Corporate Sustainability Reporting Directive (CSRD): What Companies Need to Know

27 January 2022 - by Ariadna Montoro

On April 21st of 2021, the European Commission (EC) launched its proposal for a Corporate Sustainability Reporting Directive (CSRD). This proposal amends the current reporting requirements included in the Non-Financial Reporting Directive (NFRD)

The need for this proposal arose from insufficient information in corporate reports, meaning that investors and other stakeholders find themselves deprived of what they considered important information. For that purpose, the proposal includes a number of considerable requisites such as:

  • Requiring an audit of the reporting information with a minimum of limited level of assurance;
  • The introduction of more detailed reporting requirements to report according to the mandatory EU Sustainability reporting standards; and  
  • Requiring companies to digitally “tag” their reported information for it to become machine-readable and feed into the European single access point envisaged in the capital markets union action plan. 

Depending on the final text of the Directive, your company may be directly or indirectly affected by the new requirements. That’s why it’s important to understand what it entails, and how it signals to the changing direction of regulation more broadly.

Who does the CSRD apply to?

 One of the major questions being asked is: Does the CSRD cover more companies than the NFRD? The short answer for this question is yes. Let’s unpack that.

 With the amendment, all large companies, listed or unlisted, must comply with the CSRD if they meet 2 out of 3 criteria:

  • 250 employees and/or
  • €40M turnover and/or
  • €20M total assets

The proposal also puts reporting requirements on Small and Medium Enterprises (SMEs) with securities listed on regulated markets, with the exception of listed micro-enterprises.

So, what do you as a company need to do?

CSRD What Companies Need to Know

What is required from your business?

The implementation of the CSRD introduces more detailed reporting requirements, including a requirement to report according to mandatory EU sustainability reporting standards and receive an audit (assurance) of reported information.

Specifically, disclosure requirements cover information on:

  • Business model and strategy, including your resilience towards risks, opportunities undertaken, compatibility with the transition to a circular economy as per the Paris Agreement, your stakeholders’ interest and impacts on ESG issues and how your strategy is being implemented;
  • Targets and your progress in achieving them;
  • Governance bodies on the matter;
  • Policies;
  • Due diligence processes implemented with regard to sustainability matters, the principal adverse impacts connected with your value, plus any actions taken to prevent, mitigate or remediate these adverse impacts; and
  • Descriptions of your principal risks and relevant indicators.

All of these disclosures must contain forward-looking and retrospective information, as well as qualitative and quantitative information. It’s about transparency of process as well as metrics: what have you done, what are you planning on doing, and how are you going to achieve it? And that all starts with ensuring that your company is focused on relevant priorities; in other words: materiality.

Expanding on the concept of materiality, the CSRD 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). This is what is known as ‘double materiality’.

Double Materiality: How to get started in 5 simple steps

Double Materiality: How to get started in 5 simple steps

These new disclosure requirements clarify the principle of double materiality, removing any ambiguity about the fact that companies should report information necessary to understand how sustainability matters affect your company, and information necessary to understand the impact they have on people and the environment.

These reporting requirements are also in line with Sustainable Finance Disclosure Regulation (SFDR). We can unpack that one in another blog. 

Where does this information sit?

It’s no longer about standalone sustainability reporting. Companies are expected to provide this information in their Management Report and/or their Annual Report. As the concept of double materiality highlights, sustainability/ESG issues need to be addressed in a more cohesive and consistent way. That requires engagement across the enterprise, including the Board of Directors and C-Suite Executives, and that's reflected in the EU sustainability reporting standards - the first legally binding sustainability standards in the world. 

What issues are covered by the EU reporting standards?

Now being developed by the European Financial Reporting Advisory Group (EFRAG), the EU reporting standards focus on specific ESG issues that your company, if large in size, must disclose.

These include factors ranging between climate change mitigation and adaptation measures to equal opportunities and working conditions. They also cover the introduction of the new governance factors, such as:

  • The management and supervisory bodies working on sustainability matters, and their composition;
  • Business ethics and corporate culture, including anti-corruption and anti-bribery;
  • Political engagements, including lobbying activities;
  • The management and quality of relationships with business partners, including payment practices;
  • Your internal control and risk management systems, including in relation to your reporting process.
CSRD What Companies Need to Know

For SMEs, there will be separate, proportionate standards adopted, tailored to the capacities and resources of such companies. While SMEs listed on regulated markets would be required to use these proportionate standards, non-listed SMEs, which are the vast majority of SMEs, may choose to use them on a voluntary basis.

