The new Corporate Sustainability