What the EU Corporate Sustainability Reporting Directive means for ESG reporting in Europe

The Corporate Sustainability Reporting Directive (CSRD), adopted this week, was announced as part of the European Green Deal and updates the provisions of the existing Non-Financial Reporting Directive (NFRD) which applied to large EU-listed companies, banks and insurance companies.

Compared to the NFRD, the CSRD extends the scope of the reporting obligation to more companies; requires the audit (assurance) of reported information; introduces more detailed reporting requirements, which must be reported according to mandatory EU sustainability reporting standards; and amends the format for the reported information.

The CSRD is the third pillar in the EU's sustainability reporting framework. The second pillar is the EU Taxonomy Regulation, which created a classification system of environmentally sustainable economic activities. The Sustainable Finance Disclosure Regulation (SFDR), the first pillar, introduced a sustainability labelling regime to improve transparency in the market for sustainable investment products, to prevent greenwashing and to increase transparency around claims made by financial market participants.

Which companies are in scope of the CSRD?

The CSRD has EEA relevance, meaning that it applies to all relevant companies established in the European Union, Iceland, Liechtenstein and Norway. Non-EU companies generating a net turnover of more than €150 million, and having a subsidiary or a branch in the EU generating more than €40 million net turnover, also fall within the scope of the CSRD.

The new sustainability reporting 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.

A “large undertaking” is a defined term in the Accounting Directive and means an entity that exceeds at least two of the following criteria:

• A net turnover of €40 million;
• A balance sheet total of €20 million;
• 250 employees on average over the financial year.

The rules also apply, with some modifications, to listed SMEs though they will be able to use an opt-out during a transitional period, exempting them from the application of the directive until 2028.

A subsidiary undertaking will be exempt from reporting if its parent company has already reported in a consolidated way.

However, it is worth bearing in mind that the whole value chain will be subject to the sustainability reporting. Hence, it is likely that companies that are in scope will ask their suppliers, even if they are small or medium-sized companies, to comply with the CSRD as well.

What information must be reported under the CSRD?

The CSRD requires reporting of forward-looking, retrospective, qualitative and quantitative information necessary to understand an undertaking’s impacts on sustainability matters and, from the opposite lens, the information necessary to understand how sustainability matters affect an undertaking’s development, performance, and position (that is, “double materiality” reporting).

The information must contain a description of the company's:

business model and strategy as well as opportunities and resilience to sustainability risks and transition plans;

• sustainability targets and their progress status;
• sustainability governance (administrative, management and supervisory bodies and their expertise and skills to fulfil their role);
• sustainability policies;
• incentives schemes linked to sustainability matters;
• due diligence of sustainability matters and the process to conduct it;
• principal adverse impacts, and those of its value chain, including its products and services, its business relationships and its supply chain;
• principal sustainability risks and their management.

The European Commission will adopt delegated acts to provide for sustainability reporting standards.

When will the CSRD start applying?

The application of the CSRD will take place in four stages:

• reporting in 2025 on the financial year 2024 for companies already subject to the Non-Financial Reporting Directive;
• reporting in 2026 on the financial year 2025 for other large companies;
• reporting in 2027 on the financial year 2026 for listed SMEs (except micro undertakings), small and non-complex credit institutions and captive insurance undertakings; and
• reporting in 2029 on the financial year 2028 for non-EU undertakings with net turnover above €150 million in the EU if they have at least one subsidiary or branch in the EU exceeding certain thresholds.

The first set of EU sustainability reporting standards, which will underpin the reporting, is expected to be adopted by October 2022.

Where should companies report under the CSRD?

The CSRD requires sustainability information to be published in an entity’s management report and not a separate, standalone report.

Member States may also require undertakings subject to the CSRD make their management reports available on their websites, free of charge to the public.

In what format should companies report?

The management report should be prepared in a single electronic reporting format.

It is expected that the European Commission in its delegated acts will require to digitally "tag" the reported information, so it is machine readable and feeds into the European single access point envisaged in the Capital Markets Union Action Plan.

Is independent third-party assurance mandatory?

Yes and no. Under the CSRD, there is a requirement for the company’s statutory auditor, another auditor (according to Member State’s option) or an independent assurance services provider (Member State’s option), to provide limited assurance around a company’s reported sustainability information.

Osborne Clarke comment

The CSRD will be a material change for many EU-based businesses imposing wide-ranging environmental, social and governance (ESG) disclosures on them for the first time. The disclosures will be of particular interest to the investor and asset management community who have been grappling with gathering the information they need about their underlying investments to comply with the requirements of the SFDR.

The EU's rules match similar moves in the UK and the US. In the UK, the government has already pushed ahead with mandatory climate reporting for listed and large private companies under the Taskforce on Climate-related Financial Disclosures (TCFD) framework. Last month it published its consultation on Sustainability Disclosure Requirements (SDR) for the regulated finance sector which will include sustainability labelling and a taxonomy (covering similar ground to the EU's SFDR and Taxonomy Regulation). In the US, by the end of the year, the SEC is expected to finalise its proposal to require TCF- aligned reporting for US listed companies, also coming into effect in phases from 2023.

Alongside TCFD and ESG disclosures, many businesses are adopting net zero transition plans. The UK has announced that it will introduce mandatory publication of these plans for certain business, likely from 2023.

As well as understanding the scope of the alphabet soup of disclosure requirements that are facing businesses, businesses need to consider the wider implications of making sustainability disclosures and publicising net zero commitments – such as greenwashing investigations by regulators and climate litigation risk.

Contact us to discuss how global sustainability reporting requirements are likely to impact your business.