Corporate Sustainability Reporting Directive (CSRD)
- Category: European Union Carbon Market Glossary
The implementation of the Corporate Sustainability Reporting Directive (CSRD) inevitably will be high on the regulatory and business agendas for some time.
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25 October 2023
17 October 2023
9 June 2023
Technical Reporting Instructions, CSDR Article 9 - Internalised Settlement Reporting, ESMA65-8-6560
26 January 2023 |
NFRD
The CSRD's equally ranking predecessor was the NFRD (Non-Financial Reporting Directive - Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups. NFRD was adopted in 2014 and amended the Accounting Directive,
Companies within the scope of the NFRD had to report in accordance with its provisions for the first time in 2018 (covering financial year 2017). The NFRD applies to large public-interest entities with an average number of employees in excess of 500, and to public-interest entities that are parent companies of a large group with an average number of employees in excess of 500 on a consolidated basis (public-interest entities are defined in the Accounting Directive as companies with securities listed in EU regulated markets, banks (whether listed or not), insurance companies (whether listed or not) and any other companies designated by Member States). The NFRD exempts subsidiaries from its reporting obligations if their parent company does the reporting for the whole group, including the subsidiaries.
Approximately 11 700 companies were subject to the reporting requirements of the NFRD (this figure takes account of how Member States transposed the Directive, not taking account of national transposition, about 2 000 companies were within the scope of the NFRD).
The NFRD required certain large companies to include a non-financial statement as part of their annual public reporting obligations. The NFRD introduced a requirement for companies to report both on how sustainability issues affect their performance, position and development (the ‘outside-in’ perspective), and on their impact on people and the environment (the ‘inside-out’ perspective) - often known as ‘double materiality’. The NFRD identified four sustainability issues (environment, social and employee issues, human rights, and bribery and corruption) and with respect to those issues it required companies to disclose information about their business model, policies (including implemented due diligence processes), outcomes, risks and risk management, and key performance indicators (KPIs) relevant to the business. It did not introduce or require the use of a non-financial reporting standard or framework, nor dod it impose detailed disclosure requirements such as lists of indicators per sector.
Legislative process for CSRD
The draft Corporate Sustainability Reporting Directive (CSRD) to amend the NFRD has been published by the European Commission on 21 April 2021 (Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability reporting {SEC(2021) 164 final} - {SWD(2021) 150 final} - {SWD(2021) 151 final}, COM(2021) 189 final, 2021/0104 (COD)).
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On 28 November 2022 the Council gave its final approval to the CSRD and on 16 December 2022 Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting has been published in the EU Official Journal.
Targeted improvements implemented by the CSRD
CSRD addresses shortcomings of the NFRD for both users and preparers relating to a lack of comparability, reliability and relevance of data (identified through a public consultation in 2020). The CSRD extends the scope of NFRD requirements to include all large companies, whether they are listed or not and without the previous 500-employee threshold. This change means that all large companies are publicly accountable for their impact on people and the environment. It also responds to demands from investors for sustainability information from such companies. The motives for this extension have been included in Recital 18 of the CSRD, which explains that the requirement provided for in the CSRD that also large undertakings whose securities are not admitted to trading on a regulated market in the European Union should disclose information on sustainability matters is mainly justified by concerns about the impacts and accountability of such undertakings, including through their value chain.
The Commission also proposed to extend the scope to include listed Small and Medium-Sized Enterprises (SMEs), with the exception of listed micro-enterprises. For reasons of investor protection, it is especially important that investors have access to adequate sustainability information from listed companies. If listed SMEs do not report sustainability information, they may find themselves at risk of exclusion from investment portfolios. This risk will grow as sustainability information becomes ever more important throughout the financial system. The said European Commission's Proposal envisioned for the first time the introduction of a general EU-wide audit (assurance) requirement for reported sustainability information. The EU Member States are, however, allowed to open up the market for sustainability assurance services to so-called ‘independent assurance services providers'. This means that Member States could choose to allow firms other than the usual auditors of financial information to assure sustainability information. The CSRD also amends provisions of the Accounting Directive, the Transparency Directive, the Audit Directive and the Audit Regulation.
 Links
Corporate sustainability reporting, the European Commission's website
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The new sustainability reporting rules will apply to all large companies and to all companies listed on regulated markets except listed micro undertakings. These companies are also responsible for assessing the information applicable to their subsidiaries. The rules also apply to listed SMEs, taking into account their specific characteristics. An opt-out will be possible for listed SMEs during a transitional period, exempting them from the application of the directive until 2028.
