On Monday, according to this press release from the Council of the European Union, all 27 members of the European Council voted in favor of the adoption of the Corporate Sustainability Reporting Directive, the last step for the CSRD to become law in the EU. The new rules require subject companies "to report on sustainability matters such as environmental rights, social rights, human rights and governance factors," with a phase-in beginning in 2024. The new rules are intended to "increase a company's accountability, prevent divergent sustainability standards, and ease the transition to a sustainable economy." Notably, "subject companies" are not limited to European companies—US companies that meet specific EU presence tests will also be subject to these requirements. According to the Minister for Industry and Trade of the Czech Republic (which currently holds the presidency of the Council of the EU), "[t]he new rules will make more businesses accountable for their impact on society and will guide them towards an economy that benefits people and the environment. Data about the environmental and societal footprint would be publicly available to anyone interested in this footprint. At the same time, the new extended requirements are tailored to various company sizes and provides them with sufficient transition period to get ready for the new requirements." The new rules will go into effect 20 days after approval on Monday and will need to be implemented by member states 18 months later. (See this Cooley Alert, EU's New ESG Reporting Rules Will Apply to Many US Issuers.)


At the PLI Securities Regulation Institute earlier this month, panelists expressed concern that, not only was the SEC's climate proposal "outrageously" difficult, complicated and expensive for companies to implement, but the challenge of compliance with its requirements would only be compounded by the adoption of expected new rules in the EU from the CSRD that would be applicable to many US companies and their EU subsidiaries. The expansive mandate of the CSRD raised fears that the impact on companies would be enormous. In particular, some panelists feared that companies would be bombarded with a broad, complicated and often inconsistent series of climate/ESG disclosure mandates from the EU. How would rules from the CSRD (and perhaps elsewhere) be integrated with US rules? How, with so many differences in the standards, would all the rules ultimately connect for a path forward? Moreover, the CSRD calls for, not only climate reporting, but also reporting on the environment generally (e.g., pollution, biodiversity) and the company's impact on workers, consumers and communities, applying a standard of double materiality. Former Corp Fin Director Meredith Cross observed that the SEC can't just hand over rulemaking to a non-US regulatory body; perhaps the result will be a separate stand-alone report that could be used internationally. (See this PubCo post.)

Under the new rules, the press release indicates, "companies will have 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. This will equip investors and other stakeholders better for taking informed decisions on sustainability issues." The new rules will apply to large EU companies and listed EU small and medium-size EU companies, with some exceptions. Non-EU companies will be required to provide a sustainability report if they generate "a net turnover of EUR 150 million in the EU," and "have at least one subsidiary or branch in the EU exceeding certain thresholds." ("'Net turnover' means the amounts derived from the sale of products and the provision of services after deducting sales rebates and value added tax and other taxes directly linked to turnover.") Reporting will be phased in, beginning in 2024 with companies already subject to the non-financial reporting directive, a delay from the original expectation of 2023. Reporting for subject non-EU companies will be required in 2029 for fiscal 2028. The European Financial Reporting Advisory Group (EFRAG) will develop draft European standards, final versions of which will be adopted by the European Commission.


You might recall that the EU employs a "double materiality" standard for sustainability disclosure. This memo to the European Council in connection with the CSRD explains that prior directives "require reporting not only on information 'to the extent necessary for an understanding of the undertaking's development, performance, position', but also on information necessary for an understanding of the impact of the undertaking's activities on environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters." The references to the company's "development, performance, position" are references to financial materiality, as they affect the value of the company. The memo makes clear that climate-related information "should be reported if it is necessary for an understanding of the development, performance and position of the company. This perspective is typically of most interest to investors." The references to "information necessary for an understanding of the impact of the undertaking's activities on environmental, social" and other matters is to provide information that is important to citizens, consumers, employees and other stakeholders. The memo indicates that, with double materiality, companies "report both on the impacts of the activities of the undertaking on people and the environment and on how various sustainability matters affect the undertaking. That is referred to as the double-materiality perspective, in which the risks to the undertaking and the impacts of the undertaking each represent one materiality perspective." The memo indicates that a review of "corporate reporting shows that those two perspectives are often not well understood or applied. It is therefore necessary to clarify that undertakings should consider each materiality perspective in its own right, and should disclose information that is material from both perspectives as well as information that is material from only one perspective."

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