On 10 November 2022, the European Parliament adopted the Corporate Sustainability Reporting Directive (“CSRD”). The Council of the EU is expected to adopt the CSRD proposal on 28 November 2022, following which it will be published in the Official Journal. The CSRD will enter into force 20 days after publication and EU member states will have 18 months to transpose the directive into national law.
The CSRD will replace the current regime under the EU Non-Financial Reporting Directive ("NFRD") and will apply to all large EU companies (regardless of whether or where they are listed). Non-EU companies with substantial activity in the EU will also have to comply. Listed SMEs will also be in-scope, but they will have more time to adapt to the new rules.
The CSRD introduces more detailed reporting requirements on a broad range of ESG matters in accordance with mandatory European sustainability reporting standards (“ESRS”). The European Financial Reporting Advisory Group is expected to deliver draft ESRS to the European Commission later this month and the Commission is due to adopt the first set of ESRS by 30 June 2023.
Sustainability information will be required to be reported in a dedicated section of the directors’ (management) report as part of the annual financial statements, digitally ‘tagged’ in electronic reporting format and subject to an independent audit (initially on a limited assurance basis). Reporting companies will also be required to include disclosures under Article 8 of the EU Taxonomy Regulation.
The reporting obligations under the CSRD will apply on a phased basis as follows:
- from 1 January 2024 (reporting year 2025) for large public-interest companies (with over 500 employees) already subject to the NFRD
- from 1 January 2025 (reporting year 2026) for large companies not currently subject to the NFRD
- from 1 January 2026 (reporting year 2027) for listed SMEs and other undertakings. SMEs can opt-out until 2028.
This would end greenwashing, strengthen the EU’s social market economy and lay the groundwork for sustainability reporting standards at global level.