The European Union (“EU”) has passed the world’s most far-reaching mandatory environmental, social, and governance (“ESG”) reporting regime.
The Corporate Sustainability Reporting Directive (“CSRD”) will apply to an initial group of large EU companies from 2024 and gradually extend its reach to smaller companies over the course of the following four years. It is ultimately expected to apply to more than 50,000 companies incorporated, listed, or doing business in the EU. Notably, from 2028 the CSRD will apply to non-EU parent companies that generate more than EUR 150M of net turnover in the EU and have at least one EU subsidiary subject to the CSRD (or a local branch of a certain size). (See Appendix for a table with detailed information on the CSRD’s application thresholds and dates.)
The purpose of the CSRD is to create detailed, audited, public, and comparable ESG reporting across a wide range of public and non-public companies. To this end, the European Commission (“Commission”) is expected to adopt detailed mandatory ESG disclosure requirements as the European Sustainability Reporting Standards (“ESRS”). Further, CSRD reporting will be subject to limited assurance by accredited auditors and is expected to ultimately be subject to more rigorous assurance standards (i.e., “reasonable” assurance). The intention is to both provide investors with the information they need to make investment decisions that consider sustainability factors, and more generally to increase transparency concerning companies’ ESG impacts for other stakeholders (e.g., regulators, consumers, civil society, and NGOs).
Status and Implementation Timeline
By mid-2024 Member States will be required to adopt national laws implementing the CSRD. As noted above, the application of those laws will then be phased in for different groups of companies, beginning in 2024 with the first reports due in 2025. (See Appendix for details.)
EFRAG and the ESRS
The CSRD will be operationalized through the ESRS, which the Commission must adopt as delegated acts by June 2023. A proposed draft set of ESRS has been developed over the course of the past year by the European Financial Reporting Advisory Group (“EFRAG”) and was submitted to the Commission for consideration last week.
The proposed draft ESRS include two general standards and ten subject matter-specific standards across the “E”, “S”, and “G” pillars. As currently proposed, the ESRS would cover 84 discrete disclosure requirements and 1,144 quantitative and qualitative data points.
The general standards address key foundational concepts as well as reporting processes and format of CSRD-compliant sustainability reporting. ESRS 1, for example, defines the concept of “double materiality,” which is one of the key tenets of CSRD reporting. The double materiality standard means that, unlike some other ESG reporting regimes, companies must report not only on the potential financial impact to their businesses of ESG issues but also on the material impacts that their businesses have on people and the planet. In other words, companies will be required to report on issues that are not material from a financial perspective. ESRS 1 also clarifies that some disclosures—for example on greenhouse gas emissions—are always material.
The ten subject matter-specific ESRS cover all three ESG pillars as follows (see here for all draft ESRS).
The general ESRS outlined above will be complemented with sector-specific standards applicable to companies in a broad range of sectors including information technology, financial services, oil and gas, energy production and utilities, motor vehicles, agriculture, food and beverage, and biotechnology and pharmaceuticals.
EFRAG will develop the sector-specific standards over the course of 2023. EFRAG is currently conducting workshops and public sessions to solicit input from stakeholders on the sector specific draft ESRS. The CSRD requires the Commission to adopt sector-specific standards by June 2024 taking into consideration draft standards developed by EFRAG.
Commission Adoption of ESRS
The Commission will now start the regulatory process to adopt the first set of cross-sectoral ESRS proposed by EFRAG as Commission delegated acts, which will require consultation with Member States’ expert groups. At this stage, there is still scope for stakeholders to be heard. The Commission must take into consideration EFRAG’s technical advice but it is not bound by it and must carefully review it and take full responsibility for the ESRS that it adopts as delegated acts.
The CSRD also establishes a triennial review of the ESRS to take into account developments related to ESG reporting, including with regard to international standards (e.g., those developed by the International Sustainability Standards Board (“ISSB”)). The CSRD requires the Commission to take account of the work of global standard-setting initiatives for sustainability reporting to “the greatest extent possible.” During the development of the ESRS, global regulatory alignment and inter-operability have been a key concern of the business community.
Steps Companies Can Take Now to Prepare
Although the CSRD will not apply to companies until 2024 (at the earliest), many companies are already undertaking steps to prepare for compliance.
Specific issues we see companies considering:
- Mapping application thresholds to corporate structure.
- Considering group vs. individual entity-level ESG reporting.
- Restructuring internal ESG governance processes.
- Assessing existing ESG reporting efforts and conducting gap analyses against the requirements of the CSRD.
- Evaluating ESG data availability and quality, including for assurance readiness purposes.
- Assessing the interplay between the CSRD and existing legal regimes—such as, for example, the EU Taxonomy Regulation’s technical screening criteria and the environment-focused disclosures pursuant to the CSRD.
- Assessing potential legal risks that may arise in relation to CSRD reporting, including litigation and enforcement risk.
Appendix: CSRD Application Thresholds and Dates
|Type of Company
|Application Date* / First Sustainability Report Due
|Applicable Reporting Standard
|Large EU Public Interest Entities (“PIEs”)
|Large Company (as defined below) that has more than 500 employees (annual average) and that has either (i) transferable securities listed on a regulated market in the EU, (ii) is a credit institution or insurance undertaking as defined by EU law, or (iii) is designated by a EU Member State as a PIE. (Note: These companies are already subject to the EU’s Non-Financial Reporting Directive (“NFRD”), the precursor to the CSRD.)
|FY 2024 / 2025
|Large Company / Large Group
|Large Company: Meets at least 2 of the following 3 conditions: (i) more than 250 employees (annual average), (ii) more than EUR 40M in net turnover, and/or (iii) more than EUR 20M in total assets. Large Group: Consisting of an EU parent company and its subsidiary companies (whether in the EU or ex-EU) that on a consolidated basis meet the definition of a “large company.”
|FY 2025 / 2026
|Listed Small- and Medium Enterprise (“SME”)
|Is not a Large Company but has transferable securities listed on a regulated market” in the EU and meets at least 2 of the following 3 conditions: (i) more than 10 employees (annual average), (ii) EUR 700k in net turnover, and (iii) EUR 350k in total assets.
(can opt to delay until FY 2028) / 2027 (2029 if delay)
|Non-EU Parent Company With Significant Business in the EU
|Company that is not established under the laws of a EU Member State (e.g., the US) and that has generated more than EUR 150M of net turnover in the EU for each of the last two consecutive financial years and has at least: (i) one subsidiary that meets any of the definitions above (e.g., Large Company), or (ii) a branch (generally an unincorporated physical presence) that generated net turnover greater than EUR 40M in the preceding year.
|FY 2028 / 2029
(i) ESRS; (ii) specific sustainability reporting standards the EU will develop for non-EU parent companies; or (iii) sustainability reporting standards of home jurisdiction that EU considers equivalent.