–36 (discussing economic loss in the context of US securities litigation and greenwashing); S Dadush, ‘Identity Harm’ 2018 U. Colo. L. Rev. 89 863 (arguing for the recognition of moral loss in greenwashing-related litigation).

120 Cooper (n 118) 417 (by reference to case TSC Industries, Inc v. Northway, Inc., 426 U.S. 438, 449 (1975), and Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1318 (2011)).

121 A I Saad and D Strauss, ‘A New “Reasonable Investor” and Changing Frontiers of Materiality: Increasing Investor Reliance on ESG Disclosures and Implications for Securities Litigation’ (2020) 17 Berkeley Bus. LJ 391–433, 292–397 (arguing that the modern investors also rely on ESG data to make investment decisions and that, to this extent, a broader scope of information should be deemed material under the US securities disclosure regime). C M Ajax and D Strauss (n 92) 706 (analysing the decisional practice of US Federal Courts, the authors found that claims by plaintiffs were more likely to succeed when ‘sustainability disclosures are concrete, repetitive, and fact based’ but less so when disclosures contain ‘“vague” and “aspirational” language.’).

122 There is an ongoing discussion in the United States related to the proposed SEC rules on climate-related reporting, see G S Georgiev, ‘The SEC's Climate Disclosure Rule: Critiquing the Critics’ 50 Rutgers L. REC. 101 (2022), s IV (distinguishing the materiality principle in the United States from the double materiality principle in the European Union). The approach to materiality in US federal courts does not contain an EU-like impact materiality dimension.

123 ESRS DR (n 5) Annex I, ESRS 1 General Requirements, s 3.5 para 48 (black letters removed).

124 EFRAG (n 41) para 32, ss 2.2–2.3 and s 3.

125 ESRS DR (n 5) Annex I, ESRS 1 General Requirements, s 3.2 para 31; EFRAG (n 41) ss 2.2–2.3 and s 3.

126 The ESRS-defined categories of sustainability matters are presented in ESRS DR (n 5), Annex I, ESRS 1 General Requirements, Appendix A, AR 16. Also, EFRAG (n 41) para 47 and para 71. See section II of this article defining sustainability matters.

127 ESRS DR (n 5) Annex I, ESRS 1 General Requirements, s 3.4 paras 45–46, s 4 and Appendix A. Also, EFRAG (n 41) s 3.

128 ESRS DR (n 5) Annex I, ESRS 1 General Requirements, s 3.5 para 51 and Appendix B ARs 8–10.

129 EFRAG (n 41) para 3 and para 50; ESRS DR (n 5) Annex I, ESRS 1 General Requirements, s 3.2 para 31.

130 ESRS DR (n 5) Annex I, ESRS 1 General Requirements, s 3.2 para 31.

131 Ibid para 31(b).

132 Ibid para 31(a).

133 ESRS DR (n 5) Annex I, ESRS 1 General Requirements, Appendix A, AR 9(c).

134 Baumüller and Schaffhauser-Linzatti (n 1) 103 (Discretionary decision-making has been estimated to be more difficult in relation to sustainability-related information); Aliakbari and Globerman (n 112) 7 (arguing that ‘broadly defined reporting standards would give more leeway for managers to hide unfavourable information.’).

135 ESRS DR (n 5) Annex I, ESRS 1 General Requirements, Appendix A, AR 8 (straight brackets added).

136 ibid.

137 EFRAG (n 41) s 3.1. Also, E Aliakbari and S Globerman (n 112) 4–7 (discussing problems of implementation caused by the different interests of stakeholders including investors).

138 ibid para 5 (‘The ESRS do not mandate a specific process or sequence of steps to follow when performing the materiality assessment, as so this is left to the judgement of the undertaking. Whichever process is used it should reflect the undertaking’s facts and circumstances.’).

