How New CSRD Reporting Rules Could Impact Companies in Mexico

The Corporate Sustainability Reporting Directive (CSRD) was created to strengthen sustainability reporting by requiring companies inside and outside the European Union (EU) to report transparent and comparable information. The CSRD is part of the "European Green Deal," a set of political initiatives designed to lay the foundations for an ecological transition in the EU and make the region climate neutral by 2050.

The Directive requires multinationals with business in the EU to publicly disclose ESG information, including the impact of their activities on the environment and people, as well as governance matters and the climate-related risks they are exposed to. According to the European Commission, it is expected that approximately 49,000 EU companies will be required to report sustainability information in future, compared to the 11,600 companies currently obligated.

Why is CSRD relevant for Latin American companies abroad and in Mexico? 

This requirement will not only affect European organizations. Non-EU companies, even those with parent companies abroad, with substantial activity in the EU and a turnover of more than€150 million will have to comply.  Therefore, companies should assess whether any of their subsidiaries and/or their entire consolidated group will become subject to the CSRD requirements and begin reviewing the European Commission draft disclosure standards by the European Financial Reporting Advisory Group (EFRAG) to plan for compliance.

Given the close commercial relationship between Mexico and the EU, the Directive is a significant piece of emerging international regulation. Trade between Mexico and the European Union in 2022 amounted to US$85.8 billion with Germany, Spain, and Belgium as the main export markets. Before COVID-19, 66% of Mexican exports to the EU were manufactured goods: vehicles, machinery, household appliances, mineral products, and optical and photographic instruments.

What are the requirements? 

• Detailed annual reporting on environmental, social, and governance (ESG) performance, based on common criteria in line with the EU’s climate goals.

• Obtain external and independent assurance on these reports, to ensure that the sustainability information is reliable.

• Disclose material sustainability topics and their impact from an environmental and financial perspective, also known as the double materiality principle.

• Develop and report on plans to align business models and strategies with the objective of limiting global warming to 1.5°C and the Paris Agreement.

• Measure and report qualitative and quantitative data and metrics, including emissions, throughout the value chain, in short-, medium- and long-term time horizons.

• Guarantee digital access to said sustainability information.

What is the timeline for implementation?

According to the European Parliament, the rules will start applying between 2024 and 2028, depending on the type of company, as follows:

What can companies do to comply with CSRD and other emerging regulations? 

A 2023 EY Survey found that 58% of national and multinational companies in Latin America have a sustainability strategy, but only half of them report on their ESG performance. Additionally, 55% of companies are unaware of the impact of their products beyond production, and only 43% of companies extend their ESG policies to their value chain. With emerging policies like the CSRD, it is expected that more companies will begin to focus on their ESG performance.

To comply with these regulations, companies should embed their strategies in their purpose, emphasizing long-term sustainable impact creation. This will help them to obtain benefits, disclose information, and provide value for their stakeholders. Companies should prepare for CSRD and new ESG-related regulations by getting familiar with these requirements, carrying out a gap analysis of their current state, and conducting a double materiality assessment. They should then develop a comprehensive roadmap with strategy, goals, and KPIs leading to a compliant integrated report.

In addition, companies should address their impact along their value chain, as the CSRD expects them to identify and account for their environmental and social impact beyond their own operations and calculate scope 3 emissions. Companies can adopt strategies that permeate the value chain, such as expanding existing sustainability goals beyond direct operations, aligning resources, structures, and processes with commercial partners, and applying sustainability criteria when making purchasing decisions or choosing providers.

The World Economic Forum (WEF) emphasizes that addressing scope 3 emissions is fundamental for companies' credibility regarding their climate change commitments, as the volume of emissions from value chains is several times higher than those of direct operations. The eight supply chains that contribute the most to global emissions are food, construction, fashion, consumer goods, electronics, automotive, professional services, and freight.

To meet stakeholder expectations, global reporting standards, and assurance scrutiny of sustainability disclosures, it is crucial for companies to get ahead of emerging global reporting standards and drive up ESG data quality. As sustainability standards and regulatory requirements continue to evolve, EY helps companies respond to these emerging policies by supporting them in creating their ESG strategies, identifying gaps against reporting frameworks, providing assurance, managing their supply chain ESG performance through innovative digital tools, and supporting the reporting of nonfinancial performance risks to their stakeholders.