On 5 January 2023 the Corporate Sustainability Reporting Directive (“
CSRD”) entered into force. The CSRD obligates companies within its scope (publicly listed companies and other large companies in the near future) (
link) to report on specific aspects regarding environment, social and governance (“
ESG”) related issues. The European Sustainability Reporting Standards (“
ESRS”) provide an extensive framework and methodology for reporting. This means more specifically that the CSRD creates the legal obligation to report on sustainability issues and the ESRS describe all the information those reports need to contain.
The sustainability report must not only contain information necessary to understand the impact of the business on sustainability matters, but also how sustainability matters affect the development, performance and position of the business. This is called double materiality.
The European framework of sustainability reporting is extensive, complex and challenging. However, failing to meet the reporting requirements can result in criminal liability, which has drastic consequences for (you and) your company. In this blog we explain i) how the CSRD is implemented in Dutch (criminal) law, ii) criminal enforcement of ESG legislation through the Dutch Criminal Code (greenwashing and money laundering) and iii) the consequences for your company and its management.
Legal basis: article 2:391a of the Dutch Civil Code
The CSRD is a European directive which means that EU member states must transpose the CSRD rules into national law. In the Netherlands, this is achieved through several legislative implementation instruments.
First of all, the Dutch legislator created a legal basis to implement the CSRD at a later stage through article 2:391a, paragraph 2 of the Dutch Civil Code (
in Dutch: Burgerlijk Wetboek, “BW”) via the Implementation Act Directive on disclosure of Income Tax. This provision entered into force on 30 December 2023 and provides a legal basis for establishing rules by governmental decree (
in Dutch: Algemene Maatregel van Bestuur) to implement binding EU legal acts covering certain undertakings’ obligations to include information in the management report. In other words: article 2:391a(2) BW makes it possible to implement the CSRD through a governmental decree in Dutch laws and regulations, but it does not implement the CSRD directly.
Secondly, the Dutch legislator introduced the proposal for the Directive on sustainability reporting (Implementation) Act (“
Proposal”). The part of this proposal that is relevant for this blog is the amendment of the Economic Offences Act, which will be explained in the next paragraphs.
Finally, since article 2:391a(2) BW in itself does not create the obligation to meet the requirements of the CSRD, a governmental decree is needed. The relevant governmental degree, is the Implementation Decree for the Sustainability Reporting Directive (“
Decree”). This Decree provides (detailed) sustainability reporting requirements for companies in accordance with the CSRD and the ESRS. However, this Decree has not yet entered into force.
Criminal enforcement of the reporting requirements
As explained in the previous paragraph, the Dutch legal basis for sustainability reporting according to the CSRD is (or is going to be) article 2:391a(2) BW in conjunction with the Decree. Pursuant to this legal basis, a company in the Netherlands is (or is going to be) required to fulfil the sustainability reporting requirements and has to include the sustainability information into the annual report of the company.
The CSRD itself does not include specific sanctions for violating the sustainability reporting requirements. It is up to the member states to determine the consequences of non-compliance with the reporting requirements. The Dutch legislator has chosen to classify a violation of article 2:391a(2) BW as an economic offence under the Economic Offences Act (
in Dutch: Wet op de Economische Delicten). This means that non-compliance with the reporting obligations under the CSRD can be enforced under Dutch criminal law.
The criminal enforcement of the reporting in the annual report regards the non-compliance with the requirement of
disclosure of the sustainability information. For greater clarity, the Proposal includes an addition to the text of the article 1 under 4 of the Economic Offences Act. According to the proposal “391a, paragraph 2” will be replaced by “391a, paragraph 2,
as far as it concerns disclosure”. Does this mean that companies cannot be held criminally liable for providing incorrect reports?
Greenwashing
The answer is no. It appears to be a mitigating factor that the criminalization of non-compliance with sustainability reporting requirements pertains solely the disclosure of sustainability information. However, this is not the case. Companies that include false or incorrect sustainability information in the annual report may not be held criminal liable under the Economic Offences Act, but they can be held criminally liable under the Dutch Criminal Code.
Providing false sustainability information in the annual report may constitute ‘greenwashing’. In short, greenwashing means that a company provides information on for instance environmental, social and government aspects that is false and misleading. In this context, the company presents itself in the annual report as more sustainable than it actually is. As a result, providing incorrect sustainability information (in the annual report) may fall within the scope of forgery of documents (article 225 of the Dutch Criminal Code), fraud (article 326 of the Dutch Criminal Code) and fraud with regard to annual report and/or financial statements (article 336 of the Dutch Criminal Code).
Therefore, if companies or its management provide incorrect and misleading information in sustainability reports, they may be subject to enforcement under criminal law, albeit on a different legal basis. This indicates the various possibilities available for addressing violations of sustainability reporting requirements through criminal law.
