This week, the European Parliament and Council reached a provisional agreement on the Corporate Sustainability Reporting Directive (CSRD), marking, according to EU Commissioner Mairead McGuinness, "quite a dramatic moment...in relation to reporting by companies".
CSRD changes will mean large companies must publicly disclose information on how they engage with environmental and social issues, human rights and governance factors and, under the relatively novel concept of 'double materiality', also disclose how those issues impact those companies.
For the first time, sustainability reporting will be mainstreamed, put on an equal footing to traditional financial reporting, independently audited, and based on common EU standards. The CSRD amends the existing requirements of the Non-financial Reporting Directive (NFRD), greatly expanding the range of companies captured and the type of information to be published.
The CSRD will apply to all large companies governed by the law of, or established in, an EU member state and EU stock exchange-listed companies (except listed micro-companies). A large company in this context is one meeting two or more of the following criteria:
- at least 250 employees
- annual turnover exceeding €40m
- assets exceeding €20m.
What has changed?
We set out the background to the original Commission proposal in a previous update. Coming on the back of intensive trilogue negotiations at EU level, the new deal advances the original EU Commission proposal in a number of important respects. While the detailed text reflecting the agreement is not yet available, the EU has signalled its agreed position in recent press releases and media briefings:
- In a significant development, non-EU companies with substantial
activity in the EU market will be brought within scope of the new
regime. This will create a level playing field with EU companies
and will result in the CSRD having a truly global reach. Thresholds
for non-EU entities will mirror those contained in the proposed Corporate Sustainability Due Diligence
Directive (€150 million+ in net turnover generated within
the EU in the last financial year).
- Parliament negotiated the opening of the non-financial audit
market by member states, paving the way for new market entrants
beyond the traditional audit players. Accredited and certified
non-financial auditors will be able to operate across EU boundaries
under a new passporting system.
- Listed SMEs can avail of an opt-out from the new system until
2028. Parliament also insisted on guarantees meaning that
subcontractors can only be asked by their contractual
counterparties to provide information based on a lighter version of
the reporting standards.
- While separate reports were initially considered by negotiators
– one financial and one non-financial – a single report
was eventually agreed upon. As such, an in-scope company must
produce one document comprising both financial and non-financial
- Consolidated reporting will take place at parent company level. However, where there are differentiated policies within a particular group or between different subsidiaries, the subsidiary must be identified and the differentiation made clear.
The centrepiece of the CSRD is the introduction of mandatory EU sustainability reporting standards. In parallel with the trilogue negotiations above, the Commission has been working with the reporting standards setter, European Financial Reporting Advisory GroupOpens in new window (EFRAG). EFRAG has published exposure drafts and working papers giving a clear indication of the detailed standards expected to emerge.
The EU has signalled that a general set of reporting standards will be issued in 2023, with a second set for specific high risk sectors expected to issue in June 2024.
Acknowledging the need to work towards international convergence on standards, the EU has been in discussions with the International Accounting Standards Board (IASB) and other international agencies. Commissioner McGuinness stressed, however, that the CSRD is more ambitious in scope, extending beyond the climate focused standards of the IASB and embracing the concept of double materiality. In that sense, the EU sees itself as leading the way on sustainability reporting.
The new reporting requirements will be phased in over three stages:
- 1 January 2024 for companies already subject to the Non-financial Reporting Directive;
- 1 January 2025 for companies not currently subject to the Non-financial Reporting Directive;
- 1 January 2026 for listed SMEs, small and non-complex credit institutions and captive insurance undertakings.
To give legislative underpinning to the agreement, EU co-legislators must now formally adopt the CSRD before it is published in the EU Official Journal. The CSRD will enter into force 20 days after publication and its provisions must be integrated into member states' national laws within 18 months.
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