Corporate Sustainability Reporting Directive – The EU puts sustainability reporting on a par with financial reporting

The Corporate Sustainability Reporting Directive (the “CSRD”), which has been in the works since April 2021, has just been adopted and will enter into force in 20 days within its publication in the Official Journal.

The CSRD imposes a reporting obligation on companies that fall within its scope with respect to environmental, social and governance (“ESG”) matters.  In the same way as companies publish their financial data, they will need to report the ESG information in their management reports in accordance with the European Sustainability Reporting Standards (ESRSs). The initial set of the ESRSs is expected to be formally adopted by mid-2023.  The information will need to be reported in a digital format and audited with limited (at least initially) assurance.

The CSRD replaces the existing non-financial reporting requirements of the Non-Financial Reporting Directive (the “NFDR”) and addresses its limitations. As a result of its widened scope, it is estimated that the companies now required to report on sustainability will more than quadruple. They include:

• large public-interest companies (that are already subject to the NFRD) with more than 500 employees,
• large companies (defined as companies meeting two of the following thresholds: over 250 employees, over EUR 40 million turnover, over EUR 20 million total assets),
• companies listed on EU regulated markets (irrespective of whether they are registered in or outside the EU), and
• companies or groups outside the EU with net revenue exceeding EUR 150 million in the EU and at least one subsidiary or branch in the EU.

Obliged companies will need to report on how their business model and strategy takes into account sustainability matters, their sustainability targets and progress, how sustainability risks and opportunities are affected etc.

The information to be reported is split into these 3 themes:

• Environmental matters (such as climate change, pollution, resource use);
• Social matters (such as equal opportunities, working conditions, respect for human rights);
• Governance matters (such as the role of management in sustainability mattes, business ethics/culture, including anti-corruption and anti-bribery).

The reporting obligation will start to apply to large companies already subject to the NFRD as from the 2024 financial year (i.e., reports in 2025).

The CSRD is one of the initiatives of the EU to urge businesses to consider ESG factors when developing their strategy and policies and to make such information available to investors. It will be supplemented by the Directive on Corporate Sustainability Due Diligence, and we are awaiting to see whether the EU legislative bodies will agree on the text proposed.

What is certainly clear is that the EU is committed to its objective to transition to a sustainable economy, as well as the creation of a green capital markets union.

If your company falls within the categories listed above or if you would like to learn more, please get in touch with our team.

This legal update is for information purposes only and is not intended to constitute legal advice or be a substitute for reference to the detailed provisions of applicable laws and regulations.