In our previous ESG Update blog, we described what the then anticipated new EU-wide Sustainable Corporate Governance requirements might look like.
On 21 April, The European Commission published a draft of the proposed new Corporate Sustainability Reporting Directive (CSRD). It will completely replace and significantly expand the scope of the current EU Non-Financial Reporting Directive. This short blog summarises its key features.
Background
Following the Amendment of the Accounting Directive (2013/34/EU) (ACD) by the Non-Financial Reporting Directive (2014/95/EU) (NFRD), certain large corporate entities already need to disclose ‘non-financial information’ in their annual statements (since 2017). This includes information relating to sustainability and climate change.
However, the NFRD has been criticised as limited in scope and ambition. The European Commission conducted a review of the NFRD last year. It has resulted in the adoption of the proposal for the CSRD.
The proposal ties in with the EC’s intention to further embed sustainable and responsible behaviour in the corporate governance framework more generally, as announced in the Commission Communication on the (COVID-19) Recovery Plan and in the European Green Deal.
While it is unlikely that the core elements of the proposed CSRD will change dramatically before enactment, the CSRD is likely to be amended in some respects during the legislative process.
If passed, the obligations under the CSRD will come into force for financial years commencing on or after January 2023. Member States will be obliged to transpose the CSRD by December 2022.
Specifics
The ‘non-financial information’ reporting obligation introduced by the NFRD currently applies to large public-interest companies. Under the proposed CSRD, all entities defined as ‘large’ companies will be caught. ‘Large’ company is a company which meets at least two of the following three criteria:
- Its balance sheet exceeds the total of EUR 20 million;
- Its net turnover exceeds EUR 40 million; and/or
- It has at least 250 employees.
SMEs listed on EU regulated markets will also be caught by the obligations under the CSRD (but only from 1 January 2026).
The CSRD significantly widens the scope of the reporting obligation itself. A company caught by the CSRD will need to publish an annual statement containing the following:
1. Its business model as well as its ESG strategy and how it is being implemented, including:
a. Whether it is resilient to risks related to sustainability matters;
b. The opportunities related to sustainability matters;
c. Whether it is compatible with the transition to a sustainable economy and the international obligations under the Paris Agreement; and
d. Whether it takes into account shareholders’ interests.
2. The targets related to sustainability matters set by the company and the company’s performance against these targets.
3. The role of the management, administration and supervisory bodies with regard to sustainability matters.
4. The company’s corporate culture and responsibility as well as information related to lobbying or other political engagements.
5. Information on the company’s value chain, including its own operations, products, services, business relationships, and supply chain.
The reporting obligations above are further enforced by the CSRD requiring covered companies to carry out a level of mandatory due diligence in relation to sustainability matters.
To better particularise the detailed requirements of the new reporting obligations under the CSRD, the EC will publish detailed reporting standards. The first set of standards should be adopted by October 2022. While the current reporting obligations are underpinned by non-binding guidance only, the new standards will be mandatory.
In a further extension beyond current rules, the CSRD also introduces a ‘limited assurance’ third party audit requirement. The EC plans to further strengthen the audit requirements (i.e. beyond the “limited assurance” standard) and ensure that ESG information is subject to the same level of independent auditing as financial information in the future. Companies will also have to report how they identified the information contained in their statements.
Please do not hesitate to contact any member of the Reed Smith EHS team if you would like more detailed information on this topic.