Corporate Sustainability Reporting: New EU rules for large companies and listed SMEs

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The Corporate Sustainability Reporting Directive ("CSRD") was published in the Official Journal of the European Union on 16 December 2022,1 having been formally adopted by the European Parliament and Council of the European Union in November.2 The CSRD will enter into force 20 days after its publication, on 5 January 2023. The CSRD will require in-scope companies to report on sustainability-related issues in line with the detailed set of disclosure standards developed by the European Financial Reporting Advisory Group ("EFRAG"). 

The CSRD will extend to large and listed EU companies, as well as to large third country companies which do substantial business in the EU or have securities listed on EU regulated markets.  It is estimated that more than 50,000 companies will be covered by the new CSRD obligations, a significant increase from the 11,700 companies covered by the existing Non-Financial Reporting Directive 2014/95/EU ("NFRD").3

Which companies fall within scope, and from when will the rules apply?

The CSRD revises the sections of Directive 2013/34/EU (the "Accounting Directive") relating to non-financial disclosures that were introduced by the NFRD. The new sustainability reporting requirements under Article 1 of the CSRD will apply progressively from 2024–2028 to four categories of company:

Category Criteria Implementation Date
1. Large EU 'public interest entities'4 Must be a large EU undertaking which (i) is a 'public interest entity';5  and (ii) has more than 500 employees. Reporting due from 2025 for financial years starting on or after 1 January 2024
2. Large EU undertakings and EU parent undertakings of large groups (other than those in category 1 above)

Must meet two of the following criteria (either as a single entity or on a consolidated group basis):

  • Balance sheet total of EUR 20 million;
  • Net turnover of EUR 40 million; and/or
  • An average of 250 employees during the financial year.
Reporting due from 2026 for financial years starting on or after 1 January 2025
3. EU small and medium-sized undertakings ("SMEs") that are listed on EU regulated markets (and which are not micro-undertakings)

Must (i) have securities listed on a regulated EU market;6 and (ii) meet two of the following criteria:

  • Balance sheet total: EUR 4 million;
  • Net turnover: EUR 8 million; and/or
  • An average of 50 employees during the financial year.
Reporting due from 2027 for financial years starting on or after 1 January 20267
4. Non-EU parent company with: (i) an EU-established large subsidiary or a listed SME subsidiary; or (ii) a large EU branch

Meet the following criteria:

  • Net turnover of EUR 150 million in the EU for each of the last two consecutive financial years; and
  • At least one subsidiary or branch in the EU which:
  • For a subsidiary: meets the criteria for categories (2) or (3) above; and
  • For a branch: has a turnover of more than EUR 40 million.
Reporting due from 2029 for financial years starting on or after 1 January 2028

Article 2 of the CSRD extends its sustainability reporting requirements to issuers with debt or equity securities listed on an EU regulated market, including undertakings domiciled outside the EU, by amending sections of Directive 2004/109/EC ("the Transparency Directive"). Whereas third country undertakings which fall in scope under Article 1(14) of the CSRD (as shown in row 4 of the table above) will only be required to start reporting from the 2028 financial year, third country issuers which fall in scope under Article 2 will be required to start reporting from financial years 2024, 2025 or 2026, depending on their size.8

What are in-scope companies required to do?

The CSRD will require in-scope companies to disclose information on 'sustainability matters' that affect the company, as well as the impacts of the company on sustainability matters (the so-called 'double materiality' principle). In particular, the CSRD will require management reports to include information on:

  • the resilience of the company's business model and strategy to sustainability risks;
  • plans ensuring compatibility with the 1.5°C global warming target under the Paris Agreement and with targets under Regulation (EU) 2021/1119 (European Climate Law) regarding climate neutrality by 2050 and exposure to coal, oil and gas related activities; 
  • time-bound sustainability targets, progress and processes; and
  • principal risks to the company related to its "dependencies" on sustainability matters, including actions taken to manage these risks.

In addition, companies must report on, and provide a 'description' of, due diligence processes implemented in relation to sustainability matters. This includes identifying the principal actual or potential adverse sustainability impacts in the company's value chain and own operations, including actions taken to prevent, mitigate, and remediate these adverse sustainability matters. In this sense, the reporting obligations under the CSRD will operate alongside the EU's proposed Corporate Sustainability Due Diligence Directive, which will impose due diligence obligations and require companies to identify and prevent adverse environmental and human rights impacts in their value chains.

