Corporate Sustainability Reporting Directive

Publication date: March 10, 2023

On 5 January 2023 the Corporate Sustainability Reporting Directive (CSRD) entered into force. In the framework of European green deal and ESG initiatives, this new directive tries to modernize and strengthen the rules about social and environmental information that companies have to report. A broader set of large companies, as well as listed SMEs, will now be required to report on sustainability – approximately 50.000 companies in total. By the previous regulation, the Non-Financial Reporting Directive, only about 11.000 companies were required to report. A consultation carried out by the Commission found that many stakeholders were in favour of extending reporting requirements to additional categories of companies.

The CSRD significantly expands on the requirements of the NFRD while revises sections of a number of EU statues, including the Accounting Directive (Directive 2013/34/EU), to extend the ESG disclosures required of some companies in the EU. Starting with the scope, the following articles are amended:

• Article 19a: Sustainability reporting. “Large undertakings, and small and medium-sized undertakings, except micro undertakings, which are public-interest entities shall include in the management report information”. Both are defined in the amended directive in article 2:

Public interest undertaking includes EU companies that are either listed on a regulated EU stock market; or a specific form of financial services company; or have been specifically designated a public interest entity by their country of incorporation.

Large undertaking is a EU company that fulfills two of these three criteria: balance sheet total of €20 million; net turnover of €40 million; or average number of employees of 250.

• Article 29a: Consolidated sustainability reporting. “Parent undertakings of a large group as referred to in Article 3(7) shall include in the consolidated management report information necessary to understand the group’s impacts on sustainability matters, and information necessary to understand how sustainability matters affect the group’s development, performance and position”, in other words, this means that, as defined in article 2, the groups of EU parent and subsidiary companies that meet the size thresholds for large undertakings are obligated to do the reporting.
• Article 40a: Sustainability reports concerning third-country undertakings. “A Member State shall require that a subsidiary undertaking established in its territory whose ultimate parent undertaking is governed by the law of a third country publish and make accessible a sustainability report covering the information specified in points (a)(iii) to (a)(v), points (b) to (f) and, where appropriate, point (h) of Article 29a(2) at the group level of that ultimate third-country parent undertaking”, corporations with their ultimate parent companies outside the EU, but with a significant presence in the EU, a net turnover within the EU of €150 million for two consecutive financial years and have or a branch in the EU that generated €40 million net turnover in the previous financial year or an EU subsidiary that meets the thresholds under article 19a of the CSRD; may be required to issue CSRD-aligned reports in relation to the whole global group, including in relation to non-EI group companies that themselves have no business in the EU. If the non-EU ultimate parent company does not give the report, the EU subsidiary must report the information they have access to.

Companies subject to the CSRD will have to report according to European Sustainability Reporting Standards (ESRS). The draft standards are developed by the EFRAG, previously known as the European Financial Reporting Advisory Group, an independent body gathering various stakeholders. The standards will be tailored to EU policies, while building on and contributing to international standardisation initiatives. The Commission should adopt the first set of standards by mid-2023, based on the draft standards published by EFRAGEN in November 2022.

The EFRAG has produced twelve ESRS for now. Two of them are Cross cutting ESRS and ten are focused-topic ESRS, five environmental (climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy), four social (own workforce, workers in the value chain, affected communities, consumers and end-users) and one governance (business conduct). The cross-cutting standards set out general provisions applying to sustainability reporting and sustainability disclosure requirements; the focused-topic on the other side set out disclosure requirements relating to sustainability impacts, risks, and opportunities that are deemed to be material for all undertakings, regardless of the sectors the operate in.

The CSRD also makes it mandatory for companies to have an audit of the sustainability information that they report. In addition, it provides for the digitalisation of sustainability information. From 2025, an independent third party must provide limited assurance as to the compliance of an in-scope entity’s reporting with the requirements of the CSRD according to the ESRS.

A key element of the CSRD is that it concerns in two dimensions: impact materiality and financial materiality. This means that it is intended to extend the boundaries of materiality beyond those issues that will have a material impact on a company’s income statement, but also to include those issues where the company is having a material impact on society in a way that may not have a direct impact on the company’s income statement. Notably, this will cause differences in risk assessment processes with other reporting requirements the company may adhere to, including requirements under the United States, which do not apply this double materiality approach.

Other essential elements of CSRD is the reporting requirements to include the broader value chain. Therefore, reporting companies should disclose information on material impacts, risks and opportunities related to the in-scope entity through their direct and indirect business relationships in the up and/or down value chain. The directive only require to report the relation that are considered material. For this reason, many companies that wouldn’t be in the scope of the CSRD will be included in the reports of major companies.

Because of the great change on the way of reporting, the EU authorities have prepared a timeline for a gradual implementation. The first companies will have to apply the new rules for the first time in financial year 2024, for reports published in 2025. Large EU companies and parents of large EU groups not subject to NFRD (previous normative) will have to apply in financial year 2025, for reports published in 2026. SME public interest entities in financial year 2026 for report next year. Global group reporting requirements in financial year 2028 to report in 2029.

The new rules will ensure that investors and other stakeholders have access to the information they need to assess investment risks arising from climate change and other sustainability issues. They will also create a culture of transparency about the impact of companies on people and the environment. Finally, reporting costs will be reduced for companies over the medium to long term by harmonising the information to be provided.

It is now up to the member states to transpose this European directive into their national legislation. This is important because the directive serves as a minimum framework. Each state can set more detailed requirements within the reports, or set shorter deadlines, as well as change other small details to better adapt it to their legal structure and business environment. However, the possible changes will certainly not prevent the reports from being pluggable, i.e. if a company has economic activity in several member states, the reports will be excessively different in the data they collect. Therefore, the reports will be similar in all EU countries.