The European Council on Monday gave its final approval to the corporate sustainability reporting directive (CSRD).
- Companies will soon be required to publish detailed information on sustainability matters.
- This is meant to increase a company’s accountability, prevent divergent sustainability standards, and ease the transition to a sustainable economy.
- Following the Council’s approval of the European Parliament's position, the legislative act has been adopted.
- After being signed by the President of the European Parliament and the President of the Council, it will be published in the Official Journal of the European Union and will enter into force after 20 days.
- The new rules will need to be implemented by member states 18 months later.
The Highlights: Companies in the EU will have to report on how their business model affects their sustainability, and on how external sustainability factors (such as climate change or human right issues) influence their activities.
- This is meant to equip investors and other stakeholders better for taking informed decisions on sustainability issues.
- The CSRD strengthens existing rules on non-financial reporting introduced in the Accounting Directive by the 2014 non-financial reporting directive (NFRD), which are no longer tailored to the EU's transition to a sustainable economy.
The New Reporting Rules: The CSRD introduces more detailed reporting requirements and ensures that large companies and listed SMEs are required to report on sustainability matters such as environmental rights, social rights, human rights and governance factors.
- These will apply to all large companies and to all companies listed on regulated markets except listed micro undertakings. These companies are also responsible for assessing the information applicable to their subsidiaries.
- The rules also apply to listed SMEs, taking into account their specific characteristics. An opt-out will be possible for listed SMEs during a transitional period, exempting them from the application of the directive until 2028.
- For non-European companies, the requirement to provide a sustainability report applies to all companies generating a net turnover of €150 million in the EU and which have at least one subsidiary or branch in the EU exceeding certain thresholds. These companies must provide a report on their environmental, social and governance (ESG) impacts, as defined in this directive.
- The European Financial Reporting Advisory Group (EFRAG) will be responsible for developing draft European standards.
- The European Commission will adopt the final version of the standards as a delegated act, following consultations with EU member states and a number of European bodies.
The Dates: The application of the regulation will take place in four stages:
- reporting in 2025 on the financial year 2024 for companies already subject to the NFRD;
- reporting in 2026 on the financial year 2025 for large companies that are not currently subject to the NFRD;
- reporting in 2027 on the financial year 2026 for listed SMEs (except micro undertakings), small and non-complex credit institutions and captive insurance undertakings;
- reporting in 2029 on the financial year 2028 for third-country undertakings with net turnover above 150 million in the EU if they have at least one subsidiary or branch in the EU exceeding certain thresholds.
The Background: The European Commission presented the CSRD proposal on 21 April 2021 as part of the European Green Deal and the Sustainable Finance Agenda.
- On 24 February 2022, EU member states unanimously agreed on the Council’s position on the CSRD proposal.
- On 21 June 2022, the Council and the European Parliament reached a provisional agreement on the CSRD, which was endorsed by EU member states’ representatives on 30 June 2022.
