Corporate Sustainability Reporting Directive – Latest Development
The European Parliament has just adopted the Corporate Sustainability Reporting Directive (CSRD), under which companies across the European Union will have to file sustainability information alongside their financial information in the digital Inline XBRL (iXBRL) format.
Proposed in April 2021, the CSRD replaces the existing Non-Financial Reporting Directive (NFRD) and expands the scope of sustainability reporting in the European Union. Around 11,000 EU companies currently comply with the NFRD. The number will increase to 50,000 companies under the CSRD.
The CSRD will also introduce more detailed reporting on the impact of companies’ activities on the environment, human rights and society, based on a common set of criteria in line with the EU’s climate goals.
What’s next for the Corporate Sustainability Reporting Directive?
The next thing on the CSRD timeline is its adoption by the European Council on November 28, 2022. Thereafter, the Directive will be signed and published in the EU Official Journal. The Directive will enter into force 20 days after its publication and its rules will begin to apply between 2024 and 2028.
Now that we’ve covered the latest developments about the CSRD regulation, here are five things you should know…
CSRD will be in Accordance with ESMA’s ESEF Mandate
Since January 1, 2020, public companies in the EU have been complying with the European Single Electonic Format (ESEF) mandate. Under this mandate, companies prepare their annual reports in a digital format called Inline XBRL or iXBRL. This involves applying digital XBRL tags against individual data points in the annual reports with the help of specialised software and in accordance with the ESEF Taxonomy.
EU companies will have to make sustainability disclosures under the CSRD in the same iXBRL format. The taxonomy for CSRD reporting is being readied by the European Financial Reporting Advisory Group (EFRAG). Companies will need to tie up with XBRL software or service providers well in advance of their CSRD compliance timeline to meet the reporting requirements effectively.
With both financial and sustainability disclosures reported in digital format, corporate reporting in the EU will be more accessible and comparable, bringing benefits to all stakeholders of corporate information.
CSRD will apply to Listed as well as Non-listed Companies
As mentioned before, CSRD will apply to nearly 50,000 companies in the EU, as opposed to the NFRD, which applied to only around 11,000 companies. All large companies in the EU will have to comply with CSRD reporting requirements, whether they are listed on stock exchanges or not. Non-EU companies with substantial operations in the EU and a turnover of more than €150 mln euros will also have to comply with CSRD requirements. Listed SMEs are also covered under CSRD, but they have been given more time to adapt to the requirements. Here’s the CSRD implementation timeline:
| Type of Company | Implementation Date | Reports due |
| Large public-interest companies with more than 500 employees and are already subject to the Non-financial Reporting Directive | January 1, 2024. | 2025 |
Large companies currently not subject to the NFRD, with…
|
January 1, 2025. | 2026 |
| Listed SMEs and other undertakings
(SMEs can opt out of CSRD compliance until 2028) |
January 1, 2026. | 2027 |
CSRD Reporting will Involve Using EFRAG-GRI ESRS
The European Financial Reporting Advisory Group (EFRAG) and the Global Reporting Initiative (GRI) have been jointly working on a set of European Sustainability Reporting Standards (ESRS), which will be used for CSRD reporting.
The EFRAG is tasked with supplying the European Commission with the draft ESRS and other technical advice before the final standards are adopted. Accordingly, EFRAG released a draft set of ESRS for public consultation, which ended on August 8, 2022. The EFRAG is now set to submit a revised set of ESRS to the Commission. Thereafter, the Commission will hold its own consultation on the ESRS before adopting the standards into legislation by June 2023. The Commission will adopt a second set of sector- and SME-specific standards by June 2024.
In the meantime, the EFRAG is taking the help of external experts to develop an XBRL taxonomy based on the first set of ESRS.
CSRD Reporting to follow the Double-Materiality Principle
Sustainability reporting that is focused on the risk to a company from external environmental and social factors has a narrow scope and is only intended for the investor audience. On the other hand, double materiality considers both the risk to an organisation from external factors as well as the impact the organisation’s activities have on the environment and society where it operates. Sustainability reporting based on the principle of double materiality is intended not only for investors but also for civil society – including customers, employees and investors.
CSRD reporting requirements will follow the double materiality principle, in line with the growing stakeholder interest in ensuring that companies operate in a manner that supports the environment and society. Double materiality is especially pertinent given the pace at which climate change is beginning to affect life as usual. The increase in flash floods and other climate-related calamities is a case in point.
CSRD Reports to be audited by Independent Auditors
The reports companies file under the CSRD regulation will have to be certified by an accredited independent auditor or certifier. The auditor will have to ensure that the sustainability reports comply with adopted certification standards. Even non-EU companies must have their reports certified either by an auditor in Europe or one established in a third country. The focus of the audit will initially be limited to how well companies comply with the ESRS. After October 2028, the European Commission may adopt more extensive auditing standards based on the results of an impact study.
The auditing requirement for CSRD reports stands in contrast with that under the ESEF regulation, where the national regulators of EU countries have the freedom to decide whether or not to mandate an audit for annual financial reports. The requirement is a step in the right direction to ensure that companies comply with the letter and the spirit of the CSRD legislation right from the start.
The Final Word
The EU’s efforts towards facilitating sustainability reporting in the digital iXBRL format are commendable. Also noteworthy is the fact that these developments coincide with the implementation of the European Single Access Point (ESAP) – which will be a web portal hosting financial and sustainability information about companies across the EU. What is to be looked forward to is a large system for the flow of machine-readable (XBRL) corporate information to which various stakeholders have easy access. It would help the cause of transparency and sustainability if other jurisdictions emulated the EU in creating such a system for the access of high-quality information to drive business decisions.
