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The Green Traffic Light – giving the signal of mandatory reporting and corporate due diligence with possible effect on Norwegian undertakings

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The Transparency Act will enter into force in Norway on 1 July 2022. The Transparency Act shall promote enterprises' respect for fundamental human rights and decent working conditions in connection with the production of goods and the provision of services and ensure the general public access to information regarding how enterprises address adverse impacts on fundamental human rights and decent working condition.

In the associated preparatory works of the Transparency Act there are several references to EU regulation on sustainable reporting obligations and upcoming proposals on Corporate Sustainability Due Diligence. This newsletter endeavors to provide an overview of how fast the EU has moved in recent years. Even though Norway is interlinked with the EU by the EEA Agreement, there is a challenge with the back-log for the incorporation of secondary legislation into the EEA Agreement. However, global financial markets which are increasingly met with obligations of sustainability reporting and requirements on corporate due diligences, do not have the time to wait for formal legal processes. In practical terms Norwegian companies need to follow the speed of the EU and it is therefore of importance to have the holistic view and provide advice on how to proceed according to the Green Traffic Light which sets the Green Deal Scene also for the financial sector before it turns red - preventing us from moving forward.

The Norwegian Transparency Act provides for a framework regulation. In the preparatory works of the Transparency Act there are several references to EU acts which are stated to be proposed. The issue at stake is that the EU moves fast – and much legislation has been adopted which will take time to be formally incorporated into the EEA Agreement. The challenge is that the financial regulation of the market will not wait for legal procedures and several of these obligations can already be relevant and mandatory for Norwegian undertakings. These reporting and climate due diligence conditions could be challenging to map and subsequently meet, especially for Small and Medium Sized Enterprises (SMEs) due to lack of resources. SMEs do not often fall directly within the scope of these regulations. Nevertheless, SMEs have in certain situations an obligation to fulfil these regulatory requirements due to business partnerships with undertakings that because of their size and turnover will fall within the scope of the legislation. Even though certain large undertakings and SME's will not be obliged to follow these requirements, it could be a competition advantage to have looked into that crystal bowl and prepared before such requirements become mandatory and tight deadlines for implementation provide for additional challenges.

The preparatory works of the Transparency Act makes reference to the Non-Financial Reporting Directive (NFRD)[1].  At EU level, sustainable corporate governance has been mainly fostered indirectly by imposing reporting requirements in NFRD.  It is to note that 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.

It is also to note that NFRD will be revised with the Commission’s proposal for a Corporate Sustainability Reporting Directive (CSRD). The Commission has suggested that CSRD would extend the scope of the companies covered to all large and all listed companies, require the audit (assurance) of reported information and strengthen the standardisation of reported information by empowering the Commission to adopt sustainability reporting standards. CSRD will also complement the current NFRD by adding a substantive corporate duty for some companies to perform due diligence to identify, prevent, mitigate and account for external harm resulting from adverse human rights and environmental impacts in the company’s own operations, its subsidiaries and in the value chain. Of particular relevance of the proposal on CSRD is that it mandates disclosure of plans of an undertaking to ensure that its business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement.

In addition, the EU Taxonomy Climate Delegated Act 2021/21393 adopted on 4 June and published in the Official Journal on 9 December 2021, as well as any future delegated acts on other environmental objectives will have to be assessed in this reporting exercise. Noteworthy, is the fact that the Taxonomy is a very dynamic tool. The Commission has already in principle adopted a Complimentary Delegated Act on gas and nuclear. The Commission has also in this proposal made suggestions for revising the Disclosure Delegated Act since the undertakings in the event that this act will be adopted, need also to report on the activities included for gas and nuclear in this piece of legislation. Moreover, activities included in the first Climate Delegated Act can be added or renewed. The Platform on Sustainable Finance will also soon publish the report on the technical criteria for the remaining 4 environment objectives. This Platform will also, in the near future, publish its final report on the extension of the taxonomy.  On 28 February 2021, the report on Social Taxonomy was published. The Platform on Sustainable Finance approached in this report the Taxonomy to develop further a social taxonomy consisting of three objectives: decent work (including for value-chain workers), adequate living standards and wellbeing for end-users together with inclusive and sustainable communities and societies. It is also related to CSRD since this structure of three stakeholder groups of workers, consumers and communities follow the same structure as the European Financial Reporting Authority Group's (EFRAG) draft proposal to non-financial, sustainability reporting companies under the CSRD.

