New EU directive requires increased corporate transparency on sustainability

The European Union has approved a new directive establishing stricter corporate sustainability reporting requirements. The new rules, which came into effect on January 1, 2024, aim to align business practices with the goals of the Paris Agreement and the European Green Deal, ensuring greater transparency and standardization in environmental, social, and governance (ESG) matters.

The directive applies to both large companies and small and medium-sized enterprises (SMEs) classified as being of public interest. Only micro-enterprises are exempt from these obligations.

Large companies subject to the directive are those that meet at least two of the following criteria: assets exceeding €20 million, annual turnover above €40 million, or more than 250 employees. SMEs included under these rules are those with fewer than 250 employees, an annual turnover below €50 million, or a total balance sheet of up to €43 million.

Sustainability strategies and emission reduction targets required in reports

Companies must include detailed information in their reports about their business models, sustainability strategies, emission reduction targets, and governance practices. They are also required to assess and disclose the impact of their operations throughout the value chain, including suppliers and partners. To ensure credibility and reliability, independent audits will be mandatory.

Another key aspect of the directive is the requirement to report data on gender equality, pay gaps, inclusion of people with disabilities, and human rights compliance. Companies must also set science-based targets for emission reductions, in line with the Paris Agreement’s goal of limiting global warming to 1.5°C.

Deadlines and transition period

Large companies must submit their first reports in 2025, based on their 2024 financial year. For SMEs of public interest, compliance becomes mandatory in 2026, with the first reports due in 2027.

To ease the transition, a phase-in period between 2024 and 2026 will provide companies with greater flexibility as they adapt their reporting processes.

Directive 2022/2464 is part of a broader package of EU legislative initiatives aimed at promoting sustainability, including the regulation on the eco-design of sustainable products.

For more information, visit this link.

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