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Are You Ready For EU’s Corporate Sustainability Reporting Directive?
Formally adopted by the European Council in late November 2022, the EU’s Corporate Sustainability Reporting Directive (CSRD), will make almost 50,000 companies, including SMEs, subject to mandatory sustainability reporting.
As well as applying to EU-companies the Directive will also capture non-EU companies which have subsidiaries operating within the EU or which are listed on EU regulated markets. Affected companies will have 12 European Sustainability Reporting Standards (ESRSs) to apply, and these ESRS apply regardless of the sector in which you operate.
Affected entities must also disclose on Environment, Social, and Governance (ESG). There are over 120 metrics and targets. In addition, CSRD reporting will require far more rigour and detail, as well as compliance with mandatory limited assurance ESG reporting requirements.
What Is The Background To The Reporting Changes?
According to the Explanatory Memorandum, the European Commission saw a significant gap between what organisations are required to report on under the existing Non-Financial Reporting Directive (NFRD), and what the users of that information needed to know. For example, the reporting framework under NFRD does not guarantee that the data provided by companies is reliable, comparable, and relevant. Also, the reporting framework under NFRD lacks accuracy and companies often struggle to identify the information they need to provide.
The Explanatory Memorandum concluded:
“The primary users of sustainability information disclosed in companies’ annual reports are investors and non-governmental organisations, social partners, and other stakeholders. Investors, including asset managers, want to better understand the risks of, and opportunities afforded by, sustainability issues for their investments, as well as the impacts of those investments on people and the environment. Non-governmental organisations, social partners and other stakeholders want to hold undertakings to greater account for their impacts of their activities on people and the environment.
The current legal framework does not ensure that the information needs of these users are met. This is because some companies from which users want sustainability information do not report such information, while many that do report sustainability information do not report all the information that is relevant for users. When information is reported, it is often neither sufficiently reliable, nor sufficiently comparable, between companies. The information is often difficult for users to find and is rarely available in a machine-readable digital format. Information on intangibles, including internally generated intangibles, is under-reported, even though these intangibles represent the majority of private sector investment in advanced economies (e.g., human capital, brand, and intellectual property and intangibles related to research and development).”
When Does CSRD Reporting Apply?
The CSRD revises, expands, and strengthens the sustainability reporting requirements of the NFRD. It will be effective from 1 January 2024 for those entities already subject to the NFRD) (reporting in 2025) and from 1 January 2025 for all companies newly caught within its scope (reporting in 2026).
What Companies Will Be Subject To CRSD Reporting?
The following entities will need to comply with CRSD reporting requirements:
- All large companies based in the EU that exceed two of the following criteria; a) 250 or more employees, or b) €40 million in turnover, or c) €20 million in assets.
- All companies listed on EU regulated markets. This includes companies not established in the EU but are listed on EU regulated markets generating a net turnover of €150 million and which have at least one subsidiary or branch in the EU.
- From the 2026 financial year, all SMEs listed on EU regulated markets.
In relation to non-EU companies, in order to be within the scope of the CRSD, the global corporate group of a non-EU business must have generated a net turnover within the EU of €150 million for two consecutive financial years, and also either:
- have an EU subsidiary that meets the thresholds under Article 19a of the CSRD (e.g., is a large undertaking or public interest entity); or
- have a branch in the EU that generated €40 million net turnover in the preceding financial year.
The standards applied to SMEs will be less onerous than those applied to large companies. The Commission states:
“The Commission will adopt standards for large companies and separate, proportionate standards for SMEs. The SME standards will be tailored to the capacities and resources of such companies. While SMEs listed on regulated markets would be required to use these proportionate standards, non-listed SMEs – which are the vast majority of SMEs – may choose to use them on a voluntary basis.”
What Are Affected Companies’ Obligations Under The CRSD?
If your business falls under the new CRSD reporting standards, you will need to report on the following:
- Environmental protection
- Social responsibility and treatment of employees
- Respect for human rights
- Anti-corruption and bribery
- Diversity on company boards (in terms of age, gender, educational and professional background
The above requisites are currently mandatory under the NFRD. The below requirements cover the additional reporting under the CRSD.
- Your company’s strategy towards sustainable risks.
- Referring to investment and financial strategies:
- how your company plans to move its business model and overall strategy to ensure compatibility with the transition to a sustainable economy and limiting of global warming to 1.5°C, or
- a description of the time-bound sustainability targets the company has set for itself.