Tech plays a critical role: digitization & transparency

The CSRD will also require companies to prepare their financial statements and their management report in XHTML format and ‘tag' their reported sustainability information according to a digital categorization system once specified in the European Single Electronic Format (ESEF) Regulation.

This will mean that sustainability information can easily be incorporated in the European Single Access Point envisaged in the Capital Markets Union Action Plan. It’s also about ensuring the quality of information, which gets us to the value of an audit.

Audit teams, get ready

The proposal for the first time introduces a general EU-wide audit (assurance) requirement for reported sustainability information. Helping to ensure that reported information is accurate and reliable. Although the objective is to have a similar level of assurance for financial and sustainability reporting, a progressive approach is needed.

The Commission is proposing to start with a ‘limited' assurance requirement, as this requirement is less costly for companies, and better corresponds to the current capacity and technical ability of the market for audit (assurance) services.

CSRD What Companies Need to Know

Reasonable assurance of sustainability reporting is difficult at this stage in the absence of sustainability assurance standards. The proposal, therefore, gives the Commission the possibility of adopting such standards and if the Commission does, eventually, adopt sustainability assurance standards, the legal requirement would automatically become a requirement for reasonable assurance instead of limited assurance.

To add to this the proposal allows the Member States to open up the market to ‘‘independent assurance services providers'. This means that the Member States could choose to allow firms other than the usual auditors of financial information to assure sustainability information

How does the CSRD fit in with current legislation?

The Taxonomy Regulation requires companies falling within the scope of the proposed CSRD to report on the extent to which their activities are sustainable.

Indicators will be specified and companies will have to report against these indicators alongside other sustainability information mandated by the proposed CSRD, mentioned earlier.

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.

Enforcement - risk or opportunity?

Once approved, EU Directives must be transposed into national law. This means the country in which your business is based will take decisions on the details in terms of enforcement.

Member States will have to transpose the CSRD by 1st December 2022 and ensure that its provisions apply to companies for the financial year starting on 1 January 2023 or during the calendar year 2023.

Once the transposition measure is adopted, it is enforced through the national administrative mechanisms applicable to national law. Therefore, prosecution and penalties for non-compliance can present a serious business risk – both in terms of regulatory and reputational risk.

The violation of the requirements of a Directive is therefore considered a violation of the transposition measure itself. National tribunals and courts will have jurisdiction over the non-financial statements and will judge according to the texts of relevant national laws, and not the Directive.

While the reporting requirements would not apply to SMEs, except listed SMEs, the proposal is a strong signal of market momentum. For instance, 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.

Simplified reporting standards will be developed for SMEs to use on a voluntary basis, enabling them to meet information demands from large corporate clients and banks.

Ultimately, this type of regulatory development presents an opportunity for companies, whether large or small, to improve their resilience and funnel capital in the direction that will sustain our economy over the short- and long-term. Those who have been preparing for this moment in time are the ones that will ultimately drive these strategic opportunities forward. 

Brace for impact 

The CSRD is not a standalone development. It reflects a consistently growing flood of initiatives and standards worldwide - a reflection of the market demand, from investors, employees, customers, and others - for greater transparency on ESG. Keeping abreast of global ESG policy developments is challenging at best of times. These days, it's a full time job as regulators sharpen their enforcement teeth. That's why every quarter, we share concise Policy Briefs with our clients to summarize key regulatory developments from around the world, incorporating legal insights from our partners at DLA Piper. 

Want to learn more? Get in touch

Get started with Double Materiality in 5 simple steps

Adopted by the EU Commission in April 2021, the new Corporate Sustainability Reporting Directive proposal (CSRD) is setting common European reporting rules, requiring more than 50,000 companies to conduct a double materiality assessment. 

But what is it about? And where do I get started to integrate that approach in my materiality process? This free ebook provides you with all the answers you need.

Fill the form on the right to get your free copy.


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