EU member states have until 16 June 2024 to transpose the CSRD into their national laws, says Richard Kelly. 

The EU’s Corporate Sustainability Reporting Directive (CSRD) entered into force on 5 January and will require detailed qualitative and quantitative sustainability disclosures from a substantially expanded universe of companies. Member states have until 16 June 2024 to transpose the CSRD into their national laws, with CSRD reporting then phasing in over a number of years.

The CSRD applies to:

• Large EU companies – EU entities or an EU consolidated group that exceeds at least two of the following three thresholds: (1) a balance sheet total of €20 million; (2) net turnover of €40 million; and/or (3) an average of 250 employees during the financial year,
• Non-EU undertakings with a substantial EU turnover – a non-EU undertaking that meets the following two threshold requirements: (1) over €150 million in EU annual turnover for the trailing two financial years; and (2) at least one subsidiary that is a large undertaking (or listed entity that is not a micro undertaking) or EU branch that generated net turnover of more than €40 million in the prior financial year,
• Listed SMEs – small and medium-sized undertakings with securities admitted to trading on an EU regulated market (excluding micro undertakings).

The scope of the CSRD is substantially broader than the EU’s existing Non-Financial Reporting Directive (NFRD). The European Commission estimates that approximately 49,000 undertakings will be required to comply with the CSRD, compared with 11,600 for the NFRD.

New reporting requirements

CSRD reporting will require sustainability information across environmental, social and human-rights and governance (ESG) factors to be included, alongside financial information in directors’ annual reports.

The term ‘sustainability’ was specifically used in the CSRD rather than ‘non-financial’ (as had been used in the NFRD), as the commission sought to emphasise that sustainability issues can have an impact on the financial performance of companies.

The sustainability information must be included in a clearly identifiable dedicated section and must cover the impact of sustainability factors on the company’s business, as well as the external impacts of the company’s activities on people and the environment.

The information must cover the undertaking’s business model and strategy, sustainability due diligence, and sustainability risks. In particular, EU undertakings must report on the resilience of their business models and strategy in the face of sustainability risks, the opportunities afforded by sustainability factors, and the plans of the undertaking to ensure its business model is compatible with the transition to a sustainable economy and with limiting global warming to 1.5°C in line with the Paris Agreement and the objective of achieving climate neutrality by 2050.

Timeline for compliance

The CSRD will phase-in as follows:

• Financial years starting on or after 1 January 2024 – public-interest entities that are large undertakings or parent undertakings of a large group, and that on their balance-sheet date have an average of more than 500 employees during the financial year,
• Financial years starting on or after 1 January 2025 – other EU large undertakings and parent undertakings of a large group,
• Financial years starting on or after 1 January 2026 – listed SMEs (other than micro undertakings) and certain small and non-complex credit institutions and captive insurance and reinsurance undertakings (however, for financial years starting before 1 January 2028, these SMEs may opt out of sustainability reporting if they briefly state in their management report why sustainability information has not been provided),
• Financial years starting on or after 1 January 2028 – non-EU undertakings meeting the turnover requirements under the CSRD.

The commission is required to adopt delegated acts that set out in detail the European sustainability reporting standards. These standards are being developed by the European Financial Reporting Advisory Group. It is expected that the first set of standards will be adopted in June 2023.

Those companies affected must now take operational steps to ensure compliance with the new rules. In particular, the audit process will need to be updated to ensure that sustainability factors are measured and reported on in a way that is robust and can be independently assessed by external auditors.

This may prove challenging in the short term, as the sustainability reporting requirements are still under development, but given the scale of the work needed, companies should start the process sooner rather than later.

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