On 28 November 2022, the European Council approved the adoption of the CSRD. The CSRD requires businesses to report and disclose information on their societal and environmental impact and external sustainability factors affecting their business.

The move from "non-financial disclosures" to "sustainability" disclosures represents a significant shift by the EU towards a sustainable economy with increased corporate accountability and places financial and sustainability reporting on an equal footing.

The CSRD amends the existing Non-Financial Reporting Directive (2014/95/EU) and introduces mandatory sustainability reporting standards including qualitative and quantitative information on environmental, social and governance matters. A summary of the key changes is set out below.

Summary of key changes

Requirement CSRD
Scope - EU Companies

Covers EU Companies which are:

a) Listed on a regulated market in the EU; or

b) A "large company" (listed or non-listed) which has at least two of the following:

  • a turnover of above €40 million;
  • a balance sheet total of over €20 million;
  • an average number of over 250 employees per year.
Scope – Non-EU Companies

Extends to Non-EU Companies which have the following criteria:

a) a turnover of over €150 million in the EU and;

b) a subsidiary (which is a large or listed subsidiary) or a branch (with net turnover of €40 million) in the EU.
Reporting Requirements

Information must be clearly identifiable in a section of the management report and will cover sustainability matters including:

  • The company's business model and strategy, noting resilience to risks and opportunities.
  • The plans of the company group to limit global warming to 1.5 °C in accordance with the Paris Agreement and achieve climate neutrality by 2050.
  • Relevant policies and roles of administrative, management and supervisory bodies.
Standards

Companies will be required to report on sustainability according to mandatory reporting standards. The European Financial Reporting Advisory Group (EFRAG) are developing a framework of reporting standards which will apply to (i) topics and (ii) sectors.

Topical standards were drafted by EFRAG on 23 November 2022 which cover to the following topics:

  • Environmental: climate change, pollution, water and marine resources, biodiversity and ecosystems and resource use.
  • Social: information on the use of the workforce, diversity and inclusion, communities impacted by business operations.
  • Governance: business conduct internally including for example diversity and company boards, and externally including anti-corruption and bribery.

Sectorial standards will be developed by EFRAG to cover:

  • Global Reporting Initiative (GRI) sectors: agriculture, coal mining, mining, oil and gas (separately for upstream and mid-to downstream);
  • High-impact sectors: energy production, road transport, motor vehicle production, food and beverages, and textiles.

The Commission is expected to adopt the standards in their final form in June 2023 and 2024 respectively.
Auditor's assurance
 Mandatory requirement for review of disclosures and assurance by a statutory auditor or independent assurance services provider that there has been no material misstatement in company's disclosures.
Digital Tagging
 Requirement to prepare annual financial reports in XHTML format and mark sustainability information in financial statements and management reports with a digital 'tag' so that it is machine readable.

Timeline

The CSRD will enter into force 20 days after publication on the EU Official Journal. The provisions will be applicable in stages between 2024 and 2029:

  • Stage 1 - Large public-interest companies within the scope of the NRFD from 1 January 2024, with reports due in 2025.
  • Stage 2 - Large companies not within the scope of the NFRD from 1 January 2025, with reports due in 2026.
  • Stage 3 - Listed SMEs and other undertakings from 1 January 2026, with reports due in 2027. SMEs can opt-out until 2028.
  • Stage 4 - Non-EU companies from 1 January 2028, with reports due in 2029.

Implications

It is estimated that 50,000 companies will be covered by the new rules. Companies will need to assess their reporting strategies in light of the CSRD and develop mechanisms to collect and monitor relevant, verifiable data as well as disclose relevant information in a transparent and efficient manner backed by an independent verification.

The Norton Rose Fulbright Environment team will continue to monitor the CSRD as it gradually comes into force and we will keep a close eye on the accompanying standards as they are developed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.