CSRD: practical aspects to be borne in mind when preparing the sustainability report

The Council of Ministers has made progress in the transposition of Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 (CSRD) through the approval of the draft of the Sustainability Reporting Law (Ley de Información Empresarial sobre Sostenibilidad), which will be sent to the Spanish Parliament for its final approval.

In order for organizations to be ready to comply with their reporting obligations, during the Garrigues Sustainable Dialogs, Eva Díez-Ordás (partner of the Labor Department of Garrigues), Luis Cabrera (ESG director of G-advisory), María Caño (principal associate of Corporate/Commercial Law and M&A Department of Garrigues) and Marta Guerrero (principal associate of Administrative and Constitutional Law Department of Garrigues) shared their knowledge and experience in the subject-matter.

Scope of application: companies affected by the new law

Marta Guerrero recalled that in 2025, the large corporations and groups of companies subject to the previous Non-financial Reporting Directive are already obliged to prepare, approve and publish their sustainability reports for fiscal year 2024. Other large enterprises (with more than 250 employees and/or a volume of assets of more than €25 million and/or invoicing of more than €50 million) must do so starting in 2026, reporting the information of fiscal year 2025. Subsequently, listed small and medium-sized companies, among others, will be included in the obligation.

In view of the numerous queries received in the Corporate/Commercial Law Department of Garrigues regarding possible exceptions to this scope of application, María Caño clarified that, in the case of group of companies in the EU with companies in different countries, if the parent company submits a consolidated sustainability report that includes the information of its subsidiaries, the latter will be exempt from that obligation.

María also explained that although the draft of law published does not stipulate specific penalties for the failure to file the sustainability report, given that it forms part of the financial statements, such failure will have the same consequences and penalties as for not filing the financial statements or filing them incompletely, as well as others which could be imposed by the relevant higher bodies.

Challenges faced by companies

Luis Cabrera recalled the challenge faced by companies when preparing the report according to the European Sustainability Reporting Standards (ESRS), which specify the information on sustainability that must be disclosed in the reports, including material impacts, risks and opportunities in relation to environmental, social and governance matters. He also referred to the transparency and consistency of the information in order to prevent greenwashing.

Regarding environmental standards, the ESG director of G-advisory highlighted that one of the main challenges for organizations will be the need to report scope 3 emissions (indirect in the value chain), along with those of scope 1 (direct) and 2 (indirect from purchased energy) which companies have been measuring and reporting to date. Luis Cabrera said that for some of his clients, he is finding that scope 3 emissions represent up to 98% of their total emissions.

Moreover, ESRS E1 on climate change requires companies to draw up strategic plans detailing the measures and human and economic resources used to achieve their decarbonization targets.

Training and engaging HR and Labor Relations departments

Eva Díez-Ordás recalled that the ESRS affect all areas on which information must be reported, making it essential to train the teams and ensure that they are familiar with the obligation, aware of the purpose and importance of reporting, and knowledgeable about the points on which information must be disclosed. That is the only way to ensure the flow of information and that the necessary data is obtained.

In relation to the four social standards (own workforce, workers in the value chain, affected communities and consumers & end-users), Eva noted the importance of engaging the HR and Labor Relations departments, especially in which regards own workforce. Not only are these departments responsible for providing certain sensitive information required for the reports – such as data on salaried employees, impact in the health field and on human rights, etc. – but they also help companies report to what extent they have policies for handling important impacts relating to their own personnel (as well as risks and opportunities) and the temporary goals imposed to reduce negative impacts, promote positive ones, and manage risks and opportunities. All of that along with the obligation to provide information to the workers’ representatives established by the directive, and the engagement of the interested parties (workers).

In addition, the partner of the Garrigues Labor Department pointed out that organizations must report on their due diligence processes, and that both those processes and their policies in general must be aligned with the United Nations Guiding Principles on Business and Human Rights and other internationally recognized voluntary instruments.

New aspects compared to the European directive

Although the wording of the draft of law is not yet available, the preliminary draft includes some new aspects compared to the European directive. For example, María Caño stated that in the case of business groups that publish a single consolidated report in another language, the Spanish subsidiary will be obliged to also publish it in Spanish.

Moreover, whereas the directive establishes a period of one year for publishing the sustainability report, the Spanish preliminary draft reduces it to 6 months, due to forming part of the financial statements.

Lastly, Marta Guerrero referred to the verification of the sustainability report, explaining some of the amendments envisaged in the Audit Law aimed at bringing the rules regulating verifiers on a par with those of auditors and, accordingly, assigning to the Spanish Accounting and Audit Institute (ICAC) the supervision of that verification work, following a procedure like the one for auditing of accounts. She also noted that the first verification reports will be issued without having European standards on limited verifications, and that the guidelines recently approved by the Committee of European Auditors’ Oversight Bodies (COESA) are aimed at giving some recommendations to facilitate the harmonization of that work in the intervening period, even though they are not binding.