The EU Corporate Sustainability Reporting Directive (CSRD) – Application from FY 2024

Background

The application of the European Union’s (EU)  Corporate Sustainability Reporting Directive (CSRD) is to be phased in from the start of 2024 and will require in-scope companies to make disclosures on the risks and opportunities arising from social and environmental issues, and on the impact of their business on people and the environment. The CSRD significantly alters the landscape for corporate sustainability reporting, by requiring in-scope companies to meet prescribed formats of disclosure and reporting standards. In particular, non-EU (including U.S.) corporate groups will need to consider whether they may be captured by the requirements of the CSRD given that disclosure will be required on a consolidated level, covering both EU and non-EU subsidiaries of the non-EU group.

The CSRD builds on the EU’s 2014 Non-Financial Reporting Directive (NFRD), which laid the parameters of sustainability reporting for approximately 11,000 large companies. With its broader scope, the CSRD will impact nearly 50,000 companies and mandates the sharing of more data in relation to ESG considerations.

The new standards will apply for the first time for financial years starting on or after 1 January 2024 for EU-incorporated companies that are already subject to the NFRD, with reports to be published in 2025. A staggered approach will apply for other in-scope EU companies that are not already subject to the NFRD, with in-scope EU subsidiaries or branches of non-EU groups with significant activity in the EU to be required to report in 2029 based on data from financial years starting on or after 1 January 2028.

Rationale for change

In addition to fostering sustainable practices and investments, the aims of the CSRD include addressing a disparity between investors’ information needs and the corporate sustainability information that is available. The consistent standards introduced pursuant to the CSRD are intended to increase accountability, trust and transparency, allowing investors to access non-financial data that is comparable and which helps them to assess the impact of companies on society and the environment, as well as determine risks and opportunities arising from sustainability matters.

The reporting standards - ESRS

Companies subject to the CSRD will have to report according to the European Sustainability Reporting Standards (ESRS), the first “sector agnostic” set of which were adopted by the EU Commission on 31 July 2023. Whilst the ESRS have been tailored to EU policies, they were intended to complement, and be compatible with global initiatives. Additional sector-specific ESRS will also be implemented, although it is proposed by the EU Commission (as part of its 2024 Work Programme) to postpone their adoption by two years (i.e. from 30 June 2024 to 30 June 2026) to give more time to companies to adapt to the existing new requirements.

The reporting requirements in the ESRS are divided into two “cross-cutting” standards (the “general requirements” and “general disclosures”), and 10 key “topical” ESG standards (including climate change, pollution, water and marine resources, biodiversity and ecosystems, affected communities and business conduct). It will be up to reporting companies to determine which of the topical standards are “material” to them (and therefore whether they are required to report on them). Materiality is determined on a “double materiality” principle, with a two-tiered approach where companies consider materiality in relation to both (i) the impacts of their activities on people and the environment (referred to in the ESRS as “impact materiality”), and (ii) the principal risks or opportunities relating to sustainability matters that affect the business financially (referred to as “financial materiality”).

The information reported must be assured by an independent third party (which was not the case under the NFRD) and published in a specific section of the company’s management report. This assurance is expected to be provided by the company’s statutory auditor (although EU Member States may also allow an independent assurance services provider to express this opinion).

The reporting requirements of the CSRD are onerous, with data required in relation to the company’s whole value chain, even if the value chain extends outside of the EU.

Who needs to comply?

Ultimately, all large EU companies and groups¹  (including banks and insurance undertakings), companies listed on regulated markets in the EU², parent companies of large EU groups and non-EU groups with significant activity in the EU, will need to comply with the CSRD. However, amidst the pressure for transparency, even companies not directly in scope may want to consider aligning their reporting with the CSRD standards where possible to increase investor confidence.

Note that a non-EU group (including U.S. headquartered groups) will have significant activity in the EU, and therefore become in-scope for the purposes of the CSRD, if:

• Its net turnover in the EU in two consecutive financial years is over €150 million; and
• It has at least (i) one branch in the EU that has a net turnover of at least €40 million or (ii) one subsidiary in the EU that meets certain thresholds set out in the CSRD, including being a large company or a listed small and medium enterprise in the EU.

Interrelation with the proposed CSDDD

Companies that report under the CSRD will not need to separately comply with the reporting obligations set out in the EU’s proposed Corporate Sustainability Due Diligence Directive (CSDDD) (read more about this proposal in our previous Client Alert). This is an example of how the CSRD and the proposed CSDDD are intended to operate alongside each other, with the EU Commission having previously noted that the process of identifying adverse impacts in accordance with the CSDDD due diligence obligations is closely related to the processes required to collect information for reporting purposes under the CSRD. It also noted that the CSDDD will set obligations for companies to have in place a climate transition plan, leading to more complete and effective reporting under the CSRD and driving corporate behavioural change.  

Timelines for compliance

The CSRD entered into force on 5 January 2023, with EU Member States required to implement its provisions into national law and regulation by 6 July 2024. Practical application of the measures will be staggered between 2024 and 2028, with the first reporting cycle due in 2025 based on data from financial years starting on or after 1 January 2024. EU-incorporated companies that are already subject to the NFRD will be the first to report in accordance with the CSRD.

Other large companies (including non-EU companies with listed securities on an EU regulated market) and parents of large EU groups will follow, with their reports due in 2026 for financial years starting on or after 1 January 2025. Other SMEs (except micro undertakings)²listed on an EU regulated market will come in scope for financial years starting on or after 1 January 2026, with reports due in 2027, and finally, non-EU groups with significant activity in the EU will be required to report in 2029 for financial years starting on or after 1 January 2028.

For the first three years, the application of the requirements will be on a “comply or explain” basis, to cater for the possibility that not all the necessary information regarding a company’s entire value chain is readily accessible. The company must explain the efforts made to obtain the necessary information, reasons why it cannot be obtained and its plans to obtain such information going forward.

How to prepare

Given the burdensome nature of the CSRD requirements, corporate groups should consider carefully whether they (including any of their EU subsidiaries or branches) fall within the scope of the CSRD, and address how to implement the reporting standards if they are required to do so. Companies that do not meet the criteria should be aware that they may fall within the value chains of other companies with which they have business relationships and that are in scope for the purposes of the CSRD, which may therefore result in requests from those in-scope companies to provide data to facilitate their CSRD reporting requirements. Navigating this potential challenge will require early engagement to identify any limits in data gathering.

^{1 A large company or large group for these purposes is one that meets two out of the three following criteria:}

1. 1. 1. ^{Net turnover of more than €40 million (expected to increase to €50 million under EU Commission proposals).}
      2. ^{Balance sheet total assets greater than €20 million (expected to increase to €25 million under EU Commission proposals).}
      3. ^{More than 250 employees.}

^{2 Except “micro undertakings”, being undertakings which on their balance sheet dates do not exceed two out of the three following criteria: (i) balance sheet total of €350 000 (expected to increase to €450,000 under EU Commission proposals); (ii) net turnover of €700 000 (expected to increase to €900,000 under EU Commission proposals); and (iii) average number of employees during the financial year: 10.}