The new EU Corporate Sustainability Reporting Directive

On November 28, 2022, the EU Council approved the new Corporate Sustainability Reporting Directive (the “Directive” or “CSRD”). The CSRD is the result of a long process dating back to April 21, 2021, when it began to develop in the context of the European Green Deal and the Sustainable Finance Agenda.

The Directive is designed to strengthen existing rules on non-financial reporting introduced by Directive 2014/95/EU (“NFRD”) and to update those rules to suit the current scenario with EU businesses transitioning to a sustainable economy.

Pursuant to the CSRD, beginning in 2025 a broader range of companies will be required to publish more detailed information on their environmental, social, and corporate governance (ESG) targets and actions/action plans.

The Directive was published in the Official Journal of the European Union on December 16, 2022, and will enter into force on January 5, 2023, and EU Member States will then have 18 months to implement the new rules.

1. New reporting rules

The CSRD requires certain categories of companies to publish detailed information on their ESG strategies, risks, and actions. In particular, companies will be required to disclose to the public all information about how their business models may affect sustainability and how certain external factors, such as climate change or human rights, may affect their activities. The Commission will develop EU sustainability reporting standards that companies falling under the scope of the CSRD will be required to meet.

For the first time, such reporting will need to be certified by an accredited independent auditor or certifier.

2. Companies

An estimated 50,000 companies will be subject to the CSRD. The new sustainability reporting rules apply to:

(i) large public-interest companies with more than 500 employees;

(ii) large companies that exceed at least two of the following: a balance sheet total of EUR20 million; net turnover of EUR40 million; average number of employees during the financial year of 250;

(iii) all listed companies, including small and medium enterprises (“SME”), but with the exception of micro-enterprises;

(iv) non-EU companies with a net turnover of EUR150 million in the EU and having at least one subsidiary or branch in the EU exceeding certain thresholds.

Those companies will also be responsible for assessing the information applicable to their subsidiaries.

Note that an opt-out right will be possible for listed SMEs, pursuant to which they may be exempt from application of the Directive until 2028.

3. Implementation date

The new provisions contain reporting requirements based on information from previous financial years.

Specifically, the new obligations provided by the CSRD will be applicable as indicated below:

(i) as of 2025, the CSRD will apply to companies already subject to the NFRD;

(ii) as of 2026, the CSRD will apply to large companies not subject to the NFRD;

(iii)as of 2027, the CSRD will apply to listed SMEs, small and non-complex credit institutions, and captive insurance companies;

(iv) as of 2029, the CSRD will apply to non-EU companies.

4. Conclusions

With the introduction of the CSRD, the European legislature seeks first and foremost to target and attract new investments that support green and socially responsible transition. In order for private capital to be directed toward financing sustainable companies, the market needs access not only to financial information, but also to reliable and comparable environmental, social, and governance information.

Once that type of non-financial information is available, (i) investors will be able to make more informed decisions on sustainability and (ii) companies will be more accountable and transition to a sustainable economy more quickly.