EU Proposal for a Corporate Sustainability Reporting Directive
In April 2021, the European Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD), which would amend the existing reporting requirements of the Non-Financial Reporting Directive (NFRD). Both the NFRD and the CSRD are reporting standards that have become mandatory in the EU to assist in a standardised approach to companies reporting on their sustainability practices.
The NFRD came into effect in all EU member states in 2018, and all 28 countries have since adapted the Directive into national law. The Directive forms part of the European Commission’s wider European Green Deal and its fundamental policy shift to channel finance into sustainable businesses and away from those that are dependent on fossil fuels or with adverse social impacts.
The NFRD lays out the rules for large companies regarding publishing information on:
- Environmental protection
- Social responsibility and treatment of employees
- Respect for human rights
- Anti-corruption and bribery
- Diversity on company boards.
The NFRD applies to large public-interest companies with more than 500 employees. This covers approximately 11,700 large companies and groups across the EU, including listed companies, banks, insurance companies and other companies designated by national authorities as public-interest entities.
Why has the NFRD been reviewed?
The NFRD established important principles for certain large companies to report sustainability information on an annual basis and introduced ‘double materiality perspective’. This means companies must report on how sustainability issues affect their business and about their own impact on people and environment. There had been ‘ample evidence’ that the information companies reported was insufficient, and that previous NFRD reports often omitted information investors and stakeholders consider important, along with the information being difficult to compare between companies. Investors are required to know this information to meet their own disclosure requirements under the Sustainable Finance Disclosure Regulation.
The European Financial Reporting Advisory Group (EFRAG) is responsible for developing the draft standards of the CSRD. The CSRD proposal aims to extend the scope to all large companies, whether they are listed or not and without the previous 500-employee threshold, and all companies listed on regulated markets (except listed micro-enterprises). The affected large companies meet 2 out of 3 of the following criteria:
- >250 employees and/or
- >€40M turnover and/or
- >€20M total assets
The CSRD proposal would also require:
- The audit (assurance) of reported information
- The introduction of more detailed reporting requirements, and a requirement to report according to mandatory EU sustainability reporting standards
- The companies to digitally ‘tag’ the reported information, so it is machine readable and feeds into the European single access point envisaged in the capital markets union and action plan
To limit the burden on listed SMEs, they will be allowed to report according to standards that are simpler than the standards that will apply for large companies. The reporting requirements of this proposal would also not apply to SMEs with transferable securities listed on SME growth markets or multilateral trading facilities (MTFs).
Alignment to other reporting frameworks
The new EU sustainability reporting standards will be developed through a multi-stakeholder and transparent process led by EFRAG, taking account of the GRI Standards and other existing reporting frameworks. Reporting will be mandatory, with sustainability and financial information given ‘comparable’ status, and a requirement for reported information to be audited and assured.
Timeline for implementation
The European Parliament, and the Member States in the Council, will negotiate a final legislative text based on the Commission’s Proposal. In parallel, EFRAG will start work on a first set of draft sustainability reporting standards, and the current aim is to have this ready by mid-2022.
If they reach agreement in the first half of 2022, the Commission should be able to adopt the first set of reporting standards under the new legislation by 31 October 2022. Consequently, companies would apply the standards for the first time to reports published in 2024, covering financial year 2023.
Once approved, EU Directives must be transported into national law. Once the transposition measure is adopted it is enforced through the national administrative mechanisms applicable to national law. Though no draft text has yet been published, the Commission’s consultation showed broad stakeholder support for extending the scope of the Directive to large companies listed in EU markets but established in third countries (which could include the UK), large companies established in the EU but listed on non-EU markets, and/or large non-listed companies.
It is also likely that the UK may want to mirror some of the regulations established by the CSRD and so while UK companies won’t need to report under the CSRD, they should be aware of any changes brought in by the UK government in the future.