The Council of the EU has formally made the final approval of the Corporate Sustainability Reporting Directive, which will fundamentally transform listed company sustainability reporting in the bloc.
- The Council of the EU has adopted the new legislation for the Corporate Sustainability Reporting Directive (CSRD).
- Adoption of the CSRD will standardise sustainability reporting across the bloc.
- Given the slow adoption schedule of reporting, however, concerns remain that a lack of standardised ESG data will slow the scaling up of the sustainable finance market.
The Council followed in the footsteps of the European Parliament where, earlier in November 2022, the legislative process was finalised through the adoption of the Corporate Sustainability Reporting Directive (CSRD). The goal is to increase a company’s accountability, prevent divergent sustainability standards, and ease the transition to a sustainable economy.
Jozef Síkela, Minister for Industry and Trade, said: “The new rules will make more businesses accountable for their impact on society and will guide them towards an economy that benefits people and the environment. Data about the environmental and societal footprint would be publicly available to anyone interested in this footprint. At the same time, the new extended requirements are tailored to various company sizes and provides them with sufficient transition period to get ready for the new requirements.”
Why does the adoption of the CSRD matter?
The CSRD amends the 2014 non-financial reporting directive (NFRD). It is a major update that is intended to address shortcomings in the existing rules on the disclosure of non-financial information, which were considered, by most commentators, to be of insufficient quality to allow this to be properly taken into account by investors.
In practical terms, companies will have to report on how their business model affects their sustainability, and on how external sustainability factors (such as climate change or human rights issues) influence their activities. This will equip investors and other stakeholders better for taking informed decisions on sustainability issues.
What the CSRD does is introduce more detailed reporting requirements and ensure that large companies and listed small and medium-sized enterprises (SMEs) are required to report on sustainability matters, including environmental rights, social rights, human rights and governance factors.
The CSRD will require disclosure under a common framework of European Sustainability Reporting Standards (ESRS), with the initial set of standards unveiled earlier in November 2022 by the European Financial Reporting Advisory Group (EFRAG).
What changes will the adoption of the CSRD bring to the reporting framework?
The new CSRD introduces a certification requirement for sustainability reporting as well as improved accessibility of information, by requiring its publication in a dedicated section of company management reports.
The EU rules on non-financial information will apply to all large companies and all companies listed on regulated markets, including responsibility for assessing the information at the level of their subsidiaries. The new requirements will also apply to all large companies with over 250 employees and at least €40 million in turnover, whether listed or not.
For non-European companies, there is also a requirement to provide a sustainability report. This applies to all companies generating €150 million in net annual turnover in the EU and which have at least one subsidiary or branch in the EU. These companies must provide a report on their ESG (environmental, social and governance) impacts, as defined in the directive.
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.
When does the CSRD come into effect?
There will be four stages to the application of the regulation:
In 2025, reporting on the financial year 2024 will be required for those companies already subject to the NFRD.
In 2026, reporting will be required for the financial year 2025 for large companies that are not currently subject to the NFRD.
In 2027 reporting will be required for the year 2026 for listed SMEs (except micro undertakings), small and non-complex credit institutions and captive insurance undertakings.
Finally, 2029 will see reporting required for 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.
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 20 days afterwards. The new rules will need to be implemented by Member States 18 months later.
Why is there continued concern about the availability of ESG data?
There is widespread acceptance that mandatory European sustainability reporting standards are crucial to the development of a standardised approach to data. This will be a necessary step to achieving the full potential of the EU’s sustainable finance regulatory framework.
There is a close connection with the approach taken on legislation under the Sustainable Finance Disclosure Regulation (SFDR). Such availability of data would enable asset managers to set up investment approaches and products using relevant, comparable, reliable and public ESG metrics of companies’ activities and financial risks.
Yet investors are warning that, with the first available corporate reports only expected from 2025 and the full scope only in place from 2028 onwards, there is likely to remain a chronic lack of decision-useful corporate ESG data.
Tanguy van de Werve, Director General at the European Fund and Asset Management Association which represents the €31 trillion EU investment management industry, warns this could have a negative effect on the pace at which the EU’s sustainable investment sector can scale.
He said: “CSRD is undoubtedly a crucial piece of the puzzle that will allow asset managers to further promote sustainable investing and to more accurately meet their regulatory requirements. We commend the European Commission for its original proposal and the co-legislators for prioritising this file. However, with the availability of these corporate reports being staggered between 2025 and 2029, our industry will be left picking up the ESG data pieces in the meantime.”