139 EOPIA (n 112) para 3.9.2.

140 ESRS DR (n 5) Annex I, ESRS 1 General Requirements, s. 4 para 59 and s. 4.1.

141 ESRS DR (n 5) Annex I, ESRS 2 General Disclosures, s. 4.2 para. 60 (black and indented letters removed).

142 Ibid., s. 5 paras. 74–75 and paras. 78–81.

143 ESRS DR (n 5) Annex I, ESRS 1 ‘General Requirements’ s. 4, para. 59.

144 ESMA, ‘2022 Corporate reporting enforcement and regulatory activities’ Report ESMA32-63-1385. 29 March 2023, para 143 (showing proportion of companies in the European Economic Area adopting GRI standards as of 2022 prior to the enactment of the CSRD).

145 C A Adams, A Alhamood, X He, J Tian, L Wang, and Y Wang, ‘The Double Materiality Concept: Application and Issues’ published by the Global Reporting Initiative (2021) 6 (citing several sources) (‘[t]he enhanced stakeholder engagement required by the double-materiality analysis contributes to diverse and reciprocal accountability relationships between the organisations, their stakeholders, and the wider society and enables discussions and evaluations on sustainable development’.)

146 Christensen et al. (n 70) s. 5, 1210–18.

147 ibid. 1215.

148 See section IV.A of this article.

149 A timetable has been set out in the CSRD (n 4) art 5(2).

150 Ibid.

151 ESRS DR (n 5) Annex I, ESRS 1 ‘General Requirements’ s. 10.2 (Transitional provision related to chapter 5 Value chain).

152 European Commission, ‘Questions and Answers on the Adoption of European Sustainability Reporting Standards’ Brussels, 31 July 2023, 3.

153 European Supervisory Agencies (ESAs), ‘ESAs Call for Evidence on Better Understanding Greenwashing’ (2022), <https://www.esma.europa.eu/sites/default/files/library/esas_call_for_evidence_on_greenwashing.pdf> accessed 1 October 2023

154 Ibid, para 3(a) (straight brackets added).

155 Submission made by the Spanish Securities and Markets Authority (CNMV) to the ESAs Call for Evidence on Better Understanding Greenwashing, January 2023, 3 (internet search; submission with the author).

156 Submission made by Finance Denmark to the ESAs Call for Evidence on Better Understanding Greenwashing, 16 January 2023, 9 (internet search; submission with the author).

157 Submission made by the German Investment Funds Association (BVI) to the ESAs Call for Evidence on Better Understanding Greenwashing, 13 January 2023, 2 (internet search; submission with the author).

158 Submission made by Eurosif to the ESAs Call for Evidence on Better Understanding Greenwashing, 16 January 2023, 2–3 (internet search; submission with the author).

159 Submission made by European Fund and Asset Management Association (EFAMA) to the ESAs Call for Evidence on Better Understanding Greenwashing, 10 January 2023, 6 (internet search; submission with the author).

160 Submission made by the International Capital Markets Association (ICMA) to the ESAs Call for Evidence on Better Understanding Greenwashing, 11 January 2023, 1 (internet search; submission with the author).

161 Submission made by the European Banking Federation (EBF) to the ESAs Call for Evidence on Better Understanding Greenwashing, 16 January 2023, 2 (internet search; submission with the author).

162 Among others, submission made to the ESAs Call for Evidence on Better Understanding Greenwashing by the Association for Financial Markets in Europe (AFME), 10 January 2023, 1; and by Invest Europe, 10 January 2023, 2 (internet search; submission with the author).

163 See supra text preceding note 105; ESMA report (n 105) para 12.

164 See, for example, NYU-Stern, ‘Sustainability Materiality Matrices Explained’ Report, Centre for Sustainable Business, May 2019.

165 C Edgley, ‘A Genealogy of Accounting Materiality’ (2014) 25 Critical Perspectives on Accounting 255, 256–59; more generally, C Edgley, M J Jones and J Atkins, ‘The Adoption of the Materiality Concept in Social and Environmental Reporting Assurance: A field Study Approach’ (2015) 47 The British Accounting Review 1, 16.

166 CSRD (n 4) art 1(12) and art 1 (13) (amending art 34 Accounting Directive), and CSRD (n 4) arts 2–4.

167 ibid recital 60.

168 ibid.

169 ibid.

