In the context of the EU's transition to a sustainable economy, the Council of the European Union approved on 28 November 2022 the text of the Corporate Sustainability Reporting Directive ("CSRD") which, following on from the Non-Financial Reporting Directive ("NFRD"), amends Directive 2013/34/EU on financial statements and related reports and broadens the reporting rules on environmental, social affairs and governance (ESG) matters and their scope. The NFRD established good grounds for the sustainability information disclosure but showed its limits fast. The implementation of the CSRD will now constrain concerned companies to more detailed non-financial reporting and extend the number of companies targeted by such reporting rules.
Scope and timing of application Member States need to transpose the CSRD by no later than mid-2024 but the timing of application is deferred according to the size of the companies concerned. Hence, it shall apply to:
- large public-interest undertakings, or large groups on a consolidated basis, with over 500 employees, already subject to the NFRD: from 1 January 2024, with reports due in 2025;
- large European undertakings, or large groups on a consolidated basis, listed on a regulated market or not, which on their balance sheet dates exceed at least two of three criteria: a balance sheet total of EUR 20 000 000, a net turnover of EUR 40 000 000 and an average number of employees during the financial year of 250: from 1 January 2025, with reports due in 2026;
- small and non-complex credit institutions and captive insurance undertakings: from 1 January 2026, with reports due in 2027;
- listed small and medium undertakings: from 1 January 2026, with reports due in 2027, but with a possible opt-out until 2028, except for micro undertakings which are out of scope;
- non-European undertakings with substantial activity in Europe, a turnover over 150 million in Europe, and at least one subsidiary or branch in the EU exceeding certain thresholds: from 1 January 2028, with reports due in 2029.
A group exemption is available, however, allowing a subsidiary undertaking to be exempt if any such undertaking and its subsidiaries are included in the consolidated management report of a parent company.
Content of reporting and impact Concerned companies will be subject to standardised electronic non-financial reporting, aligned with their financial reporting. Sustainability information disclosure will need to be more detailed than under NFRD, and to comply with European Sustainability Reporting Standards (ESRS), a first draft of which is expected to be prepared by the European Financial Reporting Advisory Group (EFRAG) by June 2023. These standards are to be adopted by the European Commission in the form of a delegated act no later than 1 October 2028. Reports will need to be audited and certified by an independent assurance services provider and will have to be shown in an identifiable dedicated section of the management reports.
In essence, each company's report will show a risk exposure analysis, describe how its business model affects its sustainability and how external sustainability factors affect its business. It will also detail the measures implemented to improve the company's approach towards these factors.
The non-financial reporting obligations imply internal continued monitoring of environmental, social, and governance impacts and risks, and a high level of transparency on those matters.
The CSRD is intended to make an extended number of concerned companies publicly accountable, but also to ease the access to sustainability information for investors with a view to encouraging responsible investments.
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.