Following a long delay in the negotiations, the Council and European Parliament reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD) on 21 June 2022. The agreed text was released on 30 June, however, it is still subject to the formal adoption procedure and thereby, further review.
The proposal for the CSRD, introduced by the European Commission on 21 April 2021, demands the adoption of sustainability reporting standards across the European Union (EU) and aims to review and toughen the requirements set out in the Non-Financial Reporting Directive (NFRD) adopted in 2014.
What is the Corporate Sustainability Reporting Directive (CSRD)?
In line with the Commission’s sustainable finance strategy, the CSRD replaces the provisions of the NFRD and reforms the European framework of sustainability reporting. Notably, the demand for corporate sustainability information has significantly increased in recent years, especially from the investment community. Meanwhile, the Commission has further expressed that the information companies currently report is not even merely sufficient.
Thereby, the Commission introduced some notable changes to the European sustainability reporting regime. In the first place, the CSRD clearly establishes the principle of double materiality – accordingly, the companies will have to include in their management report information necessary to understand the companies’ impacts on sustainability matters, and information necessary to understand how sustainability matters affect the companies’ development, performance, and position.
Reports will have to be provided in digital format in order to upload them to the upcoming European Single Access Point (ESAP). As such, the CSRD reviewed the applicable time frames meaning that both retrospective and forward-looking information (i.e. targets) is now required.
Furthermore, the CSRD foresees the alignment with the reporting requirements presented by other sustainability-regulated EU regulations: the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation. All companies that fall under the reporting regime provided by the CSRD must disclose how and to what extent their activities are (environmentally) sustainable. For financial institutions, this also entails disclosure of their green asset ratio (GAR), demanding increased transparency on the sustainability-related impacts of their lending, as advised by the European Banking Authority (EBA).
Who will be subject to the directive?
In comparison to the NFRD, the CSRD extends the scope of companies considerably. The reporting obligation will apply to all (listed and non-listed) large companies – companies with over 250 employees and €40 million turnover and/or €20 million in total assets – as well as to listed small and medium enterprises (SMEs). In order to create a level playing field, the CSRD will also apply to non-EU companies generating an annual €150 million net turnover in the EU having at least one EU subsidiary or branch.
The Commission expects CSRD to ensure that approximately 49 000 companies within the EU report sustainability information (75% of the turnover of all limited liability companies).
Binding reporting standards
Whereas under the NFRD, the EU provides voluntary reporting guidelines, the CSRD states that the companies will have to report the required information in accordance with the mandatory sustainability reporting standards. Besides the basic requirements set out by the CSRD itself, the Commission has put the European Financial Reporting Advisory Group (EFRAG) in charge of developing detailed standards applicable for all companies falling under reporting obligations.
On 29 April 2022, the EFRAG Sustainability Reporting Board (SRB) for sustainability reporting standards initiated a public consultation (which ends on 8 August 2022) on the first set of standards consisting of 13 exposure drafts (EDs) covering both cross-cutting and topical standards. The sector-specific standards and standards for SMEs were not included in the public consultation, but are foreseen to be published in the near future.
Before formally adopting these standards, the Commission will consult the Member States Expert Group on Sustainable Finance and seek the opinion of the European Securities and Markets Authority (ESMA) as well as other EU institutions.
Introduction of auditing requirements
The CSRD introduces a general EU-wide audit (assurance) requirement for reported sustainability information. Reporting must be certified by an accredited independent auditor or certifier. While the Commission preferred to allow only statutory auditors and audit firms to carry out the certification, the provisional agreement ensured that non-financial reporting audit will be open also to other auditors and assurance providers, on the condition that they will obtain certification for non-financial auditing – in accordance with the respective national laws.
From what date will the rules apply?
The application of the regulation will take place in three stages:
- 1 January 2024 for companies already subject to the NFRD.
- 1 January 2025 for large companies that are not presently subject to the NFRD.
- 1 January 2026 for listed SMEs, small and non-complex credit institutions, and captive insurance undertakings.
Important to note, listed SMEs can choose an opt-out from the new regime until 2028.
What to expect next?
For now, the European Parliament and Council will have to formally approve the agreement before it is published in the Official Journal. Once published, the CSRD will enter into force after 20 days. Member States will have 18 months to transpose the directive into their respective national laws.
In addition, the Commission has signalled that it aims to adopt secondary legislation containing the reporting standards (drafted by EFRAG) by April 2023, while the second set of sector-specific standards is expected around June 2024.