On 21 April 2021, as part of an ambitious package of measures aiming to direct capital flows towards sustainable activities across the EU (the ‘Sustainable Finance Package’), the EU Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD).
The CSRD will revise the Non-Financial Reporting Directive (2014/95/EU – NFRD), which currently defines the rules on disclosure of non-financial and diversity information by certain large companies. The CSRD will amend the Accounting Directive (2013/34/EU), the Transparency Directive (2004/109/EC), the Audit Directive (2006/43/EC) and the Audit Regulation (537/2014), thereby ensuring coherence between the relevant provisions of these four instruments.
The CSRD proposal follows the identification of deficiencies with the existing non-financial reporting framework. Indeed, the lack of details of current requirements make it difficult for companies to determine what information to report and virtually impossible for investors and stakeholders to compare performances between different companies.
Information needs have increased significantly in recent years, due to the growing awareness of investors that sustainability issues can put the financial performance of companies at risk. Financial entities also need reliable information to assist them in complying with their own disclosure obligations under the Sustainable Finance Disclosure Regulation (2019/2088) and the Taxonomy Regulation (2020/852). Besides, the COVID-19 pandemic is likely to further accelerate the growth in demand for sustainability information, for example regarding the resilience of supply chains.
The CSRD aims to provide companies and investors with comparable and reliable sustainability information by introducing a series of rules intended to bring sustainability reporting on equal terms with financial reporting.
CSRD’s key proposals
1. Wider scope of reporting entities
At present, the NFRD applies to “large public-interest entities” with more than 500 employees, including listed companies, banks, insurance companies and other companies designated by national authorities as public-interest entities.
The CSRD significantly expands the scope of entities subject to sustainability reporting obligations, to encompass all large companies (listed or not) and all listed companies (including non-EU issuers).
“Large companies” would mean those exceeding two out of the three following criteria:
- balance sheet total: €20 million; and/or
- net turnover: €40 million; and/or
- average number of employees during the financial year: 250.
Small and medium-sized enterprises (SMEs) whose securities are admitted to trading on an EU regulated market would also come under the scope of the CSRD (except for micro-enterprises). SMEs will benefit however from a proportionate reporting regime and will only have to start reporting three years after the entry into application of the CSRD.
For non-listed SMEs, the EU Commission intends to develop voluntary proportionate standards.
The proposal will result in nearly 50,000 companies reporting sustainability information, compared to the current 11,600 companies that are within the scope of the NFRD.
2. More detailed reporting
In contrast to the NFRD, the CRSD sets out in far greater detail the non-financial information that entities should report.
In particular, the proposal clarifies the principle of double materiality (introduced by the NFRD). In-scope entities will have to report information necessary to understand (i) their impact on sustainability matters (i.e. on people and the environment) and (ii) how sustainability matters affect their development, performance and position.
Furthermore, the CSRD introduces new requirements for companies to provide information about their strategy, targets, the role of the board and management, the principal adverse impacts connected to the company and its value chain as well as intangibles (social, human and intellectual capital).
Companies should report in particular, qualitative and quantitative information, forward-looking as well as retrospective information.
Importantly, the CSRD removes the option for Member States to allow companies to report the required information in a separate report, that is not part of the management report.
3. Mandatory EU sustainability reporting standards
The non-binding reporting guidelines published by the EU Commission to assist companies with reporting under the NFRD did not sufficiently improve the quality of the disclosed information.
Under the new proposal, companies will have to report using mandatory EU sustainability reporting standards to be developed by the European Financial Reporting Advisory Group (EFRAG).
European sustainability reporting standards will include information regarding environmental, social and governance factors and will need to be in line, in particular, with the disclosure requirements under the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation.
4. Audit assurance
The proposal also introduces for the first time, a general EU-wide audit (‘limited’ assurance) requirement for reported sustainability information, which will help to ensure that reported information is accurate and reliable.
The initial ‘limited’ assurance requirement could change to a ‘reasonable’ assurance requirement once the sustainability assurance standards are introduced.
Additionally, Member States will be able to allow independent assurance services providers, other than statutory auditors or audit firms, to assure sustainability information.
The EU Commission's proposal anticipates the increasing digitalisation of sustainability information.
Further to the CSRD proposal, companies will have to prepare their financial statements and management reports in XHTML format in accordance with the ESEF Delegated Regulation (2018/815) and ‘tag' their reported sustainability information according to a digital categorisation system to be developed together with the sustainability reporting standards.
This will ensure that sustainability information can easily be uploaded in the European Single Access Point (ESAP) envisaged in the Capital Markets Union Action Plan, for which the EU Commission will put forward a proposal later this year.
Digitalisation of companies' sustainability reporting is also in line with the Digital Finance Strategy, which aims at enhancing access to data and re-use of data within the financial sector.
6. Timing and next steps
The EU Commission suggests a transposition of the CSRD into national law by 1 December 2022, so that the amendments would be applicable for the first time for fiscal years beginning on or after 1 January 2023.
In the meantime, the European Parliament and the Council must negotiate a final legislative text based on the EU Commission's proposal. EFRAG will also start to work on a first set of sustainability reporting standards, to be ready by mid-2022.