ESG reporting in Europe: Corporate Sustainability Reporting Directive obligations
This editorial is partner content presented by Osborne Clarke
Many EU-based businesses will have to start to make disclosures which will help asset manager and investor compliance
The Corporate Sustainability Reporting Directive (CSRD) was announced as part of the European Green Deal and updates the provisions of the existing Non-Financial Reporting Directive (NFRD) which applied to large EU-listed companies, banks and insurance companies.
Compared to the NFRD, the CSRD extends the scope of the reporting obligation to more companies and imposes wide-ranging environmental, social and governance (ESG) disclosures on them for the first time. It requires the audit (assurance) of reported information, introduces more detailed reporting requirements to mandatory EU sustainability reporting standards, and amends the format for the reported information.
The CSRD is the third pillar in the EU's sustainability reporting framework. The second pillar is the EU Taxonomy Regulation, which created a classification system of environmentally sustainable economic activities. The Sustainable Finance Disclosure Regulation (SFDR), the first pillar, introduced a sustainability labeling regime to improve transparency in the market for sustainable investment products, to prevent greenwashing and to increase transparency around claims made by financial market participants.
Which companies are in scope of the CSRD?
The CSRD has European Economic Area-wide relevance, meaning that it applies to all relevant companies established in the European Union, Iceland, Liechtenstein and Norway. Non-EU companies generating a net turnover of more than €150 million, and having a subsidiary or a branch in the EU generating more than €40 million net turnover, also fall within the scope of the CSRD.
The new sustainability reporting rules will apply to:
- Large undertakings (balance sheet assets of more than €20 million, turnover exceeding €40 million, and the average number of employees during the financial year exceeding 250)
- All companies listed on regulated markets, except listed micro undertakings.
The European Commission will by 30 June 2024 adopt delegated acts to provide for sustainability reporting standards that are proportionate and relevant to the characteristics and complexity of small and medium-sized enterprises (SMEs).
The rules also apply, with some modifications, to listed SMEs though they will be able to use an opt-out during a transitional period, exempting them from the application of the directive until 2028.
A subsidiary undertaking will be exempt from reporting if its parent company has already reported in a consolidated way.
However, it is worth bearing in mind that the whole value chain will be subject to the sustainability reporting. This has an important consequence: it is likely that companies that are in scope will ask their suppliers, even if they are small or medium-sized companies, to comply with the CSRD as well.
What information must be reported under the CSRD?
The CSRD requires reporting of forward-looking, retrospective, qualitative and quantitative information necessary to understand an undertaking’s impacts on sustainability matters and, from the opposite lens, the information necessary to understand how sustainability matters affect an undertaking’s development, performance, and position (that is, “double materiality” reporting).
The information must contain a description of the company's:
- business model and strategy as well as opportunities and resilience to sustainability risks and transition plans;
- sustainability targets and their progress status;
- sustainability governance (administrative, management and supervisory bodies and their expertise and skills to fulfil their role);
- sustainability policies;
- incentives schemes linked to sustainability matters;
- due diligence of sustainability matters and the process to conduct it;
- principal adverse impacts, and those of its value chain, including its products and services, its business relationships and its supply chain;
- principal sustainability risks and their management.
What are the European sustainability reporting standards (how will they be defined)?
The Commission will adopt delegated act to provide for the sustainability reporting standard that will specify the information that undertakings are to report in accordance with the disclosure obligation contained within the directive. The standards will ensure the quality of the reported information and avoid imposing a disproportionate administrative burden on undertakings.
Also by the 30 June 2023, the Commission will specify the pieces of information that undertakings are to report. It will also by the same date specify complementarily information and sector-specific information (since the risks and impacts related to sustainability matters are higher for some sectors than for others) that undertakings are to report.
The reporting requirements laid down in the delegated acts will not enter into force earlier than four months after their adoption by the commission. The adopted delegated acts will also be reviewed every three years taking into consideration the technical advice of the European Financial Reporting Advisory group (EFRAG) and taking into account relevant developments including developments with regard to international standards.
The sustainability reporting standards shall take into account the sustainability subject matter and specify the information that undertakings are to disclose on the following:
- Environmental factors ranging from climate change adaptation and mitigation plans (including the three scopes of greenhouse gas emission) to pollution, biodiversity and ecosystem, water and marine resources, and resource use and the circular economy.
- Social and human rights factors, including gender equality, diversity and inclusion, work-life balance and respect for human rights.
- Governance factors, including business ethics and corporate culture, internal control and risk management system, and lobby activities.
During 2022, EFRAG presented the first drafts of the European Sustainability Reporting Standards, which were subject to consultation until 8 August last year. The opinions on the European Sustainability Reporting Standards of the three European financial supervisory authorities have recently been published.
The opinion of the three European financial supervisory institutions – the European Insurance and Occupational Pensions Authority, the European Securities and Markets Authority and the European Banking Authority – on the European Sustainability Reporting Standards is overall favourable, although they hold the view that there is some room for improvement.
When will the CSRD start applying?
The application of the CSRD will take place in four stages:
- reporting in 2025 on the financial year 2024 for companies already subject to the Non-Financial Reporting Directive;
- reporting in 2026 on the financial year 2025 for other large companies;
- reporting in 2027 on the financial year 2026 for listed SMEs (except micro undertakings), small and non-complex credit institutions and captive insurance undertakings; and
- reporting in 2029 on the financial year 2028 for non-EU undertakings with net turnover above €150 million in the EU if they have at least one subsidiary or branch in the EU exceeding certain thresholds.
In what format should companies report?
The management report should be prepared in a single electronic reporting format.
It is expected that the Commission in its delegated acts will require to digitally "tag" the reported information, so it is machine readable and feeds into the European single access point envisaged in the Capital Markets Union Action Plan.
Is independent third-party assurance mandatory?
Yes and no. Under the CSRD, there is a requirement for the company’s statutory auditor, another auditor (according to Member State’s option) or an independent assurance services provider (Member State’s option), to provide limited assurance around a company’s reported sustainability information.
Osborne Clarke comment
The CSRD will be a material change for many EU-based businesses with its imposition of wide-ranging ESG disclosures for the first time. These disclosures will be of particular interest to the investor and asset management community who have been grappling with gathering the information they need about their underlying investments in order to comply with the requirements of the SFDR.
The EU's rules match similar moves in the UK and the US. In the UK, the government has already pushed ahead with mandatory climate reporting for listed and large private companies under the Taskforce on Climate-related Financial Disclosures framework.
The process of change will be worldwide and all-encompassing in scope, involving not only companies obliged to implement the CSRD, but also companies that are not directly involved but work or want to work with companies included in the CSRD.
This editorial is partner content presented by Osborne Clarke.
illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.
About the authors
Valentina Facchini is a qualified chartered accountant and auditor at international law firm Osborne Clarke in Italy. She advises on ordinary and extraordinary tax and corporate matters, advising companies with consolidated financial statements. She has a niche interest in ESG matters and in particular in sustainability reporting.
Cedric Degreef is a project lawyer at international law firm Osborne Clarke in Belgium. He advises on a broad range of matters relating to energy and climate law, environmental law, and general administrative and construction law, focusing on the utilities, industry and infrastructure sectors.
Matthew Germain is an environmental lawyer at international law firm Osborne Clarke in the UK. Matt leads our Environment & Sustainability practice and the Net Zero part of our Decarbonisation team. He's also a lead lawyer in the firm's ESG service group.
Dipika Keen is a knowledge lawyer at international law firm Osborne Clarke in the UK. She has extensive experience of corporate law practice and regulation and has a particular interest in sustainable business practices and ESG considerations.