Sustainability reporting to be mandatory across Europe with CSRD

As of January 5, 2023, the Corporate Sustainability Reporting Directive (CSRD) entered into force after a parliamentary vote by the European Union (EU).

What does CSRD directive mean and what will it achieve?

The Corporate Sustainability Reporting Directive (CSRD) became effective on January 5, 2023, following the European Union's (EU) parliamentary vote. This new directive modernizes and strengthens the rules on social and environmental information that companies must report. A wider range of large companies as well as listed SMEs will now be required to report on sustainability - around 50,000 companies in total.

Another important change with the CSRD is the amendment of the EU's Non-financial Reporting Directive (NFRD), which was approved by the European Parliament on April 15, 2014. The NFRD requires more detailed reporting than before and requires companies to report on issues that are crucial to sustainability, such as governance, social rights, environmental rights and especially human rights.

he disclosure requirements under the CSRD will apply to an estimated 50,000 companies, from January 2024. All large companies governed by the law of or established in an EU member state, and all European stock exchange-listed companies (except micro-companies), as well as SMEs, are within the scope. Companies not in the EU but have securities on EU-regulated markets are also in scope.  

A large company is defined as meeting two of the following criteria:  

• €40 million in net turnover  
• €20 million on the balance sheet  
• 250 or more employees  

From January 2028, the CSRD will also apply to non-EU undertakings that generate a net turnover of over €150,000,000 in the EU and have an EU branch office with a net turnover of at least €40 million in the EU, or a large or listed EU subsidiary. However, these companies will only have to supply impact-related information, for which a special standard will be developed.

Companies subject to the CSRD will have to report according to European Sustainability Reporting Standards (ESRS). The European Financial Reporting Advisory Group (EFRAG) will be responsible for developing draft European standards. The European Commission will adopt the final version of the standards as a delegated act, following consultations with EU member states and a number of European bodies.

In order to ensure the quality of the scope and accuracy of the sustainability reports to be written and presented, certification requirements are being introduced for reporting. In this context, the EFRAG will be responsible for ensuring compliance with European standards by monitoring the technical advice of these institutions that are required to report, and for the establishment and development of standards in the meantime.

The EU directives on non-financial data apply to all companies, except for all large corporations and microenterprises, traded on regulated markets. In addition to themselves, these companies are also responsible for assessing the sustainability of their subsidiaries' operations and keeping them in line with European standards. These rules will not apply to SMEs until 2028.

While the number of companies covered by the existing rules prior to the adoption of the Directive was 11,700 according to the relevant data, the CSRD will significantly expand this number. The Directive is expected to cover an estimated 50,000 companies, perhaps more, including companies that are not EU companies but do business within the EU. For non-European companies, mandatory sustainability reporting is based on the criteria of generating a net turnover of at least €150 million in the EU and having at least one branch or subsidiary in EU countries. According to the new sustainability directive, every company that meets these criteria has the responsibility to report on its Environmental Social Governance - ESG impacts.

How will CSRD be implemented?

The implementation of the CSRD will take place in four stages:

1. Reporting on the 2024 financial year in 2025 for companies already subject to the NFRD,
2. Reporting in financial year 2025 for large companies not already subject to NFRD in 2026,
3. In 2027, reporting in FY 2026 for listed SMEs (excluding micro-enterprises), small and non-complex credit institutions and captive insurance businesses,
4. For third country undertakings with a net turnover in the EU of over 150 million, reporting in 2028 in the 2029 financial year if they have at least one subsidiary or branch in the EU exceeding certain thresholds.

What are the important issues to be reported under the Corporate Sustainability Reporting Directive (CSRD)?

These reports will describe the main actual or potential impacts related to the company's operations in the areas of sustainability, i.e. social, environmental and governance issues, and the due diligence process and results of the company's value chain, including its products, services, business relationships and supply chain.

The management report should provide a description of the responsibilities of the management and supervisory boards with regard to sustainability issues. It is important to outline the expertise and skills related to sustainability issues relevant to fulfilling these responsibilities.

It is very important that the management report sets forward-looking goals in terms of sustainability and sets dates for these goals. In particular, it is important to monitor the progress of the targets announced over a certain period of time. In this sense, the coherence of the environmental targets described in the report with scientific evidence will be confirmed and verified.

The dual reporting obligation means that the management report must provide verifiable information on both the sustainability impacts of the company's activities and the sustainability issues affecting the company. Unverifiable information will be subject to investigation and enforcement action.

Sustainability reports must be prepared according to European Sustainability Standards. This protects the quality of the report and makes it easier to audit. In addition, the fact that companies covered by the reporting obligation are obliged to make their management reports available on their websites free of charge adds a detailed transparency to the practice in the name of credibility.