Governance: Part 1 – General Outline of New Requirements in the Area of Governance

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The Corporate Sustainability Reporting Directive (CSRD) took effect on 5 January 2023. This directive amends the Non-Financial Reporting Directive of 2014 (NFRD) and introduces more detailed requirements for non-financial reporting in the area of ESG.

Companies subject to the CSRD will be required to report in accordance with the European Sustainability Reporting Standards (ESRS). The first set of these draft standards has been produced by EFRAG (formerly known as the European Advisory Group) as an independent body acting as a technical advisor to the European Commission. In November 2022, the drafts were submitted to the European Commission, which is expected to accept a final version in the first half of 2023.

Although the ESRS regulate all three main ESG areas (Environmental, Social, and Governance), this article will mostly focus on the governance standards.

The governance standards are often rather on the sidelines of the imaginary spectrum of interests in ESG. Their interpretation and application raise a number of practical issues that many companies will need to address in the near future.

Non-compliance with governance standards is often the cause (or one of the causes) of many recent economic scandals, including but not limited to the FTX cryptocurrency exchange crash. The CSRD and related non-financial reporting standards should be one of the tools helping to prevent similar situations.

Therefore, we believe that governance is absolutely crucial for the CSRD and ESG, overarching these issues.

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