The Corporate Sustainability Reporting Directive (Directive (EU) 2022/2464) (“CSRD”) that came into effect on the 5th of January 2023 has revised and broadened the reporting requirements previously set out in the Non-Financial Reporting Directive (“NFRD”) by imposing more stringent and transparent reporting requirements on environmental, social and governance (“ESG”) issues on a wide-range of companies operating in the European Union (“EU”).
In comparison with the NFRD, a significantly higher number of companies fall within the scope of sustainability reporting (“in scope”), namely:
- Large undertakings that meet at least two of the following criteria; (i) a balance sheet total of €20 million and/or (ii) net turnover of €40 million and/or (iii) an average of 250 employees during the financial year;
- Non-EU companies that generate an annual net turnover of more than €150 million and have at least 1 subsidiary or branch in the EU; and
- EU companies that are admitted to trading on an EU regulated market (with the exception of micro undertakings).
Companies that fall within said bracket must adhere to the double materiality principle, originally introduced by the NFRD, and are thus obliged to prepare a detailed report on how sustainability issues affect their business and, in turn, how their business affects sustainability. The CSRD makes it mandatory for in scope companies to provide information about their sustainability risk strategies and the plans they have in place vis-à-vis the global warming targets of the Paris Agreement. Additionally, consequent to both the CSRD and the EU’s Corporate Sustainability Due Diligence Directive (“CSDDD”), in scope companies are required to provide a report on the due diligence processes they adopt with respect to sustainability.
Moreover, in scope companies must obtain assurance of the sustainability information disclosed from statutory auditors or independent assurance providers. At first the CSRD requires in scope companies to obtain a limited assurance level, but this is subject to a reasonable assurance level to be eventually required by the year 2028.
In conformity with the Commission Delegated Regulation EU 2019/815 on the European Single Electronic Format (“ESEF Regulation”), the sustainability report must be prepared in a single electronic format. One is to also note that when the consolidated report of a parent undertaking covers its subsidiary undertaking, the latter shall be considered exempt from the reporting requirements imposed by the CSRD.
Furthermore, given the CSRD’s aim to harmonise sustainability reporting across companies, such reporting shall be in line with the EU Sustainability Reporting Standards (“ESRS”) that the European Financial Reporting Advisory Group (“EFRAG”) is developing. The ESRS includes a comprehensive range of ESG issues, such as climate change pollution, value chain workers, consumers and governance of business conduct. In November of 2022, the EFRAG delivered its first set of draft ESRS to the European Commission, and is expected to submit the second set by June of 2024. All drafts will be reviewed prior to being adopted by the European Commission.
Whilst Member States have until July 2024 to transpose the CSRD provisions into national law, the new reporting requirements will be phased in over time for different types of companies per the following timeline:-
- For European public interest companies and non-European companies that meet the NFRD thresholds and which have more than 500 employees, a turnover that exceeds €40 million and/or a balance sheet that exceeds €20 million – first report is to be prepared in 2025, covering financial year 2024;
- For other large European and non-European companies that meet at least two of the following; (i) more than 250 employees (ii) a turnover that exceeds €40 million (iii) a balance sheets that exceeds €20 million – first report is to be prepared in 2026, covering financial year 2025;
- For European and non-European SMEs that are listed in the EU regulated market – first report is to be prepared in 2027 covering financial year 2026, subject to a 2 year transitional period during which SMEs may opt out from CSRD reporting requirements;
- For other large non-European groups with a European turnover that exceeds €150 million and with a branch or subsidiary based in the EU – first report is to be prepared in 2029, covering the financial year 2028.
Finally, whilst the CSRD does not lay down sanctioning measures on in scope companies’ non-compliance, it does provide that effective penalties and procedures related to infringements should be enacted by Member States.
The CSRD has significantly extended the scope of sustainability reporting requirements that were previously in place, and the number of companies captured by the scope of CSRD has increased. That said, it is vital for all businesses to which the CSRD applies to consider the implications of the CSRD and to develop standards that ensure their compliance with the requirements that will eventually be transposed into national law.
Disclaimer: The above is not intended as legal advice. Anyone requiring assistance is encouraged to contact us directly.