The EU’s Corporate Sustainability Reporting Directive came into force in January of this year, which means that individual EU member governments must now adopt the directive at a national, legal level. The CSRD strengthens the existing EU Non-Financial Reporting Directive rules, in that global companies who are not listed in the EU will also have to comply – this includes Japanese companies who may only have what they might see as a minor presence in the EU.
From 2024, the CSRD will compel all “large” EU companies or companies that have listed securities in the bloc, to produce extensive new reports on a range of environmental, social and governance impacts of their business and of their parent companies. Japanese companies who fall into this category include Omron and Ricoh, who are both listed on the Frankfurt Stock Exchange.
Most Japanese companies will fall into the group of global companies who are not listed in the EU, but are defined as “large”, who will need to disclose on a consolidated group level their 2028 financial year, in 2029.
The definition of “large” means any company that has a subsidiary or branch in the EU with two of the following three characteristics – assets over €20m, revenues of over €40m or 250 or more employees. It is estimated that overall around 50,000 companies will be subject to this new reporting requirement. I estimate that at least seventy Japanese companies would be in this category.
To ease the transition, from 2024 until 2030, the EU has a phase-in approach for international, non-EU companies, so that a parent company can voluntarily disclose at a consolidated group level, before 2029, on all its global entities. This would mean their large EU entities are exempt from reporting gradually and individually.
In other words, if the Japanese company is already reporting at a global consolidated level by 2029 the kind of data required by the European Sustainability Reporting Standards, then there is no need for any further reporting. The ESRS are still being defined but will include not only environmental protection but also social, such as treatment of workers across the value chain, and governance, such as diversity on company boards and internal controls and risk management.
Penalties for not disclosing under these standards include public denunciation, an order to change conduct and financial punishment.
Having read many hundreds of Japanese annual reports over the years, although the level of disclosure, in English, has improved, there are many who will not currently make the grade. For example, many only disclose data about Japan based employees.
You may still think your company will be exempt from these regulations, but one of the biggest changes to EU standards is that there is an element of extra-territoriality. Global supply chains are also to be included in the reporting. If your company supplies to a Japanese company with a significant presence in the EU, they may soon be asking you searching questions about your global environmental, social and governance activities.
This article by Pernille Rudlin was first published in Japanese in the Teikoku News, 9th August 2023
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