The Corporate Sustainability Reporting Directive (CSRD) enters into force: a short guide

27th December 2022

The Corporate Sustainability Reporting Directive (CSRD) is finally ready to enter into force – after being adopted by the European Parliament and Council of the European Union and published in the Official Journal of the European Union on December 16th, 2022. As of January 5th, 2023, the CSRD is becoming a reality, promoting transparency and accountability through the requirement for companies to report on their environmental, social, and governance (ESG) performance.

But what the Corporate Sustainability Reporting Directive is?

The CSRD is an improved and stricter version of the Non-Financial Reporting Directive (NFRD), which has been in effect since 2018.

Indeed, the CSRD is only one component of the wider EU’s sustainable finance framework, which also includes the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy regulation, requiring both companies and financial institutions to report on sustainable investments and their economic activities.

As mentioned in one of our previous articles on the CSRD, the mandatory reporting requirements will affect a much broader percentage of companies than it was for the NFRD. Furthermore, it’s important to note that these regulatory changes have far-reaching implications for businesses worldwide. In fact, in this case, even companies outside of Europe will be subject to the new rules.

 If today only “public interest” entities such as banks, insurance companies, and large companies with over 500 employees are subject to the reporting requirements under the Non-Financial Reporting Directive. However, the CSRD will significantly increase the number of companies involved, with an estimated 50,000 companies expected to be affected.

Who are precisely the companies that will be affected by the CSRD?

  • All “listed” companies offering securities on an EU index (except for “micro-enterprises”);
  • All “large” companies, meaning those that meet at least two of three criteria: (i) a balance sheet of €20 million, (ii) net turnover of €40 million, and (iii) 250 employees or more on average during the year – parent undertakings of “large groups” that meet two of these criteria on a consolidated basis also qualify; and
  • Non-EU companies, referred to as “third-country undertakings,” with significant operations in the EU. “Significant operations” means generating a net turnover of at least €150 million in the EU and either having an EU subsidiary that is listed on an EU-regulated index or is considered “large” under the above criteria, or having an EU branch generating an annual net turnover of €40 million in the previous year.

These categories also show that companies based outside the EU with European operations will need to comply with the Corporate Sustainability Reporting Directive.

Subsidiary undertakings will be exempt from the reporting requirements of the CSRD if they are included in the consolidated reporting of a parent undertaking that meets the CSRD’s reporting requirements. This exemption applies to both subsidiaries of EU parent undertakings and subsidiaries included in the consolidated sustainability reporting of a parent undertaking established outside of the EU.

What are the new sustainability reporting requirements?

The NFRD was adopted in 2014 as an amendment to the Accounting Directive to improve the disclosure of non-financial information by large listed companies, banks, and insurance companies. 

NFRD was considered a significant step forward compared to the Account Directive, but still, its application was restricted to a relatively limited number of large companies. In fact, under the NFRD, only “public interest entities” – large listed companies, banks, and insurance companies with more than 500 employees – were required to publish reports disclosing policies about sustainability, social responsibility, respect for human rights, etc.

What is the Corporate Sustainability Reporting Directive (CSRD)?

The NFRD currently has a ‘double materiality perspective’, meaning that companies must report how sustainability issues affect their business and their impact on people and the environment.

Companies within the scope of CSRD will have to report on a whole range of sustainability issues relevant to the company’s business. Sustainability information will cover both environmental and social, and governance factors.

Social factors will include:

  • Equal treatment and opportunities for all, including gender equality and equal pay for work of equal value, training and skills development, the employment and inclusion of people with disabilities, measures against violence and harassment in the workplace, and diversity;
  • Working conditions, including secure employment, working time, adequate wages, social dialogue, freedom of association, the existence of work councils, collective bargaining, including the rate of workers covered by collective agreements, the information, consultation, and participation rights of workers, work-life balance and health and safety;
  • Respect for the human rights, fundamental freedoms, democratic principles, and standards established in the International Bill of Human Rights and other core UN human rights conventions, including the UN Convention on Persons with Disabilities, the UN Declaration on the Rights of Indigenous Peoples, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work and the ILO fundamental conventions, the European Convention of Human Rights, the revised European Social Charter, and the Charter of Fundamental Rights of the European Union.

Governance factors will include:

  • The role of the undertaking’s administrative, management, and supervisory bodies concerning sustainability matters, their composition, and their expertise and skills to fulfill this role or access to such expertise and skills;
  • Information about any incentive schemes offered to members of the administrative, management, and supervisory bodies which are linked to sustainability matters;
  • Business ethics and corporate culture, including anti-corruption and anti-bribery, the protection of whistle-blowers, and animal welfare;
  • The undertaking’s engagement to exert its political influence, including its lobbying activities;
  • The management and quality of relationships with customers, suppliers, and communities affected by the undertaking’s activities, including payment practices, especially with regard to late payment to SMEs; 
  • Main features of the undertaking’s internal control and risk management systems in relation to the sustainability reporting process.

