“The clock is ticking for in-scope entities to develop and implement the processes and controls for CSRD reporting”
2023 saw global acceleration in standard-setting and regulatory efforts to introduce sustainability-related corporate reporting obligations. While the US SEC climate disclosure rules have yet to be finalized, and the ISSB’s inaugural Sustainability Disclosure Standards await adoption into domestic legislation, the EU’s regime demands most urgent attention from the 50,000+ EU and non-EU companies expected to fall within its scope.
Scope
The EU’s Corporate Sustainability Reporting Directive (“CSRD”) entered into force on 5 January 2023, with EU Member States obliged to transpose it into national laws by July 2024. In-scope companies shall report on sustainability-related issues in line with a detailed set of disclosure standards, the European Sustainability Reporting Standards (“ESRS”). Obligations apply progressively from 2024-2028:
| Category | Criteria (reflecting adjustments to account for inflation impacts, as proposed by European Commission in October 2023) | Implementation Date (Reporting due from) | |
| 1. | Large EU ‘public interest entities’ | Must be a large EU undertaking which (i) is a ‘public interest entity’; and (ii) has more than 500 employees. | 2025 for FY 2024 |
| 2. | Large EU undertakings and EU parent undertakings of large groups | Must meet two of the following criteria (either as a single entity or on a consolidated group basis): Balance sheet total: EUR 25 million;Net turnover: EUR 50 million; and/orEmployees: 250. | 2026 for FY 2025 |
| 3. | EU SMEs that are listed on EU regulated markets | Must (i) have securities listed on a regulated EU market; and (ii) meet two of these criteria: Balance sheet total: EUR 5 million;Net turnover: EUR 10 million; and/orEmployees: 50. | 2027 for FY 2026 |
| 4. | Non-EU parent company with: (i) an EU-established large subsidiary or a listed SME subsidiary; or (ii) a large EU branch | Meet the following criteria: Net turnover of EUR 150 million in the EU for each of the last two consecutive financial years; andAt least one subsidiary or branch in the EU which:For a subsidiary: meets the criteria for categories (2) or (3) above; orFor a branch: has a turnover of more than EUR 40 million. | 2029 for FY 2028 |
| 5. | Non-EU and EU issuers with debt or equity securities listed on an EU regulated market | Non-EU and EU issuers which are: “large undertakings” with 500+ employees; “large undertakings”; orSMEs. | 2025 (for FY 2024)2026 (for FY 2025)2027 (for FY 2026) |
Obligations
An in-scope company shall disclose in its management report information on ‘sustainability matters’ that affect it, as well as the impacts of the company on sustainability matters (the so-called ‘double materiality’ principle). Such information must be disclosed against the ESRS, which are still under development by the European Financial Reporting Advisory Group (“EFRAG”).
In October 2023, the first set of ESRS was formally adopted. It comprises 12 standards: two cross-cutting standards “General Requirements” and “General Disclosures”, supplemented by ten environmental, social and governance topic-specific (but sector-agnostic) standards. Topics include climate change, pollution, biodiversity, own workforce,workers in the value chain, and business conduct. Concerning climate change, companies must disclose their scope 1, scope 2 and, where relevant, scope 3 greenhouse gas emissions. EFRAG also released a draft set of all possible datapoints under the sector-agnostic ESRS to guide companies’ materiality assessment. EFRAG now has until June 2026 to develop two further sets ESRS: (i) sector-specific standards, and (ii) standards specifically for non-EU reporting companies.
The CSRD also requires companies to report on due diligence on sustainability matters. Such a requirement will operate alongside the due diligence obligations anticipated under the EU’s proposed Corporate Sustainability Due Diligence Directive (or “CSDDD”, at advanced stages of the legislative process), which will require companies to identify and prevent adverse environmental and human rights impacts in value chains.
Certain exemptions apply to in-scope subsidiaries (including holding companies). For example, a company may be exempted from CSRD reporting when its EU or non-EU parent company prepares a consolidated report which includes the CSRD-aligned disclosures of in-scope subsidiaries.
Non-EU parent companies may report under ‘equivalent standards’ to those under the CSRD. The Commission is responsible for establishing an equivalency mechanism. Whilst the ESRS: (i) are structured based on pillars of the Task Force on Climate-Related Financial Disclosures (TCFD) framework, (ii) align closely with the ISSB’s Sustainability Disclosure Standards, and (iii) include elements which mirror the proposed SEC climate rules – at this stage it seems unlikely that the Commission would deem any of these frameworks CSRD-equivalent, due to current divergent approaches to “materiality”.
Implications
The clock is ticking for in-scope entities to develop and implement the processes and controls for CSRD reporting. Consequences for non-compliance could be wide-ranging. Penalties will be prescribed under each EU Member State’s domestic implementing legislation, which could include monetary fines. Other implications could involve strategic litigation, negative reputational impacts among stakeholders, or breaches of contract. Companies should carefully evaluate scope, applicable effective date and what the disclosure obligations will entail. To further mitigate risk of non-compliance, the CSRD should not be viewed through the lens of a tick-box compliance exercise, but as an opportunity to create value by driving change
