On June 30, the EU policymakers reached an agreement on the Corporate Sustainability Reporting Directive (CSRD). It is now assumed that the directive will be adopted by the European Parliament in mid-November 2022.

What is CSRD?

CSRD introduces obligations for companies to publicly disclose information on their sustainability impacts, risks and opportunities in their management report based on mandatory standards.

One of the main assumptions of the upcoming changes is data transparency, which is to limit the procedure of signing up to ESG goals, eventually not implemented. The reported sustainability information will have to be independently audited.

The directive not only contains requirements for individuals, but introduces a framework and guidelines for EFRAG and the EC on the development and content of European Sustainable Development Reporting Standards.

Who?

It will require over 50,000 companies in the European Union (equaling 75% of all EU companies’ turnover) to follow detailed sustainability reporting standards.

All large companies in the EU (250+ employees, over 40 million EUR turnover and/or over 20 million EUR in assets).

All listed companies in the EU except micro-enterprises (less than 10 employees and/or less than 20 million EUR turnover).

Non-EU companies with substantial activities in the EU.

When?

The CSRD introduces a gradual approach to reporting starting with companies situated in the scope of the Non-Financial Reporting Directive (NFRD). These companies are expected to disclose sustainability information as from January 1, 2024. Other large listed and non-listed companies will be expected to report a year later.

The provisions of the new directive will become mandatory in three phases; first they will be applied by all entities already using the NFRD, followed by the rest of large entities, and finally medium and small listed companies (they will still be able to take advantage of the temporary opt-out until 2028).

Application to fiscal years beginning with:

• 1 January 2024 – all large PIE (large public entities, banks and insurers) with more than 500 employees (at the individual and / or combined level)
• 1 January 2025 - all other large companies
• 1 January 2026 - medium and small listed units (opt-out until 2028)

Therefore, the first mandatory information on sustainable development according to the requirements of the new directive will be published in 2025.

What?

The listed large companies in the EU are already reporting on the following:

• Environmental protection
• Social responsibility and treatment of employees
• Respect for human rights
• Anti-corruption and bribery surveillance
• Diversity on company boards

What will be added?

The CSRD will add the obligation for companies to report on the sustainability impacts, sustainability risks and sustainability opportunities.

With the new standards, the additional requirements will include:

• Double materiality concept including sustainability risk (including climate change affecting the company) + companies’ impact on the environment and society
• Process to select material topics for stakeholders
• More forward-looking information, including targets and progress
• Information disclosure relating to intangibles (social, human and intellectual capital)
• Reporting in line with Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy

Who will be eligible for verification?

• statutory auditors (hence the numerous changes to AuditDirective and AuditRegulation) – the statutory auditor will voluntarily acquire the right to verify information on sustainable development
• other Certified Independent Assurance Providers (EU member countries option)

Information on sustainable development will be verified at the “limited assurance” level. Ultimately, the verification must be at the “reasonable assurance” level, as in the case of financial statements: it will take place when, in the future, the European Commission issues a European standard of reasonable assurance of information on sustainable development and, after the analysis, will set a date for moving to this higher level of verification.

The reports will be independently assured

The CSRD mandates disclosures based on “to be developed by EFRAG- sustainability reporting standards”, which is to develop a taxonomy by mid-November 2022.

The CSRD introduces an EU-wide requirement for limited assurance on sustainability information, moving to reasonable assurance as an end goal. The statutory auditor, another auditor or an independent assurance service provider can conduct an assurance engagement.

Regulations are increasing urgency in organizations to take ESG seriously and to create structure around it. We help our clients to grapple with climate and diversity reporting.