Sustainability reporting: what is the CSRD?

In January 2023, the European Corporate Sustainability Reporting Directive[1] (CSRD) entered into force. The CSRD requires a large number of companies in Europe to report on sustainability information and will have to be fully implemented in Dutch law by 6 July 2024.[2] In this blog, we discuss the background, scope, core obligations and phased entry into force of the CSRD.

Sustainability reporting and the CSRD

We previously introduced the term ESG in the blog ‘ESG: what is it and is it becoming ever more important?‘ One of the components of European Union (EU) policy on ESG is sustainability reporting, which entails that the EU requires companies to report on their sustainability, climate or corporate social responsibility performance. Sustainability reporting is one of the cornerstones of the European Green Deal and the Sustainable Finance Agenda and is also part of a broader European Union policy that obligates companies to respect human rights and reduce their impact on the planet. Examples of European sustainability reporting directives and regulations include the EU Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (SFRD), which we discuss in the blog ‘The future of ESG disclosure requirements’, and as of now the CSRD as well.

Since 2014, the European Non Financial Reporting Directive [3] (NFRD) has required a limited group of large companies[4] to report on a number of non-financial indicators as well as to include a diversity statement in their corporate governance statement. Partly because of the inconsistent application of NFRD reporting requirements and the call from practitioners for uniform sustainability standards, there has been an increasing demand for an updated version of the NFRD. This updated version (and hence replacement of the NFRD) comes in the form of the CSRD, which not only greatly expands the scope and reporting requirements of the NFRD, but also introduces a host of sustainability reporting standards. The CSRD is expected to have a big impact on the way Dutch companies design their reporting process, now and in the future.

Scope of CSRD

Whereas the NFRD applied to a limited group of large companies – around 100 companies in the Netherlands – the new CSRD applies to (a) all large companies and large groups, (b) all small and medium-sized listed companies and (c) certain non-EU companies. This is likely to further increase the scope of the regulation thirtyfold: it is estimated that over 3,000 companies in the Netherlands fall within the scope of the CSRD.[5]

(a) Large companies and large groups

In short, a large company within the meaning of the CSRD is one that meets at least two of the following three criteria on two consecutive balance sheet dates:

a balance sheet total of more than € 20,000,000;
a net turnover of more than € 40,000,000; and/or
on an annual basis, an average number of employees in excess of 250.

A large group is a group consisting of a parent company and one or more subsidiaries controlled by the parent, with the group as a whole meeting at least two of the above three criteria on two consecutive balance sheet dates.

(b) Small and medium-sized listed companies

Small and medium-sized listed companies to which the CSRD applies are all companies whose securities (such as shares and bonds) are traded on a European stock exchange and which are larger than micro-enterprises. Micro-enterprises meet at least two of the following three criteria:

a balance sheet total equal to or less than € 350,000;
a net turnover equal to or less than € 700,000; and/or
on an annual basis, an average number of employees equal to or less than 10.

The provisions of the CSRD apply to companies incorporated under or governed by the law of an EU Member State. Efforts have been made to also bring companies incorporated under or governed by the law of a non-EU Member State within the scope of the CSRD (either directly or indirectly) under certain circumstances. This is the case if a subsidiary or branch exists within the EU and/or certain turnover requirements are met.

Third-country companies which have a significant activity on the territory of the Union will be required to publish a sustainability report, either directly or through their EU subsidiary or branch, in particular on the impact of their activity on social and environmental matters. Although there are some exemptions for these companies with respect to the content of their sustainability report, the CSRD ensures that third-country companies are also held accountable for the impacts they have on people and the environment.

Core obligations under the CSRD

Companies that have to comply with the CSRD must, in a dedicated section of their management report, address the company’s impact on sustainability matters (the ‘inside-out perspective’[6]) as well as how sustainability matters affect the company’s own development (the ‘outside-in perspective’[7]). This is called the ‘double materiality test’.

The CSRD regulates in detail what information must be included in the report and (if relevant) whether companies must take into account short-, medium- or long-term time horizons.The information in the management report must include at least a description of:

the company’s business model and strategy, which must address its resilience and opportunities related to sustainability matters;
future plans and investment plans to ensure the business model and strategy are compatible with the transition to a sustainable economy and the objectives of the Paris Agreement;
the company’s time-bound targets related to sustainability matters, a description of the progress made towards achieving those targets and a statement clarifying whether those targets are based on conclusive scientific evidence;
a description of the role of the administrative, management and supervisory bodies in relation to sustainability matters, their expertise and skills in that area or their access to such expertise and skills, and the existence of incentive schemes linked to sustainability matters offered to them;
the company’s policy on sustainability matters;
the due diligence procedures applied in relation to sustainability matters;
the principal actual or potential adverse impacts connected with the company’s own operations and its value chain. This should include a description of the actions taken to monitor those adverse impacts as well as any other adverse impacts that the company is required to identify when conducting a due diligence procedure;
any actions taken by the company to prevent, mitigate, remediate or bring an end to these adverse impacts and the result of such actions;
the principal risks related to sustainability matters, including the company’s principal dependencies on those matters and how it manages those risks;
the indicators relevant to all of the above-mentioned disclosures.

On all these points, companies must also report on the process they have carried out to identify the necessary information.

To ensure that companies within the scope of the CSRD design their sustainability reporting in a coherent manner, the CSRD requires them to follow the new and very comprehensive European Sustainability Reporting Standards (ESRS). In the blog ‘Sustainability reporting: the ESRS reporting standards’, we elaborate on the ESRS and their systematics.

Phased entry into force of the CSRD

Member States must transpose the CSRD into national legislation before the rules of the CSRD become applicable. After transposition, the rules will be phased in at different stages, not being applicable to all companies concurrently. The CSRD will be phased implementation in as follows:

CSRD

Conclusion

The arrival of the CSRD will have a major impact on the way certain companies have to design their reporting process. In addition to long-standing financial reporting requirements, more and more comprehensive non-financial reporting indicators are introduced. In this manner, the CSRD forces companies to think about their ESG policies and strategies and, if necessary, adjust them to ensure a sustainable, or more sustainable, business conduct. Given the far-reaching and detailed reporting obligations, it is advisable for companies to start looking into the obligations that the CSRD will impose upon them.

More on ESG

If you are interested in finding out what else we can do for you in the field of ESG and, more specifically, CSRD (including litigation), feel free to contact us.

[1] 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.

[2] See this link for the current status regarding the implementation of the CSRD in Dutch legislation. The proposal for the Corporate Sustainability Reporting Directive Implementing Act has now been submitted for consultation.

[3] 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.

[4] Large public-interest entities, listed companies, certain banks and certain insurers.

[5] BB 2022/30: De Corporate Sustainability Reporting Directive: rapporteren, controleren én maatschappelijk verantwoord juridisch adviseren.

[6] Such as CO2 emissions or fossil fuel use.

[7] Such as the effects of water and drought damage.