The EU Directive on Corporate Sustainability Reporting (“CSRD“) entered into force on January 5, 2023 and the associated European Sustainability Reporting Standards (“ESRS“) were adopted by the European Commission on 31 July 2023. Together, the CSRD and ESRS create detailed sustainability reporting requirements that will apply to a significant number of EU and non-EU companies and will substantially increase the scope of their sustainability reporting.
The application of the rules is now imminent and for some countries the CSR reporting periods will start from January 1, 2024.
In this update we look at the implications of the CSRD for companies outside the EU and what companies can do to prepare for this.
Overview of Disclosure Requirements
Under the CSRD, companies under its scope will be required to disclose a wide range of sustainability-related information, including:
- a description of the company’s business model, strategy and sustainability risks and opportunities;
- ESG-related objectives and annual progress towards achieving these objectives;
- separate sustainability statements included in the company’s management reports, containing sector-independent, sector-specific and company-specific information, in accordance with the ESRS;
- implementation plans related to the transition to a sustainable economy, measures taken to limit global warming in line with the Paris Agreement and to achieve climate neutrality by 2050, and exposure to coal, oil and gas-related activities;
- sustainability issues that affect the company and the company’s impact on sustainability issues (the so-called ‘double materiality perspective’);
- greenhouse gas emissions targets;
- policies related to sustainability (including incentive schemes related to sustainability issues);
- EU taxonomy alignment data; And
- due diligence processes implemented by the company regarding sustainability issues and the actual and potential negative impacts of the company’s operations and value chain.
Significant additional detail is included in the ESRS, including two cross-cutting standards (ESRS 1 and ESRS 2) that provide general reporting concepts (including dual materiality and reporting limits) and overarching disclosure requirements, and ten current standards with specific disclosure requirements. for ESG matters. For more details on the disclosure requirements under the CSRD and the ESRS, please read our previous updates here and here.
Application to non-EU companies
The following non-EU companies will be required to report under the CSRD:
- Non-EU companies with securities listed on an EU regulated market. For the avoidance of doubt, the CSRD does not apply to securities listed on EU multilateral trading facilities; And
- Non-EU companies with: (a) an annual net turnover at consolidated or individual level in the EU exceeding EUR 150 million during each of the last two consecutive financial years; and (b) which have a qualifying EU subsidiary or branch in the EU that generated an annual net turnover of more than EUR 40 million in the previous financial year (the “EU turnover test“).
In addition, non-EU parent companies of EU subsidiaries will have to assess when and whether their EU subsidiaries fall within the scope of the reporting requirements – see “Timing – EU” below for further guidance.
It is important to note that there are a number of exceptions to the CSRD, although their application is complex. In particular, the exemption for “wholesale debts” under the EU Transparency Directive continues to apply. This means that non-EU companies that only have debt securities listed on a regulated market with a nominal value of more than EUR 100,000 (or the equivalent) can be considered outside the scope of the CSRD. Exemptions are also available for non-EU companies whose parent company complies with the CSRD through a consolidated group report. In addition, there may also eventually be exemptions for non-EU companies reporting under ‘equivalent standards’, although the reporting standards that could be considered equivalent to the CSRD are currently unclear.
Time of day
Understanding the phased timing of the CSRD is essential to understanding how to best prepare. The application of the CSRD will take place in four phases (for financial years beginning on or after):
|Time of day
|January 1, 2024
|Large non-EU companies with securities listed on a regulated market in the EU and with more than 500 employees.
|Large “public interest entities” in the EU already subject to the Non-Financial Reporting Directive (“NFRD“).
|January 1, 2025
|Large non-EU companies listed on a regulated market in the EU.
|Major EU companies not currently covered by the NFRD.
|January 1, 2026
|Certain SMEs from outside the EU (“SME“) listed on a regulated market in the EU.
|Certain EU SMEs, small and non-complex credit institutions and captive insurance companies.
|January 1, 2028
|Non-EU companies that fall under the rules solely because of the EU turnover test.
The term “Large” applies to an enterprise or, where that enterprise is a parent company of a consolidated group, a group that meets two of the following tests: (a) balance sheet total exceeding EUR 20 million; b) a net turnover of more than EUR 40 million; and (c) more than 250 employees.
Interoperability with other sustainability reporting regimes
CSRD will not operate in a vacuum. Non-EU companies will also have to comply with the evolving and overlapping sustainability reporting rules in their local jurisdiction. By way of example: the much-discussed US Securities and Exchange Commission (“SEC“) proposed climate change disclosure rules also focus on climate-related risks (you can read more about the SEC’s proposed rules in our legal update here).
However, the CSRD goes well beyond the SEC’s proposed rules because, in addition to reporting on climate-related risks, companies are also required to report on (among other things) water and marine resource-related risks, biodiversity, and ecosystem-related risks. and risks related to employees in the value chain, all on the basis of “double materiality”.
Finally, there are also international standards to take into account. While efforts have been made to ensure that there is a high level of interoperability between the ESRS and the global International Sustainability Standards Board (“ISSB“) standards, there will not be full alignment and disclosures will need to take into account the range of local and international standards (for more information on the ISSB standards, read our update here).
How can we help?
Our team is happy to help you prepare for the CSRD.
We recognize that new sustainability reporting requirements in the EU, US, UK and other jurisdictions are top of the agenda for many institutions. In particular, we assist a number of clients with:
- Advise on the applicability of the CSRD to the EU and non-EU subsidiaries in their group. The scope and precise applicability of the CSRD are particularly complex and require detailed analysis.
- Conducting gap analyzes to assess the overlap of the CSRD with other European and US, UK, international and other ESG-related reporting rules.
- Reviewing draft sustainability disclosures and associated disclaimers to ensure appropriate disclosure and disclaimer of data and narrative. Sustainability disclosures are increasingly subject to scrutiny by regulators and civil society and have been the target of lawsuits. For more details on these matters, see our briefing “Greenwashing: Navigating the Risk“.
- Advising clients on the human rights and environmental due diligence requirements contained in the draft EU Directive on Corporate Sustainability Due Diligence, a different but overlapping forthcoming piece of EU legislation (see our briefing on this here).