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Boiling point

Boiling point

New directive on corporate sustainability

The Corporate Sustainability Reporting Directive came into force on 5 January. It is expected to transform how large companies manage sustainability matters. Richard Lee lowers the temperature.

As governments, lawmakers, and international organisations move to tackle climate change and biodiversity loss, significant legal requirements are being introduced that will affect multinational and large companies operating in the EU and Ireland, with a knock-on effect on SMEs.

Boiling point

Boiling point

The Corporate Sustainability Reporting Directive (CSRD) came into force on 5 January 2023 and is expected to be transformative in relation to the way large companies manage sustainability matters. These include climate change, biodiversity loss, social inclusion and equality, stakeholder relations, green finance, energy consumption, greenhouse gas emissions, pollution control and much more.

The CSRD is not a one-off – there are a number of other significant sustainability initiatives in the pipeline, including the Corporate Sustainability Due Diligence Directive (CSDDD). 

Given Ireland’s position as a favourable platform for large companies trading in Europe, it is expected that, in the transposition of the CSRD, Ireland will embrace emerging opportunities.

ESG and legal practice

Now that the CSRD is in force, it is expected that ESG (environmental, social, and governance) will further assert itself from a legal viewpoint:

  • In supply chains, contract clauses are increasingly being incorporated to require suppliers to furnish ESG policies, reports, and relevant data,
  • In tendering and procurement, parties are being asked to set out their ESG policies and transition planning,
  • In mergers and acquisitions, ESG due diligence is now becoming a specific focus in larger transactions (no buyer wants to take on what may become a ‘stranded asset’ or burden),
  • In construction law, new commercial buildings are expected to comply with sustainability requirements, and many existing commercial buildings will need to be upgraded,
  • In commercial leases, clauses are now being inserted that put ESG obligations on commercial tenants,
  • In company law, leading companies are including ESG clauses in their company constitution as evidence that corporate sustainability is at their core,
  • In employment and human resources, the ‘S factor’ is now becoming more pronounced, with greater focus on social sustainability,
  • For accounting and finance, the CSRD is a major development in relation to reporting requirements for large companies, and brings in mandatory sustainability auditing.

The proposed CSDDD is expected later this year, and will introduce legal sustainability due diligence and directors’ duties for large companies.

Focused language

The terms ‘environmental, social, and governance’ and ‘corporate sustainability’ have no single defined meaning. ESG is understood to refer to the factors that affect a company’s sustainability and its effect on society and the environment. With the arrival of the CSRD, the language and terminology used in relation to ESG and corporate sustainability will become more focused.

SG and corporate sustainability are not defined in the CSRD but, in the future, it is likely that corporate sustainability will have a broader meaning than ESG. In particular, the CSRD focuses on the expression ‘sustainability matters’, which means “environmental, social and human rights, and governance factors, including sustainability factors” (with sustainability factors defined in Regulation 2019/2088 as environmental, social, and employee matters, respect for human rights, and anti-corruption and anti-bribery matters). This is an important definition, as it brings some clarity to what is meant by corporate sustainability.

The CSRD defines ‘sustainability reporting’ as the reporting of information related to sustainability matters. Large companies and listed SMEs will be obliged to report on (a) the company’s impact on sustainability matters, and (b) how sustainability matters affect the development, performance and position
of the company.

The CSRD is an important building block in terms of developing the legal understanding of what corporate sustainability means from a legal viewpoint, and also in terms of setting out what is expected of large companies and listed SMEs in Europe and Ireland.

Reporting standards

The CSRD also introduces the European Sustainability Reporting Standards, which set out the disclosure requirements to be included in the mandatory sustainability reporting. After intensive consultations, the European Financial Reporting Advisory Group (EFRAG) furnished a final draft of these new detailed standards to the European Commission in November 2022, and these are expected to form the basis of a delegated act in June this year.