What are the new reporting standards?

  • Uniform Reporting Standards. The CSRD will impose a uniform, comprehensive reporting standard applicable across the EU under the forthcoming European Sustainability Reporting Standards (ESRS). The ESRS, which is still under development by the European Financial Reporting Advisory Group (EFRAG), will make necessary the disclosure of numerous metrics across the ESG pillars, such as: a. Energy and emissions data, water use, climate-related risk management strategies, circular economy, pollution, and biodiversity under the “E”; b. Working conditions, diversity, inclusion, and human rights under the “S”; c. Business risk, strategy, and board oversight over sustainability information under the “G”.
  • Double Materiality. Under the CSRD, subject companies must report according to a “double materiality” perspective, wherein it’s required to consider not just the material impacts of ESG factors on the organization but also the organization’s impacts on the environment and social systems. In this case, it’s possible to note a clear difference with the US Securities and Exchange Commission’s climate reporting proposed rule, which embraces a “single materiality” perspective that would require disclosure only of climate-related impacts to the reporting entity.
  • Third-Party Assurance. The CSRD will impose a third-party assurance, or audit, obligation on reporting entities, requiring reporting to be certified by an accredited independent auditor. Only “limited” assurance will be needed to start, but there’s the possibility of a new “reasonable” assurance standard to be developed by 2028 (still to be understood if it’s something feasible).
  • Reporting Mechanics. The CSRD requires that companies report ESG metrics in a dedicated section of the broader company management report and not in a separate sustainability report, thus blending the sustainability and other financial reporting into a single document. Also, companies must digitally tag sustainability information to allow the EU to maintain a singular, uniform database of CSRD disclosures, furthering the goal of increasing transparency and accessibility of sustainability disclosures.

Timeline of the CSRD: a phased approach to implementation

The CSRD’s implementation will gradually affect different categories of companies from year to year, starting in 2024. Companies will become subject to the reporting requirements along a staggered timeline:

January 1st, 2024

  • It will impact large EU’ public interest entities’ already subject to the NFRD, plus large, listed companies with 500 or more employees. The reporting will be due from 2025 for financial years starting on or after January 1st, 2024.

January 1st, 2025

It will affect large undertakings, currently not subject to the NFRD, satisfying two of the following criteria (either as a single entity or on a consolidated group basis):

  • Balance sheet total of EUR 20 million;
  • Net turnover of EUR 40 million; and/or
  • An average of 250 employees during the financial year.

*Reporting due from 2026 for financial years starting on or after January 1st, 2025.

January 1st, 2026

EU small and medium-sized undertakings (“SMEs”) listed on EU-regulated markets (and which are not micro-undertakings), as well as small and non-complex credit institutions and captive insurance undertakings. Must have securities listed on a regulated EU market and meet two of the following criteria:

  • Balance sheet total: EUR 4 million;
  • Net turnover: EUR 8 million; and/or
  • An average of 50 employees during the financial year.

*Reporting due from 2027 for financial years starting on or after January 1st, 2026.

January 1st, 2028

Non-EU companies with:

  • Net turnover of EUR 150 million in the EU for each of the last two consecutive financial years; and
  • At least one subsidiary or branch in the EU which:
  • For a subsidiary: meets the criteria for categories (2) or (3) above; and
  • For a branch: a turnover of more than EUR 40 million.

*Reporting due from 2029 for financial years starting on or after January 1st, 2028.

When will the CSRD come into force and when will it be adopted?

Now that it has been formally approved, the CSRD will be signed and published in the Official Journal of the EU and will enter into force on January 5th, 2023.

EU Member States will then have 18 months to transpose the CSRD into their respective national laws. More details on what the mandatory reporting standards will look like will become more evident over the coming months as the EU considers adopting a delegated act setting forth ESRS (European Sustainability Reporting Standards) by June 30th, 2023, and a second, sector-specific set of ESRS by June 30th, 2024.

How does this fit with the SFDR and Taxonomy Regulation?

SFDR or Sustainable Finance Disclosure Regulation

The SFDR establishes guidelines for financial market participants, such as asset managers and financial advisers, to disclose sustainability information to end investors and asset owners. In order to fulfill these reporting requirements, financial market participants rely on adequate sustainability information from the companies in which they invest. The CSRD, or Corporate Sustainability Reporting Directive, aims to ensure that these investee companies provide the necessary information to financial market participants so that they can meet their SFDR obligations.

Taxonomy Regulation

The Taxonomy Regulation establishes the framework for the EU taxonomy by setting out four conditions that economic activities must meet to qualify as ‘environmentally sustainable’. Additionally, the Taxonomy Regulation requires companies that fall within the scope of the Non-Financial Reporting Directive (NFRD) to disclose information about the environmental sustainability of their activities, as determined by the EU taxonomy. This helps to promote transparency and accountability in the business sector and encourages companies to adopt more sustainable practices.

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