170 Accountancy Europe, ‘Sustainability Assurance Under the CSRD: Key matters to respond to the upcoming CSRD requirements’ Discussion Paper, Audit & Assurance, May 2022, 3. The CSRD has prescribed that the Commission set out standards on limited assurance engagement (1 October 2026) and on reasonable assurance engagement (1 October 2028).

171 K F Alsahali and R Malagueño, ‘An Empirical Study of Sustainability Reporting Assurance: Current Trends and New Insights’ (2022) 18(5) Journal of Organisation and Accounting Change 617–42, 620–23; ESMA (n 144) para 142 (Analysing non-financial reports in a sample of 113 issuers from 23 EEA countries during 2022 period: ‘For almost all issuers, the statutory auditor or audit firm verified whether the issuer provided a non-financial statement. For 66% of issuers, the information contained in the non-financial statement was verified by an independent assurance service provider (84% by a statutory auditor, 7% by another audit firm, 9% by a third-party assurance provider other that an audit firm) almost in all cases on a limited assurance basis.’).

172 ibid recitals 9–15.

173 To examine further the relation between information disclosure and change in corporate conduct, see Christensen et al (n 70) 1208–10.

174 Securities and Markets Stakeholder Group ‘Advice to ESMA: SMSG Advice to ESMA on the ESAs’ Call for Evidence on Greenwashing’ 18 January 2023, ESMA22-106-4384, para 28.

175 ESRS DR (n 5) Annex I, ESRS 1 General Requirements s 4, and ESRS 2 General Disclosures ss 4–5.

176 Baumüller and Sopp (n 67) 22.

177 ibid.

178 D W Lehman, B Cooil and R Ramanujam, ‘The Effects of Rule Complexity on Organizational Noncompliance and Remediation: Evidence from Restaurant Health Inspections’ Journal of Management, Vol. 46 No. 8, November 2020, 1436–1468; J P Mendoza, H C Dekker and J L Wielhouwer, ‘Firms’ Compliance with Complex Regulations’ (2016) 40(6) Law and Human Behavior 721–33; D B Spence, ‘The Shadow of the Rational Polluter: Rethinking the Role of Rational Actor Models in Environmental Law’ (2001) 89 California Law Review 917–98, 933–34; Timothy F. Malloy, ‘Regulation, Compliance and the Firm’ (2003) 76(3) Temp. L. Rev. 451; F E Mezzanotte, ‘EU Sustainable Finance: Complex Rules and Compliance Problems’ (2023) 42(2) Review of Banking & Financial Law 845–896.

179 E Aliakbari and S Globerman (n 112) 11 (‘complex and broad mandated reporting standards increase the likelihood that firms will inadvertently misrepresent their ESG activities.’).

180 Data of enforcement actions taken by NCAs in 2022 concerning non-financial reports show that a high percentage of all enforcement actions consisted of ordering the correction of the information in future non-financial statements, ESMA (n 144) para 149 Table no.3.

181 CSRD (n 4) recital 79 and art 2(2)(a) (modifying art 4(2)(c) of Directive 2004/109/EC).

182 ibid art 1(11) (modifying art 33, para 1, Accounting Directive; and upholding the same principles that the NFRD had adopted; NFRD (n 3) art 1(9) (amending art 33, para 1, Accounting Directive).

183 Draft CSRD (version of 21 April 2021) art 1(12) (replacing art 51 of the Accounting Directive 2013/34/EU and proposing minimum administrative measures and sanctions, including reputational ‘name and shame’ measures, cease-and-desist orders, and administrative monetary sanctions).

184 CSRD (n 4) recital 59 and recital 79.

185 ibid art 2(4) (modifying art 28(d) Directive 2004/109/EC) and recital 79.

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Félix E. Mezzanotte

Félix E. Mezzanotte is assistant professor of financial services law and Director of the MSc Programme in Law and Finance at the School of Law, Trinity College Dublin, Ireland. He has taught modules in financial services law, legal aspects of sustainable finance, company law and insolvency law. His most recent research tackles legal problems in the field of EU sustainable finance including themes of investor protection, compliance and enforcement, and corporate sustainability reporting. Prior to Trinity, Félix taught law at the Faculty of Business of the Hong Kong Polytechnic University and acted as a policy advisor for the World Bank in Washington DC.