CSRD published in Official Journal

On 21 April 2021, the European Commission (Commission) published a proposal for a Corporate Sustainability Reporting Directive (CSRD) to revise and strengthen rules introduced by the Non-Financial Reporting Directive (2014/95/EU) (NFRD). FAQs on this proposal were also published.

On 21 June 2022, the EU Parliament and Council announced that they had reached provisional political agreement on this directive.

On 30 June 2022, a letter was published confirming COREPER’s endorsement of the informal trialogue agreement, inviting the EU Parliament to adopt the text at first reading and attaching the final compromise text as published in the Council Register.

On 28 November 2022, the EU Council gave its final approval to CSRD and on 16 December 2022 CSRD was published in the Official Journal of the EU.

CSRD is intended to ensure that companies report reliable and comparable sustainability information that investors and other stakeholders need. It should also assist companies in meeting the increasing demands for sustainability information.

Main changes

The main changes are to:

• apply the new rules to all large companies, whether listed or not (removing the current 500-employee threshold) and to listed small and medium-sized enterprises (SMEs) (other than listed micro-enterprises);

• apply the rules to non-EU companies which generate a net turnover of more than €150m in the EU and have at least one subsidiary or branch in the EU;

• require reporting on a full range of sustainability information relevant to the company's business and that reporting must be in line with mandatory EU sustainability reporting standards that are being developed by the Commission;

• require that the sustainability information is subject to a limited level of audit assurance; and

• require companies to prepare their management reports in an electronic reporting format and to tag the sustainability information.

Which companies will the new sustainability reporting requirements apply to?

The new rules will apply to:

• large undertakings whether listed or not (being ones that exceed at least two out of: a balance sheet total of €20m; net turnover of €40m; average number of employees during the financial year of 250);

• non-EU companies with substantial activity in the EU market (€150m in annual turnover in the EU) and which have at least one subsidiary or branch in the EU; and

• SMEs with securities admitted to trading on an EU regulated market (other than micro undertakings). It would not include SMEs with securities listed on SME growth markets or multilateral trading facilities.

What are the new sustainability reporting requirements?

The NFRD currently has a 'double materiality perspective', meaning that companies must report about how sustainability issues affect their business and about their own impact on people and the environment.

Companies within scope of CSRD will have to report on a whole range of sustainability issues relevant to the company's business. Sustainability information will cover not just environmental factors but also social and governance factors.

Social factors will include:

• equal treatment and opportunities for all, including gender equality and equal pay for work of equal value, training and skills development, the employment and inclusion of people with disabilities, measures against violence and harassment in the workplace, and diversity;

• working conditions, including secure employment, working time, adequate wages, social dialogue, freedom of association, existence of work councils, collective bargaining, including the rate of workers covered by collective agreements, the information, consultation and participation rights of workers, work-life balance and health and safety;

• respect for the human rights, fundamental freedoms, democratic principles and standards established in the International Bill of Human Rights and other core UN human rights conventions, including the UN Convention on Persons with Disabilities, the UN Declaration on the Rights of Indigenous Peoples, the International Labour Organization's Declaration on Fundamental Principles and Rights at Work and the ILO fundamental conventions, the European Convention of Human Rights, the revised European Social Charter, and the Charter of Fundamental Rights of the European Union.

Governance factors will include:

• the role of the undertaking's administrative, management and supervisory bodies, with regard to sustainability matters, and their composition; and their expertise and skills to fulfil this role or access to such expertise and skills;

• information about any incentive schemes offered to members of the administrative, management and supervisory bodies which are linked to sustainability matters;

• business ethics and corporate culture, including anti-corruption and anti-bribery, the protection of whistle-blowers and animal welfare;

• the undertaking’s engagement to exert its political influence, including its lobbying activities;

• the management and quality of relationships with customers, suppliers and communities affected by the undertaking’s activities, including payment practices, especially with regard to late payment to SMEs; and

• main features of the undertaking's internal control and risk management systems, in relation to the sustainability reporting process.

SMEs and small and non-complex credit institutions and captive insurance undertakings can choose to report more limited information.

Subsidiary undertakings are exempt if they are included in the consolidated accounts of a parent undertaking that includes this information and provided the subsidiary undertaking includes certain specified information in its own accounts.

