The European Council gave its final approval to the Corporate Sustainability Reporting Directive (CSRD).
As a result, companies based in Europe will soon be required to publish detailed information on sustainability matters. More specifically, companies will be required to report on how their business model affects their sustainability, and on how external sustainability factors (such as climate change or human right issues) influence their activities.
The CSRD strengthens the existing rules on non-financial reporting which were introduced in the Non-Financial Reporting Directive (NFRD) back in 2014.
The CSRD introduces more detailed reporting requirements and ensures that large companies and listed SMEs are required to report on sustainability matters linked to the following three pillars: Environmental, Social and Governance.
The new rules will apply to all large companies and to all companies listed on regulated markets, except listed micro undertakings. These companies are also responsible for assessing the information applicable to their subsidiaries.
The rules also extend to listed SMEs. An opt-out will be possible for listed SMEs during a transitional period, exempting them from the application of the directive until 2028.
The European Financial Reporting Advisory Group (EFRAG) will be responsible for developing draft European standards.
1. Which companies have to apply the CSRD rules?
All listed companies on the EU regulated market (including listed SMEs, but no micro-enterprises)
All large companies exceeding two of the three following criteria:
- 250 employees during the financial year
- Balance sheet total of EUR 20M
Net turnover of EUR 40m
Non-EU companies generating a net turnover of more than EUR 150 million and having a subsidiary in the EU that follow the criteria applicable to EU companies (i.e. being listed on the European market except micro or being within the large company threshold) or a branch in the EU generating more than EUR 40 million net turnover.
Small and non-complex financial institutions as per the Regulation (EU) No 575/2013 Art 4(1), point (145) and captive insurance and reinsurance undertakings as per Directive 2009/138/EC.
2. Is there a concept of consolidated reporting in the case of large groups of companies?
In the case of a group of companies, a subsidiary is exempted from reporting in terms of the CSRD if its parent undertaking produces a consolidated sustainability report that conforms with the CSRD. This subsidiary exemption also applies to subsidiaries that are public interest entities, unless they reach the large undertaking thresholds.
If a subsidiary is exempted from reporting in terms of the CSRD, it must include the following information in its management report:
- the name and registered office of the parent undertaking that is reporting sustainability information at group level;
- the web links to the consolidated management report, and;
- a reference of this exemption in their own management report.
Where significant differences are identified between the risks and impacts of the group vs the subsidiaries, the parent company should provide an adequate understanding of the risks and impacts of their subsidiaries, including information on their due diligence processes where appropriate.
Subsidiary exemption should also apply when the parent undertaking is an undertaking established in a third country that produces reporting sustainability information in accordance with European or equivalent sustainability reporting standards. As the assessment of equivalence of sustainability reporting standards will take place at a later stage, transitional provisions have been put in place for seven years so that Member States shall permit EU subsidiaries to report under the European standards.
3. When will the CSRD rules apply?
The application of the CSRD will take place in four stages:
- Reporting in 2025 on the financial year 2024 for companies already falling within the scope of the NFRD;
- Reporting in 2026 on the financial year 2025 for large companies that are not currently subject to the NFRD;
- Reporting in 2027 on the financial year 2025 for listed SMEs (except micro undertakings), small and non-complex credit institutions and captive insurance undertakings;
- Reporting in 2029 on the financial year 2028 for third-country undertakings with net turnover above EUR 150 million in the EU if they have at least one subsidiary or branch in the EU exceeding certain thresholds.
4. What information needs to be reported?
A company that falls within the scope of the CSRD must report information that is necessary to understand the company’s impacts on sustainability matters and how such matters are incorporated within the company’s development, performance and position.
A company is required to disclose detailed information covering a host of sustainability matters from the environment, to social and governance factors. The EU Commission has tasked EFRAG with developing ESRSs.
Key concepts introduced by the ESRS include:
Identifying all potential negative and positive impacts on people and environment, from the company’s own operations and its value chain. Materiality is assessed both from a financial and an impact perspective.
A company’s boundary has expanded to include the entire value chain in measuring and reporting social and environmental impact. This covers all suppliers, both upstream and downstream.
Sustainability strategy and business model
Companies that fall within the scope of the CSRD are required to set a strategy to respond to these matters, and disclose the business model’s resilience towards sustainability-related risks and climate scenarios. This includes stakeholder engagement, the setting of targets, drafting of policies, internal risk management, and setting up of governance structures. Companies are also required to provide progress status updates on targets set.
5. Where should companies report this information?
Companies shall include report this information in a dedicated management report within its annual report.
6. In what format should companies report?
Companies shall prepare their management report in the electronic reporting format and mark-up their sustainability reporting to upload them to the upcoming European Single Access Point (ESAP).
7. Is independent third-party assurance mandatory and what level of assurance is required?
Independent third party assurance, based on a limited assurance engagement, is mandatory.
The CSRD foresees moving to reasonable assurance after assessing whether reasonable assurance is feasible for both statutory auditors and undertakings.