EU Corporate Sustainability Reporting Directive – new sustainability disclosure obligations for EU and non-EU companies

Other Author      Oliver Williams, Trainee Solicitor

On 10 November 2022, the EU Parliament adopted the Corporate Sustainability Reporting Directive ("CSRD"). The EU Council is expected to adopt the CSRD on 28 November 2022, after which it will be published in the Official Journal. The CSRD will then enter into force 20 days after publication and EU member states will have 18 months to integrate it into national law.

The CSRD will create new, detailed sustainability reporting requirements and will significantly expand the number of EU and non-EU companies subject to the EU sustainability reporting framework. The required disclosures will go beyond environmental and climate change reporting to include social and governance matters (for example, respect for employee and human rights, anti-corruption and bribery, corporate governance and diversity and inclusion). In addition, it will require disclosure regarding the due diligence processes implemented by a company in relation to sustainability matters and the actual and potential adverse sustainability impacts of an in-scope company's operations and value chain.

The CSRD will begin to apply for many for financial years starting in 2024 (see "When does this apply?" below for further details). Companies should review the effect of the CSRD to understand how and when it may apply to them and what they should to do to prepare.

Our team would be delighted to assist you in your preparations for the CSRD. We recognise that new sustainability reporting requirements in the EU, US, UK and other jurisdictions are top of the agenda for many institutions. Please get in touch if you would like to discuss how we can help.

Who does this apply to?

The following entities will be required to report under the CSRD:

• Companies currently subject to the EU Non-Financial Reporting Directive ("NFRD"): Broadly, that is, large EU "public interest entities" with EU regulated market listed securities, EU credit institutions and EU insurance companies with more than 500 employees;
• "Large" EU companies and groups: EU companies and EU consolidated groups meeting two of the following tests: (a) balance sheet total exceeding EUR 20 million, (b) net turnover exceeding EUR 40 million, and (c) more than 250 employees;
• Other EU and non-EU companies (excluding "micro-enterprises") with securities listed on EU regulated markets: EU and non-EU companies (excluding micro-enterprises) with securities (including debt securities with denominations of less than EUR 100,000 or equivalent) listed on an EU regulated market. For the avoidance of doubt, it does not apply to securities listed on EU multilateral trading facilities; and
• Non-EU companies with a net turnover of more than EUR 150 million in the EU and an EU branch or subsidiary (the "EU Turnover Test"): Non-EU companies with (a) an annual net turnover at the consolidated or individual level in the EU exceeding EUR 150 million for each of the last two consecutive financial years, and (b) which have a qualifying EU subsidiary (which is either a large EU company, as defined above, or an EU company listed on an EU regulated market which is not a micro enterprise) or a branch in the EU that generated an annual net turnover in excess of EUR 40 million in the preceding financial year.

 There are exemptions for in-scope companies where their parent company complies with the CSRD via a consolidated group report. There also remains the possibility for the EU Commission to recognise the sustainability reporting of non-EU companies in other jurisdictions as equivalent. It is unclear, however, whether the EU Commission will recognise non-EU standards as fully equivalent given the expansive nature of the CSRD. In addition, it should be noted that the CSRD is an EU Directive without direct effect that needs to be transposed into local law. Therefore, there may be differences in the manner in which the CSRD is implemented locally and it will be important to verify how the CSRD applies at the relevant national level.

What are the obligations?

In-scope companies will be required to disclose a wide range of sustainability-related information, including:

• a brief description of the company's business model, strategy and sustainability risks and opportunities. Under the CSRD, in-scope companies must set clear ESG targets and annually publish their progress on these targets, as well as their transition plans (if any). As a result, the focus on sustainability is no longer optional or voluntary, but mandatory, and must be embedded in the company's long-term vision and strategy, and must also be applied to its policies;
• implementation plans in relation to the transition to a sustainable economy, measures taken to limit global warming in line with the Paris Agreement and to achieve climate neutrality by 2050 and exposure to coal, oil and gas-related activities;
• sustainability matters that affect the company and the impact of the company on sustainability matters (the so called "double materiality" perspective);
• greenhouse gas emission targets;
• policies in relation to sustainability (including incentive schemes linked to sustainability matters); and
• due diligence processes implemented by the undertaking in relation to sustainability matters and the actual and potential adverse impacts of the company's operations and value chain. We expected that the required reporting on ESG practices under the CSRD in the value chain will have indirect implications for supply chain and other outsourcing partners.

