The CSRD brings new ESG reporting obligations to European companies
On 5 January 2023, the Corporate Sustainability Reporting Directive (CSRD) entered into force. Amending the existing Non-financial Reporting Directive (NFRD) regime, the CSRD aims to address the criticisms and modernise the environmental and social reporting requirements that companies are obligated to provide, including expanding the scope of companies falling under the obligation, simplifying information reporting standards by creating an electronic database, and mandating regular audits.
The Directive is a part of a broader push by the Commission under the European Green Deal, the goal being to reduce net greenhouse gas emissions by 55% by 2030, compared to 1990 levels, and reach net zero by 2050. The Commission considers better reporting standards as indirectly benefiting European citizens, enabling them to be better informed about the activities of undertakings surrounding them and enables Europeans to engage in social dialogue. The core audience for the reports however comprises of investors, enabling them to make informed decisions, and civil society actors, for them to be able to getter a clearer picture and to hold undertakings accountable if necessary.
The Directive 2013/34/EU amendments in the CSRD see key definitions within the context of the Directive be introduced or modified. In addition, several new reporting requirements have been inserted. The categorisation of businesses from the previous Directive remains – under Article 3 of Directive 2013/34/EU, undertakings cannot exceed the maximum limits of two of the three following criteria to qualify under CSRD:
- Balance sheet total: € 350,000
- Net turnover: € 700,000
- Average number of employees in a financial year: 10
- Small undertakings:
- Balance sheet total: € 4 000,000
- Net turnover: 8 000,000
- Average number of employees in a financial year: 50
- Medium-sized undertakings:
- Balance sheet total: € 20 000,000
- Net turnover: € 40 000,000
- Average number of employees in a financial year: 250
- Large undertakings:
- Exceeding at least two of the three criteria established for medium-sized businesses.
The scope of Article 19a, introduced under the NFRD regime, has been considerably expanded as well. Under CSRD, large, small, and medium-sized undertakings, which qualify as public interest entities under Article 2(1)(a), must also include information that shows their impact and information on how sustainability matters impact their business operations in their management report. The management report must contain an overview of the company’s business model and strategy, including an analysis of its resilience concerning risks related to sustainability matters; a viable business strategy to enable the business to comply with the Paris Agreement; an overview of how stakeholders are engaged with on sustainability matters; and how their sustainability strategy has been implemented within the company. Similarly, targets on emission reductions by 2030 and 2050 and a description on how the company aims to achieve must be included.
The CSRD also introduces sustainability reporting standards under Chapter 6a, with the purpose to ensure the quality and consistency of reporting. This requires companies to report on not just scope 1 and scope 2, but also, where relevant, scope 3 greenhouse gas emissions, which concern emissions that are not produced by the company themselves, but for which they are indirectly responsible for throughout its value chain. The reporting standards also include social and human rights factors and governance factors that undertakings must disclose. The reporting must be both forward-looking and retrospective, both qualitative and quantitative. The Commission should adopt the first set of standards by mid-2023, based on the draft standards published by EFRAG in November 2022.
The enhanced scope and requirements established under Article 19a are comprehensive and require businesses to provide a full and detailed overview of its activities through a sustainability lens. Companies that do fall under the requirements set in Article 19a must prepare their management reports in the XHTML format, in preparation for the upcoming European Single Access Point.
Furthermore, companies now will have an obligation to audit the sustainability information that they report. Pursuant to the amendments that the CSRD introduces to Directive 2006/43/EC, Member States can apply national assurance standards, provided the Commission has not adopted its own standards.
Article 5 establishes deadlines when qualified companies are obligated to comply with the reporting requirements. Large undertakings that qualify as public-interest entities must start by the 2024 financial year, other large undertakings by 2025, and SMEs by 2026. However, small and medium-sized undertakings that qualify as public-interest entities can postpone fulfilling their reporting requirements until 2028, provided they give a brief reasoning within their management report why they decided to not provide a sustainability report.