The EU Corporate Sustainability Reporting Directive (CSRD): New Rules You Need To Know

The Corporate Sustainability Reporting Directive (CSRD) is legislation that seeks to widen the scope of European companies’ sustainability disclosures and make standardized, comparable, and more reliable data available to key stakeholders such as investors and asset managers. CSRD is intended to replace the Non-Financial Reporting Directive (NFRD), which only applies to around 12,000 of the largest listed companies in the European Union. CSRD, by contrast, will cover about 50,000 EU companies. The CSRD legislation addresses certain flaws in the existing NFRD regime that render the present data inadequate to gauge a company’s sustainability performance.

The Non-Financial Reporting Directive (NFRD) was introduced in 2018, while the Corporate Sustainability Reporting Directive was proposed in April 2021.

Companies listed in EU-regulated markets come under the purview of the CSRD regulation if they meet two of the three following criteria:

  • 250 or more employees
  • 40 million euros in net turnover
  • 20 million euros in assets

On June 21, 2022, the European Council and the European Parliament reached a provisional political agreement on the Corporate Sustainability Reporting Directive. As a result, several new rules will now apply to the companies that come under the purview of the CSRD. They are as follows:

A Revised Implementation Timeline

The CSRD implementation timeline has been extended by a period of one year. Communication from the Council of the EU states that the CSRD regulation will be implemented in three stages:

  • Companies already subject to NFRD will have to comply with CSRD from January 1, 2024.
  • Large companies not subject to NFRD will have to comply with CSRD from January 1, 2025.
  • Listed SMEs, small and non-complex credit institutions, and captive insurance undertakings will comply with CSRD from January 1, 2026.

Reporting Requirements for SMEs

The original CSRD regulation was mandatory for listed SMEs. However, compliance is now voluntary for listed SMEs. They may even opt out of reporting requirements during the transition period and take an exemption from the requirements until 2028. The Commission also intends to provide less rigorous standards for voluntary reporting.

CSRD for Non-European Companies

Non-European companies will be subject to the CSRD regulation if…

  • They generate a net turnover of 150 million euros in the EU
  • They have at least one subsidiary or branch in the EU

Non-European companies will have to report on their Environmental, Social, and Governance (ESG) impacts under the directive.

An Audit and Assurance Requirement

Under the new rules, reporting in accordance with the CSRD regulation will have to be certified by an independent auditor or certifier. The auditor must ensure that the reported information complies with EU certification standards. Non-European companies must also have their disclosures certified, either by a European auditor or one established in a third country.

The information needs that CSRD intends to fulfill

Companies complying with the NFRD regime do not need to follow any particular sustainability reporting framework. Moreover, the companies can pick and choose the information they wish to disclose. As a result, the current reporting is not standardized or comparable.

The Corporate Sustainability Reporting Directive regime will be prescriptive and will introduce more detailed reporting requirements. Large companies will have to disclose their impacts on environmental rights, social rights, human rights, and governance factors, according to communication from the Council of the EU.

The communication further states: “The CSRD also introduces a certification requirement for sustainability reporting as well as improved accessibility of information, by requiring its publication in a dedicated section of company management reports.”

The CSRD regime not only seeks to increase the volume of sustainability information in the EU but also to improve its presentation and dissemination. To that end, the information will occupy a section of a company’s management report and will be digitally tagged. The information will be made available as part of the European Single Access Point (ESAP) initiative.

The ESAP will be a web portal for EU-wide financial and non-financial information.

European Financial Reporting Advisory Group – Its Role With Regards To CSRD

Under the CSRD proposal, the European Financial Reporting Advisory Group (EFRAG) has been tasked with providing the  European Sustainability Reporting Standards (ESRSs) that would form the basis for sustainability reporting by European companies. In April 2022, the EFRAG launched a consultation on draft ESRSs developed by the Project Task Force on European Sustainability Reporting Standards (PTF-ESRS). The consultation will continue until August 8, 2022.

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