European Council gives final green light to corporate sustainability reporting directive

On 28 November, the European Council gave its final approval to the corporate sustainability reporting directive (CSRD). Introduced in April 2021 as part of the European Green Deal and the Sustainable Finance Agenda, the CSRD will require companies to publish detailed information on sustainability matters. In practical terms, companies will have to report on how their business model affects their overall sustainability, and on how external sustainability factors (such as climate change or human right issues) influence their activities.

The Directive aims to address the shortcomings of the existing rules on non-financial reporting. It amends the 2014 Non-Financial Reporting Directive by introducing more detailed reporting requirements and ensures that large undertakings are required to disclose information on sustainability matters such as environmental rights, social rights, human rights and governance matters, building on common criteria aligned with the EU's climate objectives. Specifically, 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.

The new sustainability reporting rules will apply to all large companies (having two of either €20 million on their balance sheet, €40 million in annual turnover and/or 250 employees) 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 impacts, as defined in this directive. The European Financial Reporting Advisory Group (EFRAG) will be responsible for developing draft European standards.

Implementation timeline

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; and

• 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.

Sustainability reporting

Large undertakings and small and medium-sized companies, with the exception of micro-enterprises, that are public interest entities will be required to include in the management report information that provides an understanding of the company's impact on sustainability matters, as well as information necessary to understand how sustainability matters affect the group's development, performance and position.

The information should include, inter alia:

- a brief description of the company's business model and strategy, including the degree of resilience of the company's business model and strategy with respect to risks related to sustainability issues and how the company has implemented its strategy with respect to sustainability matters;

- a description of the time-bound targets related to sustainability matters set by the group, including, where appropriate, absolute greenhouse gas emission reduction targets at least for 2030 and 2050, a description of the progress the group has made towards achieving those targets, and a statement of whether the group’s targets related to environmental factors are based on conclusive scientific evidence; and

- a description of the principal risks to the group related to sustainability matters, including the group’s principal dependencies on those matters, and how the group manages those risks.

Sustainability information should be clearly identifiable in a dedicated section of the management report. It should also be available and accessible online to the public.

Sustainability reporting standards

The Directive provides for the adoption of mandatory common sustainability reporting standards to ensure comparability of information and disclosure of all relevant information.

These standards will have to specify the information that undertakings must disclose on environmental factors such as climate change mitigation, including greenhouse gas emissions, water and marine resources, resource use and the circular economy, pollution, biodiversity and ecosystems.

They will also need to specify the information that undertakings must disclose on social and human rights factors, as well as governance factors such as the role of the company's administrative, management and supervisory bodies in relation to sustainability issues, or ethics and corporate culture, including anti-corruption, whistleblower protection and animal welfare.

Certification and audit

To ensure that the information provided by companies is reliable, they will be subject to independent certification and auditing. An independent auditor or certifier must ensure that the sustainability information complies with the certification standards that have been adopted by the EU. The reporting of non-European companies must also be certified, either by a European auditor or by one established in a third country.

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For the first time, Europe putting sustainability reporting on an equal footing with financial reporting to ensure that investments are being made towards a more sustainable future. Clear and consistent disclosure requirements, together with the new certification requirement, will improve the reliability of sustainability information. This in turn will provide investors with the assurance that their investments are being made responsibly, and will support the development of a more sustainable economy.