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Firms risk ‘over-disclosing’ under CSRD rules

Lawyers at Pinsent Masons have warned businesses that they are opening themselves up to potential legal risks through detailed disclosure of their ‘double-materiality‘ assessments (DMAs).

DMAs are required under the EU’s Corporate Sustainability Reporting Directive (CSRD).

The Law Society’s Business Law Committee last year described double materiality as a “novel and far-reaching requirement” under which companies must set out not only how climate change affects them, but also how their operations affect the environment and society.

‘Growing concerns’

Lawyers at Pinsent Masons have reported “growing concerns” from clients about their disclosure obligations after the outcome of “expansive” DMAs.

They say that some businesses’ teams attempting to cope with complex guidance from the European Financial Reporting Advisory Group (EFRAG) have conducted “unwieldy” DMAs that have produced wide-ranging content that, in turn, is posing challenges in terms of public disclosures.

Pinsent Masons’ James Hay, an expert in sustainability reporting, said that CSRD was different from other reporting regimes, such as gender-pay-gap requirements, where disclosure obligations were tightly prescribed.

“The CSRD puts the onus on in-scope companies to themselves determine what is ‘material’ information to disclose in the context of their business,” Hay stated.

“The introduction of ‘double materiality’ is causing many companies to begin reporting on issues not previously considered relevant to their business. While this was an intended aspect of CSRD, many companies previously seeking to err on the side of caution are now at risk of over-disclosing,” he added.

New disclosures

Lawyer Caroline Boon said that enhanced sustainability disclosures, especially in relation to first-time reporting of the DMA, had the potential to attract new legal risks.

Pinsent Masons’ Michael Fletcher also warned of litigation risks that could arise as a result of new disclosures that shareholders or other readers were not familiar with, nor expecting.

He said that the DMA process could cause companies to identify potential human-rights impacts in supply chains and declare these ‘material’, in contrast to their previous communications on the topic.

“It should be assumed that, with ESG-related litigation on the rise, there will be third parties scrutinising such reporting looking for disclosures that can give rise to claims,” Fletcher said.

‘Boilerplate’ warning

Hay urged firms to design a DMA process that reflected the nature of the business and balanced legal and reputational risks with disclosure obligations.

He warned that boilerplate DMAs or “strict adherence to industry-agnostic guidance”  were unlikely to faithfully represent a company’s sustainability profile, and could identify issues that were “remote” from its business.

The EU is expected to announce measures aimed at simplifying reporting requirements for businesses later this month.