On 21 April 2021, the European Commission published a proposal for a Corporate Sustainability Reporting Directive (CSRD), which will amend the existing Non-Financial Reporting Directive which already had established requirement for certain large companies to report sustainability information on an annual basis. The revised directive will support the European Green Deal and is part of a bigger Sustainable Finance package. The Commission’s proposal represents a major change in corporate reporting with far-reaching implications for businesses.
The proposed CSRD aims to ensure that companies publicly disclose information about the sustainability risks and opportunities they face, as well as the impacts they have on people and the environment. Companies will be expected to disclose more sustainability-related information than before about their business models, strategy and supply chains.
Companies will need to use a set of new sustainability reporting standards being developed by the European Financial Reporting Advisory Group (EFRAG). They will adhere to the concept of “double materiality,” with both “impact materiality” and “financial materiality” being applied (i.e. they need to cover not just the risks to companies but also the impacts of companies on society and the environment). Furthermore, the Commission aims to adopt a second set of reporting standards by 31 October 2023, specifying complementary sustainability information that companies should report on, including sector-specific considerations. The Commission will review the standards every three years to take into account new developments, such as international reporting standards.
The proposal extends the scope to all large companies and all listed companies (except listed micro-enterprises). Although listed SMEs will fall within the scope, they will have until 1 January 2026 to comply with the reporting requirements. So the CSRD will first apply to bigger companies. To respect the principle of proportionality, the European Commission will adopt mandatory sustainability reporting standards for large companies and separate, proportionate standards for SMEs.
There are also exemptions to the application of the CSRD. In particular, a subsidiary will be exempt if the parent company includes the subsidiary in its report that complies with the CSRD. As mentioned above, listed micro companies and non-listed SMEs fall outside of the scope but can apply the provisions on a voluntary basis.
The EU Member States will be expected to transpose the new directive into national law by 31 December 2022. As a result, companies that fall within the scope of the directive will need to comply with the amended rules for fiscal years beginning on or after 1 January 2023. Overall, it is expected that approximately 49 000 companies will be required to report sustainability information, compared with 11 000 companies under the current Directive.
Given the significance of the new Directive and the time required to prepare for the new reporting rules, it is imperative that companies start this process from the beginning of 2022 when the draft standards will be made available for public consultation. Companies will need to consider how they identify and gather sustainability-related information, manage environmental, social and governance risks, and set targets and KPIs with an opportunity to reassess their relevance.
While the EU’s proposal aims to “reduce the unnecessary costs of sustainability reporting for companies” it is estimated companies will incur significant one-off costs as well as recurring annual costs to comply with the directive. The proposal highlights that companies already face a growing bill to provide sustainability information due to stakeholder demand. As a result, companies could effectively save by using the standards, depending on their size, on the basis that the standards remove the need for additional information requests. This, however, will only be seen once the Directive is effectively transposed.