Get ready. The Corporate Sustainability Reporting Directive is coming
As part of our Thought Leadership series at 2to3days we asked Rosanna Sarene, an Independent Consultant, about the impact on women of the CSRD – a new Sustainability Regulation in the EU - coming into force next year.
The Corporate Sustainability Reporting Directive and what it means for UK companies
What is the CSRD?
There has been a lot of discussion lately about the EU’s Corporate Sustainability Reporting Directive – “CSRD” – due to come into force in the EU in January 2024 and anticipated to be the most comprehensive sustainability regulation proposed to date, covering environment, social and governance. The CSRD reporting standards known as “ESRS” - European Sustainability Reporting Standards, drafted by EFRAG as technical advisor to the European Commission, are designed to bring sustainability reporting on a par with financial reporting over time. The European Commission requested feedback this summer on its 12 Draft “ESRS” and the final standards are due to be passed as law by the end of July 2023/ end of August 2023.
Reporting requirements for companies are due to come into force in January 2024 (although there have been recent concessions e.g., in terms of timelines for mandatory reporting for companies/groups with fewer than 750 employees). Failure to report could lead to criminal sanctions and financial penalties, not to mention reputational damage.
Whilst this is European legislation, UK companies will still be obliged to report if they are already obligated to report under the Non-Financial Reporting Directive (NFRD); and also if they have securities listed on an EU regulated markets or a net turnover in the EU of over €150 million with either an EU subsidiary or and EU branch with a net turnover of more than €40 million in the previous financial year (click here for full criteria). Reporting for those companies already subject to the NFRD will commence in 2025 (based on 2024 data) and non-EU companies covered by CSRD will report in 2029 on 2028 data.
Many predict that these regulations will serve as a model for sustainability regulation globally; and with a multitude of proposed regulation in the pipeline; for example, the FCAs Sustainability Disclosure Requirements (SDR) due to be published in Q3 of this year, it will be interesting to see how far the CSRD impacts UK and international regulation.
Perhaps unsurprisingly the majority of discussion surrounding CSRD has focused on environmental reporting, not social and governance issues. However, the reporting requirements in the “S” and “G” spaces are significant and could have a major reputational impact on firms. One such area is in relation to gender and equality in the workplace. CSRD disclosures propose that companies not only report on the ratio of men-women in workforce, but also what positions in the hierarchy they hold and what they are paid.
ESRS S1 – Own Workforce
Diversity disclosure comes under “ESRS S1 – Own Workforce” and proposed disclosure’s include (note certain requirements may be omitted in the first reporting year*):
- The gender distribution in number and percentage at top management level amongst its employees.
- The distribution of employees by age group: under 30 years old, 30-50 years old; over 50 years old.
- Percentage gap in pay between women and men and the ratio between the compensation of its highest paid individual and the median compensation for its employees.
- Percentage of persons with disabilities in its own workforce.*
- The extent to which employees are entitled to and make use of family-related leave.
In addition to the CSRD, the EU approved a new pay transparency directive earlier this year which aims to close the gender pay gap. The directive will mean employees have the right to request information about their individual salary level and the average salary level, broken down by gender, for categories of employees doing the same work or work of equal value.
According to the Office for National Statistics, the UK's gender pay gap – the difference between men and women's median hourly earnings – stands at 14.9% for all types of employees, across all industries. However, this gap significantly increases in the tech (27%) and financial services (26%) sectors.
A recent report by EY on women in Fintech (where public reporting is limited) estimates the pay gap to be 22%. The reports cites “…key contributing factors to the gender pay gap in the UK FinTech industry are the low levels of transparency around pay, and low female representation in higher paying roles.” The report calls for salary transparency amongst others to attempt to redress the balance.
Whilst the aim of encouraging more Women on Boards has been on the “agenda” in the UK and EU (indeed the EU "Women on Boards" Directive will require large, listed EU companies to have at least 40% of their non-executive director positions held by women by June 2026); there has been less emphasis on promoting women throughout the company hierarchy; supporting their career paths ensuring that they don’t leave at crucial times in their careers. UK firms currently have to report on the gender pay gap if they have over 250 employees, however there is no law yet in relation to salary transparency, and critics argue that this doesn’t go far enough in addressing inequality in the workplace.
The CSRD will impact many of the larger UK firms with a presence in the EU; and is predicted to include many in the financial services industry where statistics suggest that women are still underrepresented in senior management roles. It will be interesting how companies justify not only pay disparity, but also explain the lack of female presence, especially at more senior levels.
The new generations entering into the workforce have become more discerning about the companies they want to work for according to Forbes. Further, a recent study carried out by WorkBuzz – the “State of Employee Engagement Report 2022” reveals that 45 per cent of UK employees and business leaders rank “a great culture” (including DE&I matrices,) as the most important factor when looking for a new job. When the new regulations come into law, and companies are forced to become more transparent in relation to their DE&I policies (or lack thereof); there will likely be consequent assumptions made about company culture; which begs the question: will the younger generations want to work with them?
Regardless of where one stands on the ability of regulation and quotas to improve equality in the workplace; younger generations are demanding greater transparency and an attractive working “culture”, and if companies can’t prove that they are working towards this, they may not attract the talent they wish to.
Much of the debate surrounding what success looks like in UK Companies centres around risk and resilience, particularly in an age of increased scrutiny and a call for transparency. Increased reporting around DE&I issues could prove to be a real reputational risk for companies who are not sufficiently addressing the disparity in relation to pay and presence of women; and that could impact their resilience in the market.
Rosanna Sarene is an Independent Consultant specialising in Sustainability, Regulation & Corporate Affairs.