ESG and Sustainability Reporting

CSRD: Corporate Sustainability Reporting Directive

Directive (EU) 2022/2464 on corporate sustainability reporting (CSRD) replaces the previous NFRD and dramatically expands non-financial reporting obligations. Its transposition into Spanish law will proceed progressively between 2024 and 2028.

Scope (phased)

• From 2024 (reports on FY 2024): large public-interest entities with over 500 employees (already subject to NFRD).
• From 2025: other large companies (two of three criteria: balance > 25 M euros, turnover > 50 M euros, > 250 employees).
• From 2026: listed SMEs (with opt-out possibility until 2028).
• From 2028: subsidiaries and branches of third-country companies with net EU turnover exceeding 150 M euros.

Mandatory Content

The sustainability report must be integrated into the management report (not a separate document) and cover:

• Environmental information (climate change, pollution, water, biodiversity, circular economy).
• Social information (working conditions, equality, human rights in the value chain).
• Governance information (business ethics, anti-corruption, risk management).

EU Taxonomy

Regulation (EU) 2020/852 establishes a unified classification system determining which economic activities can be considered "environmentally sustainable." The taxonomy defines six environmental objectives:

1. Climate change mitigation.
2. Climate change adaptation.
3. Sustainable use of water and marine resources.
4. Transition to a circular economy.
5. Pollution prevention and control.
6. Protection of biodiversity and ecosystems.

For an activity to be taxonomy-aligned, it must substantially contribute to at least one objective, cause no significant harm (DNSH) to the others, and comply with minimum social safeguards.

Relevance for lawyers: financial entities and large companies must report the percentage of their activities aligned with the taxonomy. Incorrect advice on classification can generate liability for greenwashing.

Double Materiality

The CSRD introduces the concept of double materiality, central to ESG reporting:

• Impact materiality (inside-out): how the company's activities affect the environment and society.
• Financial materiality (outside-in): how sustainability factors affect the company's financial position.

A matter is material if it is relevant from either perspective. The lawyer must verify that the materiality analysis covers both dimensions, as it forms the foundation of the entire sustainability report.

ESRS: European Sustainability Reporting Standards

The ESRS are the technical standards implementing the CSRD. Approved by the European Commission (Delegated Regulation 2023/2772), they include:

• ESRS 1: general requirements (principles, scope, digital XBRL format).
• ESRS 2: general disclosures (governance, strategy, impact management).
• ESRS E1 to E5: environmental standards (climate, pollution, water, biodiversity, circular economy).
• ESRS S1 to S4: social standards (own workforce, value chain workers, affected communities, consumers).
• ESRS G1: governance (business conduct).

Reports must be auditable with a limited assurance level (initially), evolving toward reasonable assurance.

Supply Chain Due Diligence (CS3D)

Directive (EU) 2024/1760 on corporate sustainability due diligence (known as CS3D or CSDDD) requires large companies to identify, prevent, mitigate, and remediate adverse human rights and environmental impacts in their value chain.

Key points:

• Scope: companies with over 1,000 employees and worldwide net turnover exceeding 450 M euros (phased implementation).
• Climate transition plan: subject companies must adopt a plan aligned with limiting global warming to 1.5 degrees.
• Civil liability: affected parties can claim before European courts for damages caused by failure of due diligence.
• Sanctions: fines of up to 5% of worldwide net turnover.

Greenwashing and Advertising

Greenwashing is the practice of presenting products, services, or the company itself as more sustainable than they actually are. Directive (EU) 2024/825 (amending the Unfair Commercial Practices Directive) expressly prohibits:

• Generic environmental claims without substantiation ("eco-friendly," "green," "sustainable" without data).
• Displaying sustainability labels not verified by independent third parties.
• Presenting mere legal compliance as an "advantage."

Risk for lawyers: advising a client on ESG communications without verifying the substantiation can generate professional liability if the communication proves misleading.

The Lawyer's Role in ESG

The lawyer specializing in ESG and compliance operates at the intersection of multiple disciplines:

• Legal audit of the sustainability report: verifying that the CSRD report complies with ESRS, the taxonomy, and double materiality.
• ESG due diligence in M&A transactions: assessing the target's sustainability risks (climate litigation, CS3D non-compliance, greenwashing exposure).
• Climate litigation: representation in claims for environmental damage, failure of transition plans, or misleading advertising.
• Regulatory advice: guiding companies through CSRD, taxonomy, CS3D, and greenwashing regulation implementation.
• Contracts and value chain: drafting ESG clauses in contracts with suppliers, partners, and distributors.