New standards of transparency and accountability in the management of social and environmental risk

This follows the announcement on 21 June 2022 that the Council and European Parliament has reached provisional political agreement on the new Corporate Sustainability and Reporting Directive (CSRD), designed to strengthen existing rules set out within the Non-Financial Reporting Directive (NFRD).

Following a comprehensive review of the current NFRD, CRSD amends existing reporting requirements by:

• extending the scope to all large companies and all companies listed on regulated markets (except listed micro-enterprises)
• requiring the audit (assurance) of reported information
• introducing more detailed reporting requirements and a requirement to report according to mandatory EU sustainability reporting standards
• requiring companies to digitally ‘tag’ the reported information so that it is machine readable and will feed into a European single access point.

With new requirements starting to take effect from 1 January 2024 for some companies, it is important to determine whether CRSD applies to your business.

What are the current reporting requirements?

From 2016, NFRD required certain large public-interest companies, (listed companies, banks, insurance companies, designated public-interest entities), with more than 500 employees to disclose information on the way they operate and manage social and environmental challenges.

Affected companies are required to report how sustainability issues affect their performance, position and development, (the ‘outside-in’ perspective), and their impact on people and the environment, (the ‘inside-out’ perspective), known collectively as ‘double materiality’.

What has prompted the changes within CSRD?

The European Commission committed itself to a review of the NFRD in the European Green Deal and its 2020 Work Programme. This is based on a belief that:

• investors want to better understand the risks/opportunities created by sustainability issues, as well as the impacts of those investments on people and the environment
• NGOs, social partners and other stakeholders want to hold companies to greater account for the impact of their activities on people and the environment.

CSRD aims to improve publicly available information about the risks that sustainability issues present for companies, and the impacts of companies themselves on people and the environment.

Who will CSRD apply to?

In addition to applying to listed companies, CSRD applies to:

• unlisted large undertakings. A company is a large undertaking where it exceeds at least two of the following:
  - balance sheet total of EUR 20 million
  - net turnover of EUR 40 million
  - an average number of employees during the financial year of 250
• non-EU companies with substantial activity in the EU market, (that is, annual turnover in the EU of EUR 150 million or more)
• listed SMEs, (listed on EU regulated markets).

It is expected that approximately 49,000 companies will be required to report sustainability information in the future, compared with 11,700 companies currently under NFRD.

What must companies do to comply?

The draft standards are being developed by the European Financial Reporting Advisory Group, (EFRAG), with the first set of standards due to be adopted by October 2022.

Standards will align, where possible, with global standard-setting initiatives such as GRI and the ISSB Standards, but they also aim to link other EU legislation and initiatives such as the Sustainable Finance Disclosure Regulation and the EU Taxonomy Regulation.

The cost of achieving compliance with these new requirements is estimated at EUR 1.2 billion in one-off costs and EUR 3.6 billion in annual recurring costs.

When will CSRD take effect?

The application of the regulation will take place in three stages:

• 1 January 2024 for companies already subject to the NFRD
• 1 January 2025 for large companies that are not presently subject to the NFRD
• 1 January 2026 for listed SMEs and others.

Companies potentially affected by the CSRD should act now to:

• determine whether/how CSRD impacts their activities
• review existing ESG ratings, frameworks and disclosures against proposed EU sustainability reporting standards
• conduct a gap assessment to ascertain required improvements
• begin the process of implementing any required changes.