Large companies will be expected to put corporate sustainability strategies, policies, metrics, and targets in place in accordance with these new standards. To date, there are 12 standards setting out what sustainability reporting will need to address, which include disclosure requirements and information relating to:

  • Climate change – mitigation and adaptation,
  • Pollution prevention and control,
  • Water and marine conservation,
  • Biodiversity preservation,
  • Circular resource management,
  • Company workforce,
  • Workers in the value chain,
  • Affected communities,
  • Consumers and end users, and
  • Business conduct.

Detailed information can be found in the resources set out in the ‘Look it up’ section at the end of this article.

Planning and preparation

Substantial planning and preparation will be required to be in a position to comply with the timelines set out in the CSRD. Some larger companies are already well advanced in their arrangements, but many will be required to put in place additional sustainability strategies, policies, metrics, and targets.

Under the CSRD, corporate sustainability should be a matter for the board and senior management of a company and should be at the core of its strategy, with specific sustainability policies and transition planning.

Sustainability matters are likely to land on many different desks within a large company, including (for example) finance, HR, legal, and company secretarial.

As part of their planning, some large companies are putting together a designated ESG corporate sustainability team, with members from different sections contributing in order to deal with the various sustainability matters – with one senior person or director in control.

A number of challenges are emerging for large companies, in that the European standards include aspects of corporate sustainability not included in existing international sustainability reporting standards. Teams from various international standard-setting organisations are currently engaged in active dialogue to achieve interoperability between the various international sustainability reporting standards.

A significant difference is emerging internationally, in that, for some countries, corporate sustainability is primarily a matter of risk management, whereas the EU is going further by requiring that corporate sustainability should address sustainable and resilient economies.

The CSRD will apply to companies already subject to the Non-Financial Reporting Directive (NFRD) in respect of their financial year commencing in 2024, to be reported in 2025. For large companies not subject to the NFRD, the CSRD will apply in respect of their financial year commencing in 2025, to be reported in 2026.

Sustainability and suppliers

What is already emerging is that large companies are asking suppliers to provide relevant ESG and corporate-sustainability information and data to them so that they will be in a position to meet their reporting obligations. SMEs supplying large companies are already being asked for relevant sustainability data, which in some cases is not available.

The general view of large companies appears to be that companies are in a transition period and that they are happy to work with suppliers. The CSRD will bring about a need for far greater sustainability information and data, and it is recognised that this will be one of the primary difficulties encountered in the implementation of the CSRD.

EFRAG is working on voluntary standards for SMEs not in the scope of the CSRD, and these are likely to bring clarity and guidance as to what a large company should be asking of an SME. Solutions may also have to be found in relation to sustainability data from non-EU suppliers.

Report and be judged

The CSRD is expected to have a significant input on the way companies organise and manage their operations and their relations with stakeholders. Central to the CSRD is the requirement on large companies to report and disclose how their activities affect climate change, biodiversity loss, social inclusion, and equality.

In making audited standardised disclosures, they will then be judged by their shareholders, investors, customers, employees, and stakeholders.

The CSRD standardised data is likely to be used for company comparison purposes by ESG rating agencies and by NGOs. Concerned investors, consumers, and business partners may make unwelcome judgements.

Awareness and upskilling

It is generally accepted that there is an insufficient level of understanding of ESG and corporate sustainability within business – the arrival of the CSRD will no doubt raise awareness.

If companies hope to benefit from the opportunities and avoid the pitfalls that are likely to come with the CSRD and the proposed CSDDD (and other proposed sustainability mandatory measures), it makes sense to upskill and build sustainability knowledge within their organisations in a planned and targeted manner.

One of the goals of the CSRD is to bring transparency and eliminate ‘greenwashing’ (unfounded claims to have made beneficial contributions to sustainability matters).

What may previously not have been questioned as greenwashing may now fall into difficulties, with the greater clarity coming from the CSRD and European standards. Marketing and PR may also need to be included in the ESG team.

Look it up



Richard Lee is principal of Lee Solicitors and is currently completing a doctorate on ESG/corporate sustainability, impact and planning.

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