What are the new reporting standards?

Reporting will be in line with mandatory EU sustainability reporting standards (ESRS) that are being developed by the Commission. The Commission is expected to take account of global standard-setting initiatives for sustainability reporting when setting the ESRS and they should be aligned with disclosure requirements and indicators in various existing regulations, including the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation.

There will be a proportionate set of ESRS for SMEs, which non-listed SMEs might choose to use voluntarily.

The European Financial Reporting Advisory Group (EFRAG) is responsible for developing draft ESRS. They need to cover not just the risks to companies but also the impacts of companies on society and the environment so that the 'double materiality' principle is maintained. At the Commission's request, EFRAG had already published technical recommendations and a roadmap for the development of ESRS.

On 22 November 2022, EFRAG submitted the first set of draft ESRS to the Commission.

The European Commission will now consult EU bodies and Member States on the draft standards, before adopting the final standards in June 2023. This will be followed by a scrutiny period by the European Parliament and Council. EFRAG will now focus on certain sector specific standards and the standards for SMEs.

Audit

CSRD will for the first time, introduce a general EU-wide audit (assurance) requirement for reported sustainability information. Any assurance will have to be carried out in compliance with assurance standards set by the Commission. Initially these will be ‘limited’ assurance standards but the Commission will also carry out an assessment to see whether it is feasible for there to be a ‘reasonable’ assurance.

CSRD also allows Member States to open up the market for sustainability assurance services to so-called 'independent assurance service providers'. Member States will be able to allow firms, other than the usual auditors, to assure sustainability information.

How is this achieved?

This proposal consists of one Directive that would amend four existing pieces of legislation:

• the NFRD, revising some existing provisions and adding certain new provisions about sustainability reporting;

• the Audit Directive and the Audit Regulation, to cover the audit of sustainability information; and

• the Transparency Directive to extend the scope of the sustainability reporting requirements to companies with securities listed on regulated markets, and to clarify the supervisory regime for sustainability reporting by these companies.

How does it fit with the SFDR and Taxonomy Regulation?

SFDR

The SFDR governs how financial market participants (including asset managers and financial advisers) should disclose sustainability information to end-investors and asset owners. To be able to do that, those financial market participants need adequate information from investee companies. The CSRD aims to ensure that investee companies report the information financial market participants need to fulfil their own SFDR reporting requirements.

Taxonomy Regulation

The Taxonomy Regulation establishes the framework for the EU taxonomy by setting out four conditions that an economic activity must meet for it to qualify as 'environmentally sustainable'. It also requires companies within the scope of the NFRD to publish information on how and to what extent their activities are environmentally sustainable according to the taxonomy. See EU Taxonomy Regulation: ESG disclosure obligations for large companies for more information.

On 10 December 2021, a Commission Delegated Regulation (the Article 8 Delegated Act) setting out Level 2 measures under the Taxonomy Regulation was published in the Official Journal and took effect on 1 January 2022. The Article 8 Delegated Regulation specifies the KPIs for financial undertakings. It also sets out the detailed rules for complying with the Article 8 disclosure obligations, with the content, methodology and presentation of the KPIs being set out in a number of Annexes.

The CSRD consultation stated that the indicators in the Taxonomy Regulation are complementary to the information that companies must disclose under the NFRD, and companies will have to report them as well as other sustainability information required by the NFRD.

As noted above, the Commission is expected to align its ESRS with disclosure requirements and indicators in various existing regulations, including the SFDR and the Taxonomy Regulation.

Timing

The directive will enter into force on 5 January 2023 (20 days after publication in the Official Journal) . It must be integrated into Member States’ national laws within 18 months. The directive will be implemented in three stages:

• financial years starting on or after 1 January 2024 for companies already subject to the NFRD;

• financial years starting on or after 1 January 2025 for large companies not currently subject to the NFRD; and

• financial years starting on or after 1 January 2026 for listed SMEs, small and non-complex credit institutions and captive insurance undertakings, but SMEs can opt out until 2028.

CSRD requires the Commission to adopt a first set of reporting standards by 30 June 2023 and a second set by 30 June 2024. The reporting standards for SMEs are to be adopted by 30 June 2024.

See ESG: building value, minimising risk and Sustainable Financing and ESG Investment for more information