- Information relating to intangibles (social, human, and intellectual capital)
Conclusion
Reporting must be in line with the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation.
When drafting reports, it is helpful to keep in mind the European Commission’s objective which is to ‘nudge’ organisations to direct capital towards sustainable investments to achieve viable and inclusive growth.
To discuss any of the points raised in this article, please contact Ann-Maree Blake or fill in the form below.
Beaut-AI | How Regulations Will Impact the Beauty Industry
In the-post-Covid world, retailers have been working hard to improve the customer experience as the retail landscape continues to move from in-store to online. From fitness to footwear, couture to cosmetics, data analytics and artificial intelligence are the new ingredients accelerating product development and providing consumers with personalised products and services.
According to McKinsey, in 2022 the beauty market generated approximately $430 billion in revenue and is expected to reach approximately $580 billion by 2027. Amongst the factors driving this growth is the increased digital sophistication of both brands and retailers.
Customer Feedback Analysis
Mintel’s 2024 Global Beauty and Personal Care Trends reports that “AI will permeate the beauty industry in the form of personalised recommendations, virtual try-on experiences and data-driven insights.”
The report goes on to say that “By analysing social media trends, customer feedback and market research, AI will help brands identify emerging beauty preferences and eco-friendly options.
Brands Positioning In AI
In the last few years brands and retailers have been deploying an increasingly sophisticated range of tools and analytics to enhance the consumer experience. For example, the Taiwanese company Perfect Corp has an extensive range of augmented reality enabled tools.
These include virtual make up, hair colour and nail effects, as well as photograph enhancements like virtual tattoos and personalised avatars. No7 used Perfect Corp’s artificial intelligence and augmented reality technology, for its cosmetic shade matching experience and Yves Saint Laurent, L’Oréal Paris, MAC Cosmetics, and Macy’s have all used Perfect Corp technologies to offer customers virtual try-ons of clothes and cosmetic products.
In 2018, L’Oreal acquired ModiFace and used its technologies for an AI makeup app with augmented reality in cooperation with Facebook. With Modiface technology customers use a smartphone camera ‘try on’ products virtually and then move to the product page to make a purchase.
In 2019, Coty released Wella Professionals AR enabled smart mirror for hair salons. Combining AR, facial recognition and 360° video capture that works in salon and on smartphones, Wella customers can retrieve past hair styles and view their hair at every angle in their smart mirror, creating a highly personalised customer experience.
DeepAR‘s augmented reality and emotional detection tools are being used by customers for virtual try-ons of Ray-bans sunglasses and Allbirds footwear, virtual make up by Lush and Sephora as well as augmented reality advertising. It teamed up recently with Sky to integrate AR to the Sky Glass TV using body-tracking software to deliver an AR experience for casual games, and fitness applications at room-scale.
Risks Of AI Implementation
Whilst Beaut-AI offers many benefits for brands and consumers, the collection, storage and processing of personal data, and in particular biometric data from facial recognition software is already subject to Data Privacy laws and regulations.
Companies looking to use technology in this area must guard against data breaches and misuse, ensuring that their policies include adequate customer consents to the collection and use of personal data, and in particular special category data such as biometric information. Beaut-AI will soon be subject to more rigorous and extensive regulations and policies in the EU and UK.
In the EU the use of artificial intelligence will be regulated by the AI Act, the world’s first comprehensive AI law. The new rules will establish obligations for providers and users depending on the level of risk from artificial intelligence. These will range from unacceptable risk AI systems (which are systems considered a threat to people), through to high and limited risk systems.
Unacceptable risk AI systems, such as cognitive behavioural manipulation of people or specific vulnerable groups, or social scoring people based on behaviour, socio-economic status or personal characteristics will be banned. High risk systems will have to comply with EU product legislation and certain categories of products will have to be registered on an EU database.
Limited risk AI systems will have to comply with transparency requirements that allow users to make informed decisions.
At present the UK does not intend to introduce new legislation. In the White Paper published in March 2023 the Government set out five principles underpinning its AI regulatory approach:
- Safety, security, and robustness
- Appropriate transparency and explainability
- Fairness
- Accountability and governance
- Contestability and redress.
Conclusion
As Mintel predicts “Transparency in AI systems will be crucial to building consumer trust and ensuring the disclosure of data sources and decision-making processes. Consumers will prioritise data protection and privacy by demanding customer consent and pushing brands to adhere to relevant regulations.”
