Legislation update: EU Corporate Sustainability Reporting Directive (CSRD)
“Reports often omit information that investors and other stakeholders think is important. Reported information can be hard to compare from company to company, and users of the information are often unsure whether they can trust it.” – The European Commission.
In a bid to become the front-runner in global sustainability reporting standards,, the European Commission recently voted to adopt the Corporate Sustainability Reporting Directive (CSRD), which will replace and build on the current Non-Financial Reporting Directive (NFRD) by introducing more detailed reporting requirements and expanding the number of companies that have to comply.
This will affect around 50,000 companies compared to the current 11,700
Who does it affect and how?
From January 2024,the Directive will apply to all large EU companies (including EU subsidiaries of non-EU parent companies) that meet at least two of the following criteria:
more than 250 employees;
a turnover of more than €40 million; or
total assets of €20 million.
Under the new system, companies will be required to comply with detailed sustainability reporting standards on issues ranging from environmental sustainability and social rights to human rights and governance factors.
The new rules will also introduce a mandatory audit and assurance regime to ensure the reliability of data and avoid greenwashing and/or double accounting.
Sustainability information will be required to be reported in a clearly identifiable dedicated section of the company’s management report, which must be made publicly available.
Below are some of the key requirements that will extend beyond the sustainability information currently reported:
(a) General standards. Generally applicable sustainability disclosures will be required across a number of key topic areas, including environmental matters (such as climate change and biodiversity) as well as social factors (such as working conditions, equality, non-discrimination, diversity and inclusion, human rights, and the effects of the undertaking on people and on human health). Entities will be required to disclose information about their business strategy and the resilience of the business model and strategy to risks related to sustainability matters.
(b) Sector-specific standards. EFRAG will also develop sector-specific standards. The standards are intended to be proportionate to the scale of the risks and effects related to sustainability matters of the relevant sector, noting that risks and effects are higher for some sectors than others. Sector-specific standards are therefore identified as being especially important in the case of sectors associated with high sustainability risks and/or effects.
(c) Targets and transition plans. Undertakings will be required to disclose their sustainability targets and the transition plans (if any) that they have established to ensure their business model and strategy are compatible with:
(i) the transition to a sustainable economy;
(ii) the objectives of limiting global warming to 1.5°C in line with the Paris Agreement; and
(iii) achieving climate neutrality by 2050 in line with the EU’s goals in the European Climate Law, with no or limited overshoot.
(d) Value chains. Undertakings will be obliged to disclose their due diligence process with regard to sustainability matters in their own operations and their value chain and the principal actual or potential adverse effects connected thereto. Undertakings should also disclose any actions taken to prevent, mitigate, remediate, or bring an end to actual or potential adverse effects. A number of EU member states have already imposed value chain due diligence obligations on companies.
Companies will need to engage with their value chains, including suppliers; however, for the first three years of CSRD, if information regarding the value chain is not available, undertakings can elect to explain their inability to obtain such information rather than comply fully with the disclosure requirement.
(e) Intangible resources. Undertakings will be required to report on their “key intangible resources,” being resources without physical substance on which the undertaking’s business fundamentally depends and that are a source of value creation for the undertaking. Intangible resources may be relevant to sustainability information in some cases, including the company’s relationships with its stakeholders.
(f) Forward-looking disclosures. Sustainability information shall be provided on a forward-looking as well as retrospective basis, both in qualitative and quantitative terms, and based on conclusive scientific evidence where appropriate.
Although it’s an EU directive, the CSRD also applies to companies based abroad who have a presence in the EU.
This means that a hypothetical U.K-based company with dozens of subsidiaries has to abide by the CSRD if even one of those subsidiaries is in the EU.
CSRD will have an impact on non-EU undertakings with annual EU-generated revenues in excess of €150 million and which also have either a large or listed EU subsidiary or a significant EU branch (generating €40 million in revenues). The respective subsidiary or branch will be responsible for publishing CSRD-style sustainability reports for these non-EU undertakings at a consolidated level from 2028 onwards.