When an in-scope EU parent company prepares a consolidated management report in respect of its subsidiaries that includes the sustainability information required under the CSRD, the subsidiaries are exempted from including the same information in their management reports. However, where an undertaking domiciled outside the EU falls within the scope of the CSRD, the EU subsidiary or branch is responsible for publishing the sustainability report at the group level of the third-country undertaking.

Which sustainability reporting standards will apply?

The CSRD will require companies to make disclosures using a detailed set of sustainability reporting standards, which the European Commission will adopt in final form by 30 June 2024.9 In adopting these standards, the Commission will take account of the EU Sustainability Reporting Standards ("ESRS") being developed by EFRAG. On 23 November 2022, EFRAG submitted its approved final draft of the ESRS to the Commission.

The ESRS set out in detail the disclosures which companies would be required to make under the CSRD. These include disclosures in relation to environmental issues (including (i) climate change, (ii) pollution, (iii) water and marine resources, (iv) biodiversity and ecosystems, and (v) resource use and circular economy); social topics (including (i) own workforce, (ii) workers in the value chain, (iii) affected communities, and (iv) consumers and end-users); and a governance theme (relating to business conduct). Notably, in relation to climate change, the ESRS would require companies to disclose their scope 1, scope 2 and, where relevant, scope 3 greenhouse gas emissions.10

In order to minimise disruption for undertakings that already report sustainability information, the ESRS will take account of existing standards and frameworks for sustainability reporting and accounting.11 In particular, technical discussions are ongoing between the European Commission, EFRAG and the International Sustainability Standards Board ("ISSB") with the aim of achieving as much commonality and harmonisation as possible between the European framework and the anticipated global standards of the ISSB.

Non-EU parent companies subject to the CSRD will be permitted to report on sustainability matters using 'equivalent standards' to those set out under the CSRD. Guidelines as to which standards will be deemed 'equivalent' for this purpose will be developed by the Commission.

In light of the increasing focus on 'greenwashing', the CSRD contains detailed provisions on third party audit assurance requirements regarding sustainability information: by 1 October 2026, legislation must be adopted by the Commission relevant to 'limited assurance' engagements, and in relation to more onerous 'reasonable assurance' engagements by 1 October 2028.

1 Directive (EU) 2022/2464 of the European Parliament and the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting, OJ L 322, 16.12.2022, pp. 15-80, available here.
2 On 10 November 2022, the European Parliament voted in favour of the CSRD, which was subsequently adopted by the EU Council on 28 November 2022.
3 'Sustainable economy: Parliament adopts new reporting rules for multinationals', European Parliament Press Release, 10 November 2022, available here. The text of the NFRD is available here.
4 Large EU 'public interest entities' are already subject to the provisions of the NFRD, which the CSRD extends to further categories of undertakings and to 'public interest entities' which are parent undertakings of a large group.
5 'Public interest entity' is defined under Article 2(1) of the Accounting Directive as including listed EU undertakings, as well as certain other specific types of undertakings, such as credit institutions and insurance undertakings, and entities designated as such by Member States.
6 Specifically, the CSRD applies to SMEs which are 'public interest entities' as defined under Article 2(1)(a) of the Accounting Directive, namely EU undertakings whose "securities are admitted to trading on a regulated market of any Member State".
7 In-scope SMEs may opt-out until 2028.
8 As set out in Article 5(2) of the CSRD, the sustainability reporting requirements will be applied (i) from 1 January 2024 to issuers which are large undertakings within the meaning of the Accounting Directive and which had more than 500 employees during the previous financial year; (ii) from 1 January 2025 to issuers which are large undertakings within the meaning of the Accounting Directive; and (iii) from 1 January 2026 to issuers which are SMEs within the meaning of the Accounting Directive.
9 The Commission will adopt an initial set of ESRS by 30 June 2023 and a further set of standards by 30 June 2024.
10 Reporting companies will be required to disclose their scope 1, scope 2, and "where relevant", scope 3 GHG emissions. This is noted under Recital 47 of the CSRD which explains that it is "a priority for users […] to receive information about which scope 3 categories are significant in the case of the undertaking, and about the emissions in each of those scope 3 categories".
11 These include, for example, the standards developed by the Global Reporting Initiative, the Sustainability Accounting Standards Board, the International Integrated Reporting Council, the International Accounting Standards Board, the Task Force on Climate-related Financial Disclosures, the Carbon Disclosure Standards Board, and CDP, formerly known as the Carbon Disclosure Project (see CSRD, Recital 43).

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