The discussions within the Task Force on ESG & Green Leasing of Leaseurope are providing significant insights into the evolving landscape of sustainability reporting and the implications for companies under new EU rules. This article provides an overview of the latest issues discussed, covering key aspects of the Corporate Sustainability Reporting Directive (CSRD), EU Sustainability Reporting Standards (ESRS), and the challenges faced by the industry, particularly in the context of car leasing.
Corporate Sustainability Reporting Directive (CSRD)
Overview: The CSRD, published in the EU Official Journal in December 2022, amends the Non-Financial Reporting Directive (NFRD) to enhance the transparency and accountability of companies regarding their sustainability practices. The directive aims to provide investors, consumers, and stakeholders with better tools to evaluate companies' sustainability performance.
Scope and Requirements: The CSRD extends the scope of NFRD to all large companies and listed SMEs, requiring them to disclose information on sustainability risks and opportunities. This includes non-EU parent companies with significant EU market activities. Companies must report on double materiality, encompassing both financial and impact materiality, i.e., the financial risks sustainability issues pose to the company and the company’s impact on people and the environment.
Exemptions and Reporting Standards: Certain exemptions exist, such as group exemptions and ultimate non-EU parent exemptions, where consolidated reporting can be performed. Detailed reporting requirements cover environmental, social, and governance (ESG) factors, and companies must prepare reports in an electronic format with mandatory assurance by auditors.
Implementation Timeline: The CSRD will be implemented progressively from 2024 to 2028, starting with large public-interest companies and eventually encompassing all relevant entities.
EU Sustainability Reporting Standards (ESRS)
Development and Adoption: The ESRS, developed by the EU Financial Reporting Advisory Group (EFRAG), set out the specific disclosures required under the CSRD. The standards are divided into general, sector-specific, and entity-specific requirements, addressing material sustainability impacts, risks, and opportunities.
Mandatory Standards: ESRS 1 and ESRS 2 are cross-cutting standards applicable to all companies, providing general principles and essential disclosures. Topical (ESG) standards cover topics such as climate change, pollution, water resources, biodiversity, resource use, and various social and governance issues.
Materiality Assessment: Companies must conduct materiality assessments to determine the relevance of sustainability matters to their operations. This involves evaluating impacts based on severity, scope, and irremediability, as well as financial risks and opportunities. The assessment process must be thorough and transparent, involving stakeholder consultations and the use of reasonable assumptions and estimates.
Challenges in Reporting: The ESRS implementation faces challenges such as data availability, especially from upstream suppliers, and the complexity of assessing future sustainability impacts. SMEs, in particular, may struggle with compliance due to resource constraints.
Double Materiality in Car Leasing
Definition and Principles: Double materiality is a key concept under the ESRS, requiring companies to assess both the financial materiality (outside-in) and impact materiality (inside-out) of their activities. For the car leasing industry, this involves evaluating how environmental and social issues affect the business and how the business impacts the environment and society.
ESG Topics for Car Leasing: Key ESG topics for the car leasing sector include climate change, pollution, water and marine resources, biodiversity, resource use, and social impacts on workers and communities. Companies must map these topics to their value chain and assess their materiality based on specific considerations such as regulatory requirements and stakeholder expectations.
Leaseurope Leaflet and Industry Advocacy
Role of Leasing in Green Transition: Leaseurope highlights the crucial role of leasing in facilitating sustainable growth and supporting SMEs in the green transition. Leasing provides essential financing for upgrading technology and reducing environmental impacts, helping businesses manage their working capital and invest in sustainability.
Policy Recommendations: Leaseurope calls for policymakers to recognize leasing as an environmentally sustainable activity under the EU Taxonomy and ensure that reporting measures capture the full scope of transition finance. This includes acknowledging the unique characteristics of leasing and avoiding discriminatory practices that could hinder the industry's contribution to sustainability goals.
Conclusion
The Task Force experts meeting underscored the significant advancements in sustainability reporting driven by the CSRD and ESRS. Leasing companies must adapt to these new requirements, leveraging detailed materiality assessments to align their operations with sustainability goals. While challenges remain, the collaborative efforts between industry stakeholders and policymakers are vital for achieving a sustainable and strong EU Economy.
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