After much anticipation, the Corporate Sustainability Reporting Directive (CSRD) finally came into force on 5 January 2023. The CSRD revises, broadens and strengthens the rules originally introduced by the Non-Financial Reporting Directive (NFRD) by introducing a standardised and common language for sustainability information and bringing sustainability reporting on par with financial reporting. Member States now have 18 months to transpose the provisions of the CSRD into national law (i.e. by 4 July 2024 at the latest).
The CRSD is a significant step towards the goals set out by the EU in the European Green Deal. It will require several companies operating in the EU to publicly disclose and report on environmental, social, and governance (ESG) issues, thereby making them more transparent in their commitments to sustainability. The CSRD aims to achieve this by: (i) extending the scope of mandatory ESG reporting to all large companies and SMEs listed on regulated markets; (ii) requiring independent auditing of ESG reports; and (iii) implementing mandatory ESG standards with more detailed reporting requirements.
The obligations under the CSRD apply to companies listed on EU regulated markets (except listed micro-undertakings) as well as all companies based in the EU that meet at least two of the following criteria: (i) employ more than 250 employees; (ii) have a net turnover which exceeds €40 million; (iii) have total assets which exceed €20 million. The CSRD also applies to non-EU companies that generate revenues within the EU of more than €150 million, as well as those non-EU companies that have large or listed EU subsidiaries or significant EU branches generating more than €40 million in revenues. It is anticipated that these thresholds would capture around 50,000 companies that are currently active.
Companies within the scope of the CSRD will need to report on the impact of their activities on sustainability, as well as how sustainability issues affect their own business – the so-called ‘double materiality principle’. Reporting will have to be in line with European Sustainability Reporting Standards (ESRS) that will be developed by the European Financial Reporting Advisory Group (EFRAG). The first set of ESRS’ (Set 1) is currently being worked on by the European Council with a view to being adopted by 30 June 2023 and will focus on information that is likely to be relevant to all companies regardless of the sector(s) they operate in. Further, more sector-specific standards will be adopted down the line.
The reporting obligations under the CSRD will be rolled out over several years. Companies already subject to the NFRD must produce their first report in 2025, relating financial year 2024. Large companies not presently subject to NFRD will have to abide by CSRD reporting obligations from financial years starting on or after 1 January 2025 and thus first report in 2026. The CSRD will also be applicable to listed SMEs for financial years starting on or after 1 January 2026, although such companies may opt-out of their CSRD reporting obligations until 2028.
The CSRD does not directly stipulate sanctions for non-compliance. However it does provide that Member States should impose administrative pecuniary sanctions and penalties that are ‘“effective, proportionate and dissuasive’” and which take into account the gravity and duration of the breach, the degree of responsibility, the financial strength of the company, the importance of profits gained or losses avoided through the breach, losses sustained by third parties, the level of cooperation by the company, and whether it had any previous infringements.
The reporting obligations introduced by the CSRD are considerably onerous and detailed, as businesses will need to comply with more demanding transparency obligations on their commitment to sustainability. This will also extend to companies that are not directly captured by the scope of the CSRD but who are in business with such companies, as they will likely face increased pressure to also provide sustainability information in view of the CSRD obligation for captured businesses to consider the entire value chain. It is thus crucial for all businesses to take the time to consider the implications of the CSRD and to prepare well in advance for the moment when the CSRD requirements are eventually transposed into national law.
Luca Amato is a senior associate within the Corporate and Commercial Law department of Fenech & Fenech Advocates.