The Corporate Sustainability Reporting Directive (“CSRD”) has now been approved by the European Council, the last legislative obstacle to becoming officially adopted into EU law. The new requirements are a revision of the Non-Financial Reporting Directive (“NFRD”)1, which will apply to a broader scope of entities, expand the level of information to be disclosed and introduce audit assurance requirements.
With the approval from the European Council on 28 November 2022, the CSRD is now officially adopted into EU law. This concludes its journey from the initial legislative proposal, published in April 2021, to its adoption by the European Parliament on 10 November 2022. The legislation is now set to be published in the Official Journal of the European Union and will enter into force 20 days after the date of publication. Member States will then have 18 months to transpose the new reporting requirements into national law.
The legislation is built upon the existing requirements of the NFRD and will impose more extensive, more stringent, and more widely applicable standards compared to its predecessor, the details of which are discussed below. Its additional requirements are the EU’s solution to the current problem of an inconsistent and insufficient sustainability reporting landscape.
Streamlined reporting standards that apply to a wider range of companies will bring several advantages. Such advantages include much-needed transparency on sustainability efforts; a reduced burden caused by information requests from stakeholders; and more help for financial market participants to comply with other EU disclosure obligations under the SFDR and the Taxonomy.
So, which entities are in scope for CSRD?
The number of entities required to report under the CSRD is set to increase more than four-fold from those that were subject to the requirements of the NFRD. Entities in scope include:
- Undertakings with securities listed on EU regulated markets;
- All large undertakings, listed or not, meeting at least two out three criteria (this includes EU undertakings and EU subsidiaries of a non-EU entity):
- > 250 employees
- > €40m turnover
- > €20m total assets
- As of 1 January 2026 (with the ability to opt-out until 2028), small and medium sized enterprises (SMEs) with transferable securities on an EU-regulated market.
It is worth noting that listed micro-undertakings are exempt from the rules and small and medium sized listed companies have an extra three years to comply.
Post-Brexit, these requirements do not automatically apply to UK entities. However, it is very likely that similar legislation will be introduced in the UK in the future. Following the EU Taxonomy, the UK has committed to synthesising its own version of the Taxonomy; the FCA has also released the consultation paper for the Sustainability Disclosure Requirements (SDR) – applying to asset owners, asset managers and real economy companies – which succeeded the EU’s SFDR. Evidently, the UK is ramping up sustainability related regulatory obligations the same way the EU has been. It is to be expected that the UK will follow suit regarding the legislation with their own set of requirements applying to companies. The US Securities and Exchange Commission (SEC) have presented a proposal for climate-related disclosure requirements for companies, but these requirements are very different from those contained in the CSRD. For example, the SEC’s proposal only addresses climate related factors whilst the CSRD requires disclosure against a broader range of ESG matters.
Furthermore, the legislation includes an equivalence regime that allows certain non-EU disclosure requirements to qualify as CSRD compliant. This provides a large incentive for the UK and the US to introduce their own requirements aligned with the CSRD. However, it still remains unclear how equivalence will be measured and there has been no guarantee that UK and US companies will be granted the possibility for equivalent compliance.
What new information needs to be disclosed under CSRD?
The scope of the requirements includes those anchored in the NFRD, in addition to the new ones set out in the CSRD. The new legislation requires reporting against the concept of “double materiality”, which was not a requirement of the former NFRD. Double materiality can be understood as the consideration of both incoming and outgoing sustainability impacts. To ascertain the incoming sustainability impacts, companies must evaluate how environmental and social factors may have an effect on themselves as entities. To understand the outgoing impacts, companies must analyse how their activities may affect the environment and wider society.
The CSRD will require reporting entities to disclose information regarding their strategy subject to the double materiality concept: companies will disclose how their business is resilient against sustainability risks, and how they can also identify sustainability opportunities. Companies will also disclose sustainability targets, their approach to governance, the due diligence processes in place, which consider sustainability factors and any relevant sustainability policies. Disclosure requirements also include, inter alia, information on remedial actions to prevent any actual or potential adverse impacts, as well as transparency about such negative outgoing impacts.
Finally, the legislation will introduce mandatory audit assurance requirements, a feature that was absent from the NFRD, under which they were optional. This will begin as a limited requirement in 2026, but the EU will look to increase its rigor in the next two years to follow. Reported sustainability information provided by companies will be audited, in a bid to prevent greenwashing. To facilitate this, Member States can authorise assurance service providers to perform the audits.
The new legislation has been widely welcomed for the centralisation and cohesion it promises; it can be used as an instrument to contribute to the objectives set out in the EU Green Deal, as well as overall global sustainable finance efforts.
Companies have expressed concerns about the burden that the reporting requirements may bring; however, it is in the interest of in-scope entities to comply with the regulation. This is not only to avoid sanctions, but high-quality sustainability reporting can provide companies and investors with a competitive edge, provide much sought-after outward transparency, and highlight risks which then allows for more effective mitigation efforts.
Like any other disclosure requirement, the CSRD does not mandate action, only transparency. However, it remains a valuable tool. Compulsory reporting can indirectly cause improvement in sustainability performance due to consumer preferences, reputational damage, or anti-greenwashing efforts.