On 22 June 2022, the European Council and European Parliament announced that they had reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
The provisional agreement is subject to approval by the European Council and the European Parliament. Therefore, the requirements could change and the final text of the CSRD may differ from the summary set out below.
What is the CSRD?
The CSRD amends the current Non-Financial Reporting Directive (NFRD). The CSRD would require more detailed public reporting by entities about sustainability matters, which encompass environmental, social and governance (ESG) factors.
The CSRD will require European Sustainability Reporting Standards (ESRSs). EFRAG issued exposure drafts of ESRSs in April 2022, with a comment deadline of 8 August 2022, which are likely to form the basis of these requirements. If finalized as drafted, significant amounts of detailed information will need to be disclosed.
Information likely to be required in public disclosures will cover all environmental, social and governance matter, including greenhouse gas emissions, labour practices, water usage, etc.
The CSRD would also require entities to comply with the EU Taxonomy for sustainable activities, which is a classification system, establishing a list of environmentally sustainable economic activities.
Who will apply the CSRD?
The application of the CSRD will take place in three stages for companies located in the EU:
- 1 January 2024 for companies already subject to the NFRD;
- 1 January 2025 for companies that are not presently subject to the NFRD which meet two out of three criteria;
- More than 250 employees
- More than EUR 40m turnover
- More than EUR 20m total assets
- 1 January 2026 for listed SMEs, small and non-complex credit institutions and captive insurance undertakings.
Current applicability of the NFRD is based on whether a company meets the definition of a Public Interest Entity (PIE) and has more than 500 employees.
Separate, proportionate standards for unlisted SMEs are also expected to be issued for adoption on a voluntary basis.
An opt-out will be possible for SMEs during a transitional period, meaning that they will be exempted from the application of the directive until 2028.
Will non-European companies need to comply with the CSRD?
For non-European companies, the requirement to provide a sustainability report applies to all companies generating a net turnover of EUR 150 million in the EU and which have at least one subsidiary or branch in the EU. These companies must provide a report on their environmental, social and governance impacts, as defined in the CSRD.
Will the reports needs to be certified?
Reporting must be certified by an accredited independent auditor or certifier. To ensure that companies comply with the reporting rules, an independent auditor or certifier must ensure that the sustainability information complies with the certification standards that have been adopted by the EU. The reporting of non-European companies must also be certified, either by a European auditor or by one established in a third country.