Companies using AI-powered software solutions should pay close attention to the new regulatory landscape since the risk of damage to brand and reputation are moving to a whole new level.
To discuss any of the points raised in this article, please contact Marcus Rebuck or fill in the form below.
Share Purchases – Warranties & Disclosures
At its most basic, the only document required for the sale and purchase of shares in a company is a share transfer form executed by the seller to the buyer. But we would always advise a buyer of shares to enter into a binding Share Purchase Agreement (or ‘SPA’) with the seller, which document should contain detailed warranties from the seller.
When buying the shares in a company, you will be acquiring the company ‘warts and all’ – all the good aspects (i.e. the company’s assets, staff, contracts, etc.) but also the less good aspects (i.e. the company’s debts, tax liabilities, outstanding contractual obligations, any pending litigation, etc.). To protect the buyer, the SPA should contain detailed warranties from the seller about the company so that the buyer is made fully aware of both the good and the bad.
What Are Warranties?
Because warranties are statements of fact given by the seller about the company being sold which the buyer relies on when deciding whether to buy the company, if a warranty is later found to be untrue, the buyer may be entitled to make a claim by the buyer against the seller for any losses it may suffer as a result.
Generally, warranties can be provided in a standard format, but they sometimes need to be tailored to specific circumstances of the company and the transaction. But where the facts do not fit the ‘standard’ warranties, the seller will want to ‘disclose’ relevant facts which are contrary to the warranties given. Such disclosure is usually contained in a separate disclosure letter – which sets out clearly what facts have been disclosed (and therefore which facts the buyer is deemed to be aware of when entering into the SPA).
By way of example, if a warranty states that there are no anticipated liabilities other than those set out in the company’s balance sheet, but the seller is aware of a proposed litigation claim, details of the proposed claim should be separately ‘disclosed’ to be sure that the buyer cannot later say they were not made aware of that potential liability.
Who Benefits From Disclosure?
Disclosure by way of the disclosure letter can be of benefit to both the seller and the buyer: (i) it can provide a defence to the seller – if the seller might otherwise be in a breach of warranty (i.e. the seller’s warranty proves to be untrue), provided that the seller made a legally adequate disclosure against that warranty, the buyer cannot bring a claim against the seller in relation to that claim; (ii) it can also bring to light to the buyer certain information that it might not have obtained in the due diligence process.
The disclosure letter is often accompanied by a bundle of supporting documents which again serve to benefit both parties – the supporting documents make clear which documents the buyer has been made aware of, and the buyer may discover information that it did not obtain in the due diligence process.
It is important for any information that qualifies the seller’s warranties be incorporated in and properly disclosed in the disclosure letter. The seller should not assume that the buyer already knows something or that if the information was contained somewhere within documents previously supplied as part of the due diligence process (e.g. ‘buried’ in a data room) that this will provide protection for the seller in respect of a claim for an untrue warranty. The best starting point to provide the seller protection or a defence is to include the relevant information or disclosure within the disclosure letter.
What To Consider When Writing A Disclosure Letter
Some sellers leave the disclosure letter to the last minute just prior to exchange of the SPA, but the preparation of disclosures specific to the transaction requires a detailed analysis by the seller of each warranty contained in the SPA based on their knowledge of the business.
They need to carefully consider whether any facts or matters may exist that make any of the statements untrue. This needs to be addressed by the seller and its senior team members and its finance team or accountants, etc. The warranties need to be reviewed by all relevant senior personnel and this process should not rely upon the legal advisers to know whether a warranty is or is not untrue without qualification (i.e. whether disclosure is required against a warranty).
Where a thorough due diligence process has been undertaken, the buyer should not find any major surprises when they review the draft disclosure letter, but if any items do arise from the draft disclosure letter they can then be dealt with in the SPA before it is signed.
Conclusion
Although the disclosure process (when done properly) can be time-consuming, it is a valuable step in the company sale process which provides great protection, especially for the seller but also provides benefits the buyer. Parties may be tempted not to give the disclosure process the priority it deserves in a company sale transaction, given other issues that seem to be more urgent or important.
However, mistakes during disclosure can be extremely costly, especially where a claim that could have been easily avoided is brought by the buyer after completion which would have been completely avoided had the appropriate disclosure been made.
To discuss any of the points raised in this article, please contact Jason Greenberg or fill in the form below.