EU Corporate Sustainability Due Diligence Directive: ESG Reporting

Rahman Ravelli details the progress of the European Union corporate directive on ESG reporting

The European Parliament has moved one step further to making businesses more accountable for their environmental impact.

On 10 November 2022, the EU Parliament adopted the Corporate Sustainability Reporting Directive (CSRD), with 525 votes in favour, 60 votes against and 28 abstentions.

The Directive is set to oblige companies to regularly disclose information about the effect their activities have on the environment and society. It is viewed as a step towards ending greenwashing while also strengthening the European Union’s (EU’s) social market economy and setting potential benchmarks for global sustainability reporting standards.

Addressing shortcomings

The European Commission presented its proposed CSRD in April 2021. It was devised to address shortcomings in current legislation relating to the disclosure of non-financial information that is required of large companies under the EU’s Non-Financial Reporting Directive (NFRD), which is perceived as being largely insufficient and unreliable. As put forward in the Q & As on the proposed CSRD directive, reports prepared under the NFRD often omit information that investors or other stakeholders would consider important with respect to how sustainability issues affect corporates’ business operations and how they, in turn, affect people and the environment.

To address such shortcomings, the CSRD would cover more companies - in particular all large companies, whether listed or not, operating in the EU, as well as listed SMEs - and introduce more detailed reporting requirements regarding companies’ impact on the environment, human rights and social standards, based on common criteria in line with EU climate goals. Standards to ensure harmonized reporting are expected to be developed by the European Financial Reporting Advisory Group (EFRAG), a private association established in 2001. EFRAG’s proposed standards should be adopted by the EU Commission by June 2023.

To ensure companies are providing reliable information, they will be subject to independent auditing and certification. Financial and sustainability reporting will be equally stringent, and investors will have access to equivalent data. Companies will also have to guarantee digital access to sustainability information.

Extending the scope of the reporting obligations

The new EU sustainability reporting requirements will apply to all large companies, whether listed on stock markets or not. Non-EU companies with substantial activity in the EU (with a turnover over €150 million in the EU) will also have to comply. Listed SMEs will also be covered, but they will have more time to adapt to the new rules.

For nearly 50 000 companies in the EU, collecting and sharing sustainability information will become the norm - compared to the current figure of approximately 11,700. The new measures can, therefore, be seen as a considerable extension of the scope of current reporting requirements. They are a significant step in the move towards greater transparency in environmental, social and governance matters and will make the EU a front-runner when it comes to introducing such reporting standards.

Next Steps

The Council of the European Union is expected to adopt the proposal on 28 November, after which it will be signed and published in the EU Official Journal. The directive will come into force 20 days after publication.

The CSRD relies on a progressive implementation. The new reporting rules will start to apply between 2024 and 2028:

• From 1 January 2024 for large public-interest companies (with over 500 employees) already subject to the non-financial reporting directive, with reports due in 2025.
• From 1 January 2025 for large companies that are not presently subject to the non-financial reporting directive (with more than 250 employees and/or €40 million in turnover and/or €20 million in total assets), with reports due in 2026.
• From 1 January 2026 for listed SMEs and other undertakings, with reports due in 2027. SMEs can opt-out until 2028.