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Corporate Sustainability Reporting: CSRD Requirements Now Include Non-EU Companies and Independent Auditing
Sustainability

Corporate Sustainability Reporting: CSRD Requirements Now Include Non-EU Companies and Independent Auditing

By | July 6, 2022

Sustainability reporting is serious business in Europe. When reporting frameworks for corporate ESG disclosures are not sufficiently aligned with the European Union’s environmental and social ambitions, things change.  

In June, the Council of the European Union and the European Parliament provisionally agreed on new rules for the disclosure of non-financial information under the Corporate Sustainability Reporting Directive (CSRD). The agreement seeks to strengthen non-financial reporting, essentially sending the message that the CSRD’s predecessor, the Non-Financial Reporting Directive (NFRD), was not strong enough. The rules also expand the scope of the CSRD and offer a timeline for their application.   

Bruno Le Maire, French minister for economic affairs, finance and industrial and digital sovereignty, noted that the new rules will lead to simpler, more accessible information that provides greater transparency for citizens, consumers and investors.  

CSRD Standards for ESG Reporting

The directive’s proposed reporting standards—the European Sustainability Reporting Standards (ESRS) issued by the European Financial Reporting Advisory Group (EFRAG)—provide specific disclosure requirements and guidance. (See And Now… New Sustainability Reporting Standards from Europe to learn more.) 

Released as exposure drafts in April this year, the reporting standards address environmental, social and governance matters and are currently in a public consultation phase that ends on August 8. Like the proposed regulations for climate-related disclosures from the U.S. Securities and Exchange Commission (SEC), the reporting standards also include mandatory reporting of Scope 1, Scope 2 and Scope 3 emissions, but the European standards go well beyond the SEC regulations.  

Regulations fall into three categories: environmental, social and governance. Environmental categories include:  

  • Climate change 
  • Pollution 
  • Water and marine resources 
  • Biodiversity and ecosystems 
  • Resource use and circular economy  

  Social categories include:  

  • The company’s own workforce 
  • Workers in the value chain 
  • Affected communities 
  • Consumers and end users 

Governance categories include:  

  • Governance 
  • Risk management and internal control 
  • Business conduct 

In drafting the CSRD standards, EFRAG considered other proposed regulations and frameworks, including the SEC’s proposed climate-related disclosures and recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD).  

The CSRD standards are ambitious, and if they demand robust monitoring and reporting and encourage corrective action, they may effect real change — particularly if many businesses fall under their jurisdiction. Fortunately, this seems to be the case.  

Corporate Sustainability Software
Corporate Sustainability Software

Non-EU Companies: Take Note

The exposure drafts indicate that the CSRD will apply to:  

  • Large companies in the EU that meet two of the following three criteria:  
    • 250 or more employees
    • Turnover of at least 40M
    • Or a balance sheet total of at least 20M 
  • All companies listed on EU-regulated markets 
  • Small to Medium Enterprises (SMEs), depending on their specific characteristics. A transitional period allows SMEs to opt out until 2028.  

The agreed text of the CSRD is not yet available, but press releases from the European Council and Parliament suggest a notable difference from the CSRD proposal released in April 2021. The new rules expand the scope of CSRD to include certain non-EU companies:  

  • Sustainability reporting will be required of non-European companies that generate an annual net turnover of 150M in the EU and that have at least one subsidiary or branch in the EU. Non-EU companies will have to comply after an interim transitional period.    

A Requirement for Independent Auditing

Another significant development is the requirement for independent auditing of reports:   

  • Reporting must be certified by an accredited independent auditor or certifier. This also applies to non-EU companies that meet the criteria above; their reports must be certified by a European auditor or by an auditor established in a third country.  

When Will CSRD Sustainability Reporting Requirements Go into Effect?

More discussion and deliberation are needed before the rules can be officially released. The provisional agreement is subject to approval by the Permanent Representatives Committee before it goes through the formal steps required for adoption. The final directive will be published in the Official Journal of the EU (OJEU) and will go into force 20 days after publication in the OJEU. The CSRD standards will then need to be incorporated into Member States’ national laws within 18 months. Take note of the timeline for compliance:  

  • Companies already subject to the NFRD: from 1 January 2024 (reporting year 2025) 
  • Large companies that are not presently subject to the NFRD: from 1 January 2025 (reporting year 2026)  
  • EU-listed SMEs, small and non-complex credit institutions and captive insurance undertakings: from 1 January 2026 (reporting year 2027) 

Take Sustainability Reporting Seriously

The flaws of the Non-Financial Reporting Directive have been addressed through the Corporate Sustainability Reporting Directive. The CSRD, when first proposed in April 2021, brought more companies under its jurisdiction and promoted greater transparency by addressing the need for comparability. The rules agreed by the European Commission and European Parliament take the CSRD even further by expanding the scope and imposing an auditing requirement. The rules prove that corporate sustainability reporting is truly serious business in the EU.  

Sustainability Performance Improvement
Sustainability Performance Improvement
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