Compliance with due diligence and reporting requirements in Norway should address human rights and climate impacts to keep up with legislative progress in Europe
The Transparency Act came into force in Norway on 1 July 2022. The Transparency Act promotes enterprises' respect for fundamental human rights and decent working conditions in connection with the production of goods and the provision of services. It also ensures that the general public has access to information regarding how enterprises address the adverse impacts of their operations on fundamental human rights and decent working conditions.
The Transparency Act does not address the environmental impacts of enterprises or their impact on the climate. However, it is likely that such reporting requirements will be added to the Transparency Act within a few years.
In this newsletter we argue that the sooner businesses begin to map and perform their due diligence on both their impact on human rights and the climate, the more prepared businesses will be to take part in the "Green Transition" and secure access to finance.
We consider that climate due diligence and reporting on environmental impacts is crucial for Norwegian undertakings in light of the steps taken by the EU this summer. In particular, on 21 June 2022 the European Parliament and the European Council reached a political agreement on the Corporate Sustainability Reporting Directive (CSRD). In addition, negotiations between the European Institutions are ongoing in relation to the proposal for a European corporate due diligence directive (Draft Due Diligence Directive).
Both the CSRD and the proposed Draft Due Diligence Directive will have a different application and scope to the Norwegian Transparency Act. Significantly, both the CSRD and the Draft Due Diligence Directive address the impact of enterprises on human rights and the climate.
This newsletter contains an overview of the CSRD and the proposed Draft Due Diligence Directive, including the potential implications for Norwegian stakeholders and businesses.
In practical terms Norwegian companies need to follow the speed of the EU. The agreed requirement of "double materiality" is here to stay. That is, a business must not only disclose how sustainability issues can affect the business («impacts inward) but also how the business impacts the society and the environment («impacts outward»).
Corporate Sustainability Reporting Directive (CSRD)
On 21 of June this year the European Parliament and the European Council reached a political agreement on the CSRD, barely a year after the Commission had published the proposal of the CSRD on 21 of April 2021.
The CSRD is closely interlinked to the Taxonomy Regulation. At EU level, sustainable corporate governance has been mainly fostered indirectly by imposing reporting requirements in the Non-Financial Reporting Directive (NFRD). NFRD is an act which is referred to in Article 8 of the Taxonomy Regulation. On 6 July 2021, the European Commission adopted the Delegated Act supplementing Article 8 of the Taxonomy Regulation (the Disclosures Delegated Act), which requires large financial and non-financial companies to provide information to investors about the environmental performance of their assets and economic activities. The Delegated Act was published on 10 December 2021 in the Official Journal and became applicable on 1 January 2022.
CSRD will change the Disclosure Delegated Act by extending the scope of entities which will have to report on their environmental performance. All large companies governed by the law of, or established in, an EU Member State and all European stock exchange-listed companies (except micro-companies), as well as small and medium-sized enterprises (SMEs) will now fall under the scope of the CSRD.
A large company is defined in CSRD as meeting two out of the three following criteria:
(1) EUR€40 million in net turnover,
(2) EUR€20 million on the balance sheet and
(3) 250 or more employees
The CSRD will even have an impact on non-European countries. In particular, non-European companies, generating a net turnover of EUR €150 million in the EU, and which have at least one subsidiary or branch in the EU, will need to report on their environmental performance.
The CRSD builds upon the standards that the Commission will adopt in delegated acts. The European Commission has given a mandate to the European Financial Reporting Advisory Group to develop EU sustainability reporting standards (ESRS).
The standards seek to align to the extent possible with global standard-setting initiatives such as GRI and the ISSB Standards, but they also aim to link other EU legislation and initiatives, particularly the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation. It is worth noting that SMEs and non-EU companies will have separate standards. In the political agreement, the deadline set for general standards to be elaborated on by the Commission is by 31 October 2022 and, for sector-specific standards, the deadline is by 31 October 2023.
The reporting scope
The general standards will address a number of key topic areas, including environmental matters (such as climate change and biodiversity) as well as social factors (such as working conditions, equality, non-discrimination, diversity and inclusion, human rights, and the effects of the undertaking on people and on human health). The specific standards will focus on sectors associated with high sustainability risks and/or effects.
It is worth noting that the CSRD imposes a requirement on companies to disclose their sustainability targets and the transition plans that they have established to ensure that their business model and strategy are compatible with the transition to a sustainable economy and the objective of limiting global warming to 1.5°C in line with the Paris Agreement. At the same time, companies need to have a plan in place to achieve climate neutrality by 2050 in line with the EU’s goals under the European Climate Law.
Companies will need to report sustainability information in a dedicated section of their management reports rather than in a separate report. The consequence is that financial and sustainability information will be published simultaneously. Administrative, management, and supervisory bodies will be accountable for this reporting.
CSRD is interlinked with the proposed Draft Due Diligence Directive as it requires proper information collection for reporting purposes, which is closely related to identifying adverse impacts in accordance with the due diligence duty contained in the Draft Due Diligence Directive. Secondly, the CSRD will cover the last step of the due diligence duty, namely the reporting stage, for companies that are covered by the CSRD.
The proposal of a Corporate Due Diligence Directive
The next step is under way
The Commission has proposed that the Draft Due Diligence Directive will apply to EU companies with more than 500 employees and more than 150 million euros global net turnover. Two years after its entry into force, EU companies with more than 250 employees and a global net turnover of 40 million euros will be included in the scope of the Draft Due Diligence Directive provided that at least 50% of this net turnover was generated in one of the high-risk factors listed in the Draft Due Diligence Directive. Non-EU companies that are active in the EU and generate turnover in the EU exceeding the above-mentioned thresholds will also fall within the scope of the Draft Due Diligence Directive.
The due diligence list embedded in the Draft Due Diligence Directive goes beyond the requirements of the Norwegian Transparency Act. Moreover, it is proposed that the Draft Due Diligence Directive establishes a complaints procedure whereby companies must have procedures in place to consider all complaints, including those that the company considers to be unfounded, and inform the relevant workers and trade unions of those procedures. Civil liability is also introduced.
Requirement to be in line with 1.5 °C target
As embedded in the CSRD, the proposed Draft Due Diligence Directive also imposes an obligation on companies to ensure that their business model and strategy are compatible with the transition to a sustainable economy and with goal of limiting global warming to 1.5 °C in line with the Paris Agreement. A company should identify, on the basis of information reasonably available to the company, the extent to which climate change is a risk for, or an impact of, the company’s operations. In addition, the proposed Draft Due Diligence Directive requires Member States to ensure that, in case climate change is or should have been identified as a principal risk for, or a principal impact of, the company’s operations, the company includes emission reduction objectives in its business strategy.
Important to have the holistic picture
One of the challenges of EU law, that will most probably be EEA relevant, is to see the big picture and how all these legislative acts are interlinked. One of the Climate Packages the Commission refers to in the Draft Due Diligence Directive is the “Fit for 55” Package. The “Fit for 55” Package will only indirectly apply to some non-EU value chains of EU companies through the Carbon Border Adjustment Mechanism which aims at preventing “carbon leakage” by imposing a carbon adjustment price for selected imported products not subject to the carbon price deriving from the EU Emission Trading System.
In complying with their due diligence and reporting requirements, Norwegian businesses should also address climate change and not only human rights as set forth in the Norwegian Transparency Act. The earlier your business begins to map and perform its due diligence processes with regard to the impact it has on the climate, the more "Fit" your business will be for the target of 55 % cut in emissions by 2030 and the "Green Transition".