Which sustainability reporting standards will apply?

The European Financial Reporting Advisory Group ("EFRAG") has been charged with helping to develop further disclosure requirements and recently published exposure drafts of the EU Sustainability Reporting Standards (“ESRS”) that will inform further obligations under the CSRD (see our earlier briefing The European Financial Reporting Advisory Group issues draft European Sustainability Reporting Standards | Eye on ESG). EFRAG has been asked to help develop a framework that respects global standard-setting initiatives for sustainability reporting, but also produces information of sufficient quality for other market participants to satisfy their requirements under other EU rules, such as the EU Sustainable Finance Disclosure Regulation and the EU Taxonomy Regulation.

In particular, EFRAG has been asked to look at rules for detailed disclosure requirements in respect of the EU taxonomy environmental objectives, social and human rights disclosures and sustainability governance disclosures. EFRAG are also separately developing rules for non-EU companies that are within scope solely on account of the EU Turnover Test. There are also exemptions to some of the disclosure requirements for small and medium sized institutions. To align with other industry efforts on standardisation of sustainability reporting, EFRAG has taken note of international developments, including recently issued exposure drafts by the International Sustainability Standards Board. EFRAG is expected to deliver the draft ESRS to the EU Commission later this month and the Commission is due to adopt the first set of ESRS requirements by 30 June 2023.

Companies will also be required to obtain third-party assurance in relation to their CSRD disclosures. 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. Assurance requirements will be applied progressively from "limited" assurance to more fulsome "reasonable" assurance by 2028.

Companies must report the relevant information in their annual management reports, rather than in a separate sustainability report. To aid usability of the information provided, the disclosures will be required to be reported in "XHTML" format. This is in line with other EU work on the digitalisation of reporting data, but may differ from the current reporting activities of many entities.

When does this apply?

The application of the CSRD will take place in four stages (for financial years starting on or after):

1. 1 January 2024 for large EU "public interest entities" that are already subject to the NFRD (i.e. large EU companies with EU regulated market listed securities, EU credit institutions and EU insurance companies with more than 500 employees) and non-EU companies listed on a regulated market in the EU within the definition of large undertakings with more than 500 employees;
2. 1 January 2025 for large EU organisations that are not presently subject to the NFRD and large non-EU companies listed on a regulated market in the EU;
3. 1 January 2026 for listed EU and certain small and medium sized enterprises (“SMEs”) (including non-EU SMEs listed on a regulated market in the EU), small and non-complex credit institutions and captive insurance undertakings; and
4. 1 January 2028 for non-EU companies falling within the rules solely on account of the EU Turnover Test.

How should companies prepare?

The CSRD will impose sustainability disclosure obligations on a range of EU and non-EU companies. Whilst some of the detail remains to be developed by EFRAG, it is clear that it will require significant resource and will overlap in scope and diverge in content with the rules of other jurisdictions.

The CSRD is, for example, different in many respects from the proposed SEC climate rules and from UK requirements (see, for further detail,, our briefings SEC Proposes Climate Change Disclosure Rules Applicable to Public Companies | Eye on ESG and The UK’s FCA and FRC review the quality of companies’ TCFD disclosures | Eye on ESG).

To prepare, institutions may wish to:

1. take advice on the applicability of the CSRD to the EU and non-EU subsidiaries in their group. The scope and precise applicability of the CSRD is particularly complex and will require detailed analysis;
2. complete a gap analysis and assess the overlap of CSRD with other EU and US, UK, international and other ESG reporting rules;
3. review the EFRAG exposure draft ESRS and the final draft to be delivered to the EU Commission later this month for further guidance on expected reporting requirements;
4. look to the human rights and environmental due diligence requirements contained in the draft EU Directive on Corporate Sustainability Due Diligence which are indicative of emerging regulatory and stakeholder expectations (see our briefing Human Rights and the Environment – EU publishes draft Corporate Sustainability Due Diligence Directive | Eye on ESG); and
5. review the role, resources and expertise of their legal and compliance functions, who should play a key part in addressing the new challenges of this legislation.