The European Council gave its final approval to the corporate sustainability reporting directive (CSRD). This means that companies will soon be required to publish detailed information on sustainability matters. This will increase a company’s accountability, prevent divergent sustainability standards, and ease the transition to a sustainable economy.
“The new rules will make more businesses accountable for their impact on society and will guide them towards an economy that benefits people and the environment. Data about the environmental and societal footprint would be publicly available to anyone interested in this footprint. At the same time, the new extended requirements are tailored to various company sizes and provides them with sufficient transition period to get ready for the new requirements.” – Jozef Síkela, Minister for Industry and Trade
In practical terms, companies will have to report on how their business model affects their sustainability, and on how external sustainability factors (such as climate change or human right issues) influence their activities. This will equip investors and other stakeholders better for taking informed decisions on sustainability issues.
The CSRD amends the 2014 non-financial reporting directive (NFRD) and strengthens the existing rules on non-financial reporting, which are no longer tailored to the EU’s transition to a sustainable economy.
New reporting rules for companies
The CSRD introduces more detailed reporting requirements and ensures that large companies are required to report on sustainability matters such as environmental rights, social rights, human rights and governance factors.
The new sustainability reporting rules will apply to large public-interest companies with more than 500 employees, to all large companies with more than 250 employees and a EUR 40 million turnover, and to all companies listed on regulated markets except 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. 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) will be responsible for developing European standards, following technical advice from a number of European agencies.
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 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.
The European Commission presented the CSRD proposal on 21 April 2021 as part of the European Green Deal and the Sustainable Finance Agenda.
The CSRD will fill the gaps in the existing rules on non-financial information. Financial markets need access to environmental, social and governance information that is reliable, relevant and comparable if private capital is to be channelled into financing the green and social transition. Disclosure of sustainability information could attract additional investment and funding to facilitate the transition to a sustainable economy, as described in the Green Deal.
On 24 February 2022, EU member states unanimously agreed on the Council’s position on the CSRD proposal.
On 21 June 2022, the Council and the European Parliament reached a provisional agreement on the CSRD, which was endorsed by EU member states’ representatives on 30 June 2022.
Following the Council’s approval today of the European Parliament’s position, the legislative act was adopted.
After being signed by the President of the European Parliament and the President of the Council, it will be published in the Official Journal of the European Union and will enter into force 20 days afterwards. The new rules will need to be implemented by member states 18 months later.