One of the most ground-breaking aspects of the EU's Corporate Sustainability Reporting Directive ("CSRD") is that it will require certain private companies (and subsidiaries of listed companies) to publicly report sustainability information for the first time. Private companies incorporated in the EU will be in-scope for CSRD reporting if they constitute "large undertakings" or "parent undertakings of large groups" by meeting set financial thresholds. On 13 September 2023, the EU Commission announced proposals to increase these thresholds in light of inflation. If adopted, it is expected that the Commission's proposals will reduce the scope of application for CSRD reporting, bringing thousands of EU companies outside of the CSRD regime.
Proposed increased thresholds
From 2026, the CSRD will require "large undertakings" and "parent undertakings of large groups" to report sustainability information under the European Sustainability Reporting Standards. Under the existing legal framework, an undertaking is considered to be large or a parent undertaking of a large group if it meets two of the following three criteria (including on a consolidated basis, in the case of "parent undertakings of a large group"):
- turnover in excess of €40 million;
- balance sheet total in excess of €20 million; and / or
- more than 250 employees.
On 13 September 2023, the EU Commission published a proposed Commission Delegated Directive that, if adopted, would increase the financial thresholds for being "large" by approximately 25% to account for inflation in the EU: the turnover threshold would be increased from €40 million to €50 million and the balance sheet threshold from €20 million to €25 million, reducing the scope of application of CSRD accordingly.
The EU Commission estimates that thousands of companies will be affected by this change ie, that thousands of companies that would otherwise be in-scope for CSRD reporting in 2026, will instead fall outside of the regime. The EU Commission estimates that this change to the scope of CSRD reporting would result in one-off cost savings of €150 million and savings of recurring annual costs of €700 million.
The Commission is running a consultation until 6 October 2023 in respect of the proposal. The consultation can be accessed here. If adopted, we expect that the new thresholds would be in place before "large undertakings" and "parent undertakings of large groups" would be required to report under CSRD in 2026.
Transposition of CSRD into national law
Separate to these proposed changes to the thresholds, all EU member states are required to transpose CSRD into national law before July 2024. We are hopeful that each member state will stick closely to the provisions of CSRD itself (ie, that there will be little in the way of national regulatory divergence or 'gold plating'). The Irish Department of Enterprise, Trade & Employment has indicated that the Irish transposing national regulations will be published before the end of 2023.
Implications and takeaways for CSRD readiness
The Commission's proposals represent a welcome step towards reducing the burden of CSRD on EU companies, which may have found themselves caught by the regime due to the effects of inflation.
As the proposals are only in draft, companies that are preparing for CSRD should continue to do so on the basis of the existing financial thresholds but should keep the possible amendments in mind while conducting their scoping exercises, particularly for companies that may be on the margins of the existing thresholds. We are hopeful that the EU Commission will move quickly on the proposals to increase the thresholds, to provide certainty to those preparing for CSRD.
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