Going back to the requirements of reporting from January 2022, non-financial undertakings are in particular required according to Article 8(2) Taxonomy Regulation to disclose the share of their turnover, capital and operational expenditure associated with environmentally sustainable economic activities as defined in the Taxonomy Regulation. In the case of financial undertakings (investment firms, asset managers, insurers, credit institutions), key performance indicators (KPIs) relate to the proportion of environmentally sustainable economic activities in their financing activities, such as lending, investment and insurance. As of January 2022, in accordance with Article 10(2) and (3) of the Disclosure Delegated Act, all large undertakings will need to report the proportion of their activities that are considered as eligible in accordance with Article 1(5) and non-eligible in accordance with Article 1(6) of the Disclosures Delegated Act in their turnover, capital (‘CapEx’) and operational expenditure (‘OpEx’) and total assets (in the case of financial undertakings).  Furthermore, financial undertakings (according to Annex XI) and nonfinancial undertakings (according to Section 1.2 of Annex I) must disclose qualitative information as of January 2022.

The CSRD is closely linked to the Commission proposal which was presented on 23 February on Corporate Sustainability Due Diligence. The proposed Directive on Corporate Sustainability Due Diligence will particularly improve corporate governance practices to better integrate risk management and mitigation processes of human rights and environmental risks and impacts, including those stemming from value chains, into corporate strategies. By harmonising provisions of due diligence in Europe, this Directive seeks to avoid fragmentation of due diligence requirements in the single market and create legal certainty for businesses and stakeholders as regards expected behaviour and liability. In addition, this framework is proposed as an endeavour to increase corporate accountability for adverse impacts and ensure coherence for companies regarding obligations under existing and proposed EU initiatives on responsible business conduct.

The clear interlink between the CSRD and this proposal on Corporate Sustainability Due Diligence Directive is that the proper information collection for reporting purposes under the proposed CSRD requires setting up processes, which is closely related to identifying adverse impacts in accordance with the due diligence duty set up by the proposal of Due Diligence Directive. Secondly, the CSRD will cover the last step of the due diligence duty, namely the reporting stage, for companies that are also covered by the CSRD. Thirdly, the Corporate Due Diligence Directive will set obligations for companies to have in place the plan ensuring that the business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement on which the CSRD requires to report.

The proposed Directive on Corporate Sustainability Due Diligence Directive interlinks further with Directive 2011/36/EU on preventing and combating trafficking in human beings and protecting its victims and the Employers’ Sanctions Directive. The Commission also points to this Directive will also complement existing or planned sectoral and product-related value chain due diligence instruments at EU level due to its cross-sectoral scope and broad range of sustainability impacts covered such as the Conflict Minerals Regulation, the Commission proposal for a Regulation on deforestation-free supply chains, the Commission’s proposal for a new Batteries Regulation and the future Sustainable Products Initiative (SPI) which will revise the current Ecodesign Directive concerning more broadly the sustainability of products placed on the EU market and the transparency of related information.

Finally, the Commission sets out that the Directive on Corporate Sustainability Due Diligence must look to the “Fit for 55Package to achieve climate neutrality by 2050 across the economy and throughout value chains. The “Fit for 55” Package will only indirectly apply to some non-EU value chains of EU companies through the Carbon Border Adjustment Mechanism (CBAM) 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 (ETS). In Norway the ETS is incorporated into Annex 20 of the EEA Agreement – however, it is a more complicated legal assessment whether CBAM would be considered EEA-relevant or Norway will be regulated as a third country.

As a concluding remark, we increasingly see that the financial, climate, energy and social rights regulations are approached by the EU holistically. The different proposals will be discussed and negotiated with the European Parliament and the Council. For the reporting it is to take note that the CSRD was proposed on 21 April last year, but it is still under negotiations, and the negotiations for the Directive on Corporate Due Diligence has just started since this proposal was launched on 23 February 2022.

Meanwhile, the Disclosure Delegated act has put on the Green Traffic Light and it is time to report and drive that emission free car and industry into the Green Lane.

 

[1] Directive 2014/95/EU amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups (OJ L 330, 15.11.2014, p. 1–9). The NFRD is an amendment of the Accounting Directive, i.e. of Directive 2013/34/EU on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC

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