The European Parliament has adopted the near-final version of the Corporate Sustainability Reporting Directive under which European Union (“EU”) companies (including non-EU companies with substantial business activity in the EU) will be required to comply with robust environmental, social, and governance disclosure requirements starting as early as January 2024.
On November 10, 2022, the European Parliament adopted the revised version of the Corporate Sustainability Reporting Directive (the “CSRD”), which, once in force, will amend existing reporting rules under the Non-Financial Reporting Directive (the “NFRD”) by introducing significantly more detailed reporting requirements and expanding the pool of companies subject to such enhanced disclosure rules. In particular, the CSRD will extend the scope of sustainability reporting to non-EU companies and groups. Approval from the EU Council is expected on or around November 28, 2022 and the CSRD will then enter into force 20 days after publication in the Official Journal of the European Union.
The CSRD will apply to all EU companies that meet the definition of a “large undertaking” under the Accounting Directive, whether public or private companies; and to small-and-medium undertakings (“SMEs”) that are “public-interest entities,” which include companies with equity securities listed on a regulated EU stock exchange (e.g., Euronext Paris, Frankfurt Stock Exchange), credit institutions, and insurance undertakings. The CSRD will also apply to consolidated non-EU groups with substantial activity in the EU. (Read our Commentary on the Extraterritorial Reach of Upcoming European ESG Rules), commenting on the June 30, 2022 version of the CSRD.)
While the CSRD will enter into force on a phase-in basis starting in 2024 (reporting in 2025), given the significant lead time to generate data to be reported under the CSRD, companies should review their planning on data management, systems updates, and management reporting to ensure timely compliance.
The CSRD rules will take effect between 2024 and 2028 as follows:
- January 1, 2024 for EU companies (this includes EU subsidiaries of non-EU groups) that are already subject to the NFRD (first CSRD reporting due in 2025);
- January 1, 2025 for EU companies (this includes EU subsidiaries of non-EU groups) meeting two of the following three criteria on their last balance sheet date: More than 250 employees; €40 million in turnover; and €20 million in total assets (reporting due in 2026);
- January 1, 2026 for SMEs that are “public-interest entities” (reporting due in 2027); and
- January 1, 2028 for non-EU groups, including U.S. and other companies incorporated outside the EU, on a consolidated basis that have a subsidiary or branch in the EU and meet certain threshold requirements of doing “substantial business” in the EU (reporting due in 2029).
The CSRD will require detailed consolidated disclosures on a variety of ESG topics, at first on a consolidated EU basis (consolidated EU group companies only), and subsequently, for groups with a non-EU parent company, on a global consolidated basis (subject to certain limited exceptions). Required disclosures include:
- Business model and strategy;
- Targets related to sustainability, including absolute greenhouse gas emission reduction targets at least for 2030 and 2050, and progress made toward achieving these goals;
- Policies relating to sustainability (including incentive plans linked to sustainability);
- Implemented due diligence processes;
- Plans and actions to mitigate, remediate, and end actual or potential adverse impacts related to ESG issues, including with regard to meeting the 1.5 °C goal in line with the Paris Agreement and the objective of achieving climate neutrality by 2050; and
- A description of the role of company management in sustainability matters and members’ related expertise and skills.
The specifics of CSRD requirements will be set forth in new EU Sustainability Reporting Standards adopted by delegated acts of the European Commission on a rolling basis. The standards are currently under development by the European Financial Reporting Advisory Group (“EFRAG”), which has published interim drafts that EFRAG voted on November 15, 2022, to submit to the EU Commission. It is expected that the first set of standards will be formally adopted in June 2023, while the reporting standards specific to non-EU groups are expected by June 30, 2024.
Stay tuned for our upcoming publication further describing what the CSRD means for certain industries, EU companies, and non-EU companies.