Money laundering and ESG
However, in addition to the above, another possibility for the criminal enforcement of ESG legislation is through the anti-money laundering provisions. The Dutch Criminal Code criminalizes money laundering. Money laundering refers to the execution of transactions designed to give the appearance of legal origin to funds derived from criminal activities. It is relevant that the money derived from a crime. A minor offence is insufficient.
Under certain conditions, ESG related offences may fall within the scope of the money laundering provisions of the Dutch Criminal Code. This implies that, if the violation of ESG legislation qualifies as a crime, it can be considered a basic offence for money laundering, as the funds obtained from non-compliance with ESG legislation, such as reporting requirements, might effectively be ‘laundered’ by the company.
Is criminal enforcement of ESG legislation desirable?
As previously outlined, failure to comply with the sustainability reporting requirements can lead to several, serious criminal offences. Since the reporting requirements are extensive and challenging, criminal liability lies in wait. Question is if this is desirable and if criminal law is the appropriate instrument to enforce ESG legislation.
The provision of the Dutch Civil Code as mentioned above are vague, open and contain new obligations. Therefore, it is difficult for companies to ensure compliance with all provisions, especially when expectations remain unclear. To start with article 2:391a(2) BW, this article from the Dutch Civil Code is criminalized in the Economic Offences Act. That would not, in itself, be a problem. However, article 2:391a(2) BW does not specify the reporting requirements, but refers to a governmental decree. This means that companies themselves need to find out what governmental decree is applicable. In this case, it is the Decree. The Decree specifies the applicable reporting requirements (in line with the CSRD and the ESRS).
Does this system align with the criteria for criminalization? This, however, is open to doubt. One of these criteria is the legality principle. The legality principle requires that an offence is
clearly and precisely defined in a preceding legal provision. As explained before, this provision is vague and open and the underlying system of subordinate legislation is complex, which results in a lack of clarity.
Moreover, the retrospective proportionality principle lays down that the sanctions need to be in relation to the gravity of the offence. This principle ensures at the same time that similar offences are assigned similar sanctions. When comparing the sanctions that may be imposed when violating articles 225, 326 and 336 of the Dutch Criminal Code to the sanction(s) that may be imposed when violating article 1 under 4 of the Economic Offences Act (imprisonment for a term not exceeding 2 years or a fine of the fourth category), we observe that the discrepancy is significant. The maximum sanctions outlined in articles 225, 326 and 336 of the Dutch Criminal Code are considerably higher (imprisonment for a term not exceeding 6 years, or a fine of the fifth category). We should therefore ask ourselves whether ESG violations can and should be sanctioned via the existing articles of the Dutch Criminal Code, since the sentence in these articles is not intended for ESG offences. Would the legislator be of the opinion that these articles are indeed well-suited for ESG offences, the legislation should give this more thought and align sentencing accordingly.
Implementation of ESG legislation in your company is a new, extensive and complex process. The first aim of the legislator is to obtain transparency and make insightful the impact of the company on environment and society with this legislation. While everyone is still learning on the implementation of these processes it may be debatable whether criminal enforcement is (immediately) appropriate. The instrument of criminal enforcement can be an obstacle for the desired transparency, we often experience in our practice. In principle, criminal law needs to be used as an
ultimum remedium, it might therefore be preferable to let companies implement legislation, followed by an evaluation of the implementation. Would this result in signs of calculating violation of standards, regulation within criminal law can be considered. The parliamentary debate does not explain why enforcement within administrative law would not be appropriate.
Consequences for (you and) your company
In principle, the CSRD (and the ESRS) focuses on companies (that can be solely held criminally liable in the Netherlands). However, the criminalization of ESG legislation will also result in a risk for actual directors/the management. It is practice of the Public Prosecution Services that when a company is charged with a criminal offence, it is investigated if any natural persons in the company (most often directors/management) can be made a (criminal) reproach. Also, from a point of view of good employment practices another reason to take ESG legislation serious.
A suspicion (let alone a conviction) can lead to serious (reputational) damages to your company. You can think of the following consequences. The company may not be a desired business party to (local) governments; requests for permits may be denied (and existing permits may be withdrawn). Also, a conviction is a ground for exclusion at tenders, where a suspicion can already form an optional ground for exclusion. We often see that competitors for tenders then object to the company competing for a tender. When there are (alleged) profits of a crime and/or (alleged) saved costs by not taking measures to be compliant with ESG legislation, confiscation of unlawfully obtained gains will be demanded by the Public Prosecutor Services, this in addition to prosecution.
Member States are required to implement deterrent measures with regard to non-compliance with reporting requirements. However, we believe the above shows that criminal enforcement needs to be carefully considered before implemented.
At Taylor Wessing, we have experts ready to support your company and answer your questions. Our assistance is aimed meeting all applicable requirements, avoiding criminal prosecution, and preserving your company’s reputation.
