Why should I read this?
The European Parliament has adopted the Corporate Sustainability Reporting Directive (CSRD). The CSRD aims to make EU companies more accountable by requiring a greater number of companies to disclose information on environmental, social affairs and governance matters.
The changes will impact large EU companies (both listed and private), as well as certain non-EU companies with substantial activity in the EU. The rules will start to apply between 2024-2028.
As a result, more companies in the EU will have to collect and share sustainability information. Organisations in scope need to plan ahead as to how they will obtain the necessary data to satisfy the new reporting requirements.
What is changing and when?
The CSRD amends a number of existing EU Directives, including the Non-Financial Reporting Directive (NFRD), rather than introducing new standalone requirements.
The revised requirements will apply in the EU broadly as follows:
- From 1 January 2024 to large companies listed on an EU regulated market, banks and insurance companies (referred to as "public-interest entities") with over 500 employees already subject to the NFRD. The 500 employee threshold that currently applies under the NFRD remains for those entities required to report from 1 January 2024.
- From 1 January 2025 to large companies (whether or not they are listed) that are not presently subject to the NFRD. See below for the meaning of a "large" company.
- From 1 January 2026 to listed small and medium-sized enterprises (SMEs) (excluding micro undertakings). SMEs can opt out until 2028, they will report according to simpler standards, and the requirements will not apply to SMEs listed on EU growth markets.
"Large" companies mean those that satisfy any two of the following three criteria: more than 250 employees, a balance sheet of more than EUR 20 million, or a net turnover of more than EUR 40 million. Many financial services companies will fall within the definition of a large company.
Extra-territorial effect
CSRD will have extra-territorial effect, as it will apply to non-EU companies that generate a net turnover of more than EUR 150 million in the EU and which have a subsidiary or a branch in the EU which meets the specified criteria noted below. The in-scope subsidiaries or branches of such undertakings will have to publish a sustainability report at the level of the third-country parent undertaking.
This will be relevant where the EU subsidiary is a large undertaking or an SME (except micro undertakings) listed on an EU regulated market, or the branch located in the EU generated a net turnover of more than EUR 40 million in the previous financial year. The extra-territoriality requirements apply from 1 January 2028.
Non-EU companies that generate a net turnover in excess of EUR 150 million in the EU but do not have a branch or a subsidiary there will not be within scope; however, the Commission has raised the possibility of extending the CSRD to such companies.
What information will in-scope companies need to report?
As with reporting under the NFRD, Companies required to report under the CSRD will have to report about the risks arising from sustainability issues and about their own impacts on people and the environment. This will include not only information regarding the environmental impact of significant aspects of the business but also social measures, such as safeguarding human rights in companies' global supply chains, including issues such as forced and child labour.
Mandatory EU sustainability reporting standards will be set by the European Commission, with simpler standards for SMEs. It is likely that reporting standards will take account of global initiatives, such as the draft IFRS Sustainability Disclosure Standards published by the International Sustainability Standards Board. There are also requirements for assurance (audit) of reported sustainability information on a limited basis initially, as well as for "digital tagging" in a digital, machine-readable format.
Action required
The Council of the EU is expected to adopt the proposal on 28 November. The Directive will be published in the EU Official Journal, and will enter into force 20 days thereafter.
Although the reporting standards are still to be developed, and the reporting requirements will be phased in from 2024 (to apply to annual reports published from 2025), companies that will be within the extended scope of the CSRD should begin to consider and familiarise themselves with the reporting requirements and consider how they will address these. This will include determining responsibility for collating and monitoring a broad range of information involving finance, legal and HR teams.
New EU Corporate Sustainability Reporting Directive To Take Effect From 2024
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