For non-European companies, the requirement to provide a sustainability report applies to all companies generating a net turnover of EUR 150 million in the EU and which have at least one subsidiary or branch in the EU exceeding certain thresholds. These companies must provide a report on their environmental, social and governance (ESG) impacts, as defined in this directive.
The European Financial Reporting Advisory Group (EFRAG) is 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.
The application of the regulation will take place in four stages:
- reporting in 2025 on the financial year 2024 for companies already subject to the NFRD;
- reporting in 2026 on the financial year 2025 for large companies that are not currently subject to the NFRD;
- reporting in 2027 on the financial year 2026 for listed SMEs (except micro undertakings), small and non-complex credit institutions and captive insurance undertakings;
- reporting in 2029 on the financial year 2028 for third-country undertakings with net turnover above 150 million in the EU if they have at least one subsidiary or branch in the EU exceeding certain thresholds.
Information to be disclosed under the CSRD
The CSRD introduces more detailed reporting requirements and ensures that large companies and listed SMEs are required to report on sustainability matters such as environmental rights, social rights, human rights and governance factors. The definition of the term ‘sustainability matters’ in the CSDR incorporates the definition of the term ‘sustainability factors’ laid down in Sustainable Finance Disclosure Regulation (SFDR). The reporting requirements are without prejudice to national reporting obligations.
Articles 19a(1) and 29a(1) of the Accounting Directive require undertakings to disclose information about five reporting areas: business model; policies, including due diligence processes implemented; the outcome of those policies; risks and risk management; and key performance indicators relevant to the business. In addition to the reporting areas identified in Articles 19a(1) and 29a(1) of Directive 2013/34/EU, undertakings should be required to disclose information about their business strategy and the resilience of the business model and strategy in relation to risks related to sustainability matters. They should also be required to disclose any plans they may have to ensure that their business model and strategy are compatible with the transition to a sustainable economy and with the objectives of limiting global warming to 1,5 °C in line with the Paris Agreement and achieving climate neutrality by 2050, as established in Regulation (EU) 2021/1119, with no or limited overshoot.
Information disclosed in accordance with Article 8 of Regulation (EU) 2020/852 about the amount of capital expenditure (CapEx) or operating expenditure (OpEx) associated with taxonomy-aligned activities could support financial and investment plans related to such plans where appropriate.
Undertakings are also required to disclose:
- whether and how their business model and strategy take account of the interests of stakeholders;
- any opportunities for the undertaking arising from sustainability matters;
- the implementation of the aspects of the business strategy which affect, or are affected by, sustainability matters;
- any sustainability targets set by the undertaking and the progress made towards achieving them;
- the role of the board and management with regard to sustainability matters;
- the principal actual and potential adverse impacts connected with the undertaking’s activities; and
- how the undertaking has identified the information that they report on.
Undertakings that fall within the scope of the reporting obligations of CSRD will have to communicate any time-bound targets on sustainability matters they might have, as well as any plans they might have to ensure that their business model and strategy are compatible with the transition to a sustainable economy and to limiting global warming to 1.5°C.
For example, where necessary, undertakings can use the taxonomy criteria to plan stepwise alignment with the taxonomy: as a first time-bound target, to transition beyond performance levels defined by the do-no-significant-harm criteria, and as a second time-bound target to align with substantial contribution criteria, explained in an activity-based transition plan.
Exemption regime for consolidated financial statements and consolidated management reports
As regards consolidated groups CSRD requires subsidiary undertakings to include in their management report the name and registered office of the parent undertaking that is reporting sustainability information at group level, the weblinks to the consolidated management report of their parent undertaking and a reference in their management report to the fact that they are exempted from sustainability reporting.
Article 23 of Directive 2013/34/EU exempts parent undertakings from the obligation to prepare consolidated financial statements and a consolidated management report where parent undertakings are subsidiary undertakings of another parent undertaking that complies with that obligation.
Nevertheless, the exemption regime for consolidated financial statements and consolidated management reports operates independently from the exemption regime for consolidated sustainability reporting. An undertaking can therefore be exempted from consolidated financial reporting requirements but not from consolidated sustainability reporting requirements where its ultimate parent undertaking prepares consolidated financial statements and consolidated management reports in accordance with Union law, or in accordance with equivalent requirements if the undertaking is established in a third country, but does not carry out consolidated sustainability reporting in accordance with Union law, or in accordance with equivalent requirements if the undertaking is established in a third country.
Coherence with the Taxonomy Regulation and SFDR
Under the EU Taxonomy Regulation, the same companies that are subject to NFRD – and the additional companies brought under the scope of the CSRD, include in their non-financial statement information on how and to what extent their activities are associated with environmentally sustainable economic activities. The reporting standards of the CSDR also include indicators that correspond to the indicators contained in the SFDR. The indicators for this will be specified in a separate Commission Delegated Act.
Companies will have to report these indicators alongside other sustainability information mandated by the proposed CSRD. The reporting standards to be developed under the CSRD would fully take into account these indicators and build on the 'substantial contribution' and ‘do-no-significant-harm' criteria of the taxonomy.
EU ETS linkage
The content of the EU Emissions Trading System (EU ETS) has been embedded in the draft ESRS E1 Climate change, specifically, in draft ESRS E1-6 Gross scope 1 of GHG emission and the percentage of Scope 1 GHG emissions from regulated emissions trading schemes, and ESRS E1-9 Financial effects from material climate-related risks: potential liabilities linked to EU ETS (Draft European Sustainability Reporting Standards, Explanatory note of how draft ESRS take account of the initiatives and legislation listed in Article 1 (8) of the CSRD adding article 29 (b) -5 to the Accounting Directive, EFRAG, November 2022).
Directive on corporate sustainability due diligence
Published on 23 February 2022 by the European Commission Proposal for a Directive on corporate sustainability due diligence (COM(2022) 71 final, 2022/0051 (COD)) will complement the NFRD and its amendments in the form of CSRD by adding a substantive corporate duty for some companies to perform due diligence to identify, prevent, mitigate and account for external harm resulting from adverse human rights and environmental impacts in the company’s own operations, its subsidiaries and in the value chain.
European Sustainability Reporting Standards (ESRS)
The Accounting Directive (2013/34/EU) as amended by the CSRD requires large companies and listed small and medium-sized companies (SMEs), as well as parent companies of large groups, to include in a dedicated section of their management report the information necessary to understand the company's impacts on sustainability matters, and the information necessary to understand how sustainability matters affect the company's development, performance and position.
This information must be reported in accordance with European Sustainability Reporting Standards (ESRS), to be adopted by the Commission by means of delegated acts specify the content and, where relevant, the structure to be used to present that information. This information must include information related to short-, medium- and long-term time horizons, as applicable, and it must contain:
- a brief description of the undertaking's business model and strategy;
- a description of the time-bound sustainability matters set by the undertaking;
- a description of administrative, management and supervisory bodies with regard to sustainability matters, and relevant expertise and skills or access to them;
- a description of the undertaking's policies in relation to sustainability matters;
- information about the existence of incentive schemes linked to sustainability matters;
- a description of the due diligence process implemented by the undertaking with regard to sustainability matters;
- the principal actual or potential adverse impacts connected with the undertaking's own operations and with its value chain;
- any actions taken by the undertaking in relation to actual or potential adverse impacts, and the result of such actions;
- a description of the principal risks to the undertaking related to sustainability matters; (x) indicators relevant to the required disclosures.
Where applicable, it must contain information about the undertaking’s own operations and about its value chain, including its products and services, its business relationships and its supply chain.
Hence, the ESRS under the CSRD will enable companies to communicate sustainability information in a standardised way to a variety of lenders, investors and other stakeholders.
On 9 June 2023 started the feedback period regarding Commission Delegated Regulation supplementing Directive 2013/34/EU of the European Parliament and of the Council as regards sustainability reporting standards.
A first set of ESRS was adopted by the Commission on 31 July 2023 (European Commission adopted Delegated Regulation supplementing Directive 2013/34/EU of the European Parliament and of the Council as regards sustainability reporting standards (C(2023) 5303 final). The ESRS in this first set are sector-agnostic, meaning that they apply to all undertakings under the scope of the CSRD, regardless of which sector or sectors the undertaking operates in.
The delegated act is based on Article 29b(1), first subparagraph, of the Accounting Directive. It specifies the ESRS undertakings must use to carry out their sustainability reporting in accordance with Articles 19a and 29a of the Accounting Directive. The said delegated act is accompanied by the following Annexes:
1. Annex I, which includes:
i. Cross-cutting standards:
ESRS 1 General requirements
ESRS 2 General disclosures
ii. Standards on Environmental, Social and Governance matters:
ESRS El Climate change
ESRS E2 Pollution
ESRS E3 Water and marine resources
ESRS E4 Biodiversity and ecosvstems
ESRS E5 Resource use and circular economy
ESRS S1 Own workforce
ESRS S2 Workers in the value chain
ESRS S3 Affected communities
ESRS S4 Consumers and end-users
ESRS G1 Business conduct
2. Annex II, which includes the list of Acronyms and the Glossary with the definitions to be used for the purposes of carrying out sustainability reporting in accordance with ESRS.
The delegated act is intended to apply from 1 January 2024 to the undertakings that were already subject to the non-financial reporting requirements introduced by the Non-Financial Reporting Directive. Its application will be phased-in for other categories of undertakings based on the phased approach set out in Article 5 CSRD:
- from financial years starting on or after 1 January 2024:
- large undertakings that are Public Interest Entities (PIEs) exceeding on their balance sheet dates the average number of 500 employees during the financial year;
- PIEs that are parent undertakings of a large group exceeding on its balance sheet dates, on a consolidated basis, the average number of 500 employees during the financial year;
- from financial years starting on or after 1 January 2025:
- large undertakings other than large undertakings that are Public Interest Entities (PIEs) exceeding on their balance sheet dates the average number of 500 employees during the financial year;
- parent undertakings of a large group other than PIEs that are parent undertakings of a large group exceeding on its balance sheet dates, on a consolidated basis, the average number of 500 employees during the financial year;
- from financial years starting on or after 1 January 2026 (with the option of voluntarily opting out for financial years 2026 and 2027):
- small and medium-sized undertakings with securities listed on the EU regulated markets, excluding micro-undertakings;
- small and non-complex institutions, provided they are large undertakings or that they are small and medium sized undertakings with securities listed on the EU regulated markets, excluding micro-undertakings;
- to captive insurance undertakings and captive reinsurance undertakings, provided that they are large undertakings or that they are small and medium sized undertakings with securities listed on the EU regulated markets, excluding micro-undertakings.
Listed SMEs will have the option of meeting their reporting requirements under the CSRD by reporting according to separate, proportionate standards that the Commission will adopt by end June 2024.
It is noteworthy that besides the sustainability reporting requirements for large undertakings and listed SMEs set out in Articles 19a and 29a of the Accounting Directive, the Accounting Directive as amended by the CSRD also requires the branches or subsidiaries of certain non-EU companies to report certain sustainability information (Article 40a). The reporting obligation on these branches and subsidiary will apply as from financial year 2028 and the information to be reported will be specified in separate standards not covered by this delegated act.
Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, A sustainable finance framework that works on the ground (COM/2023/317 final) observes that the standardisation of sustainability information to be reported by companies is a key element of the legal framework. The standards will provide the guidance companies need when determining what data to report and how to ensure that the information they supply is material to them and useful for the financial institutions.
Sustainability reporting is also expected to enhance undertakings’ access to financial capital and identification and management of own risks and opportunities, helping to increase competitive advantage by contributing to the transition.
The standards will focus on the financing-relevant information needed by financial institutions and will also constitute a limit for the information which ESRS can require large undertakings to disclose from SMEs in their value chains. This is an important safeguard specified in the CSRD to limit the indirect effects on SMEs of value chain reporting requirements imposed on large undertakings. Non-listed SMEs, which are not in the scope of the Directive, may nevertheless face increased information requests from larger companies in their value chains and from financial institutions. The Commission acknowledges the challenge that non-listed SMEs may face in this regard due to their size and more limited resources. The Commission therefore encourages large corporates and financial intermediaries to apply the principle of proportionality when engaging with SMEs and to exercise restraint when requesting information from SME value chain partners.
In future years the Commission is expected to adopt additional delegated acts for additional sets of standards. The CSRD requires the Commission to adopt by June 2024: sector-specific standards, proportionate standards for listed SMEs, and standards for non-EU companies.
On 17 October 2023 European Commission adopted the Proposal for a Decision of the European Parliament and of the Council amending Directive 2013/34/EU as regards the time limits for the adoption of sustainability reporting standards for certain sectors and for certain third-country undertakings (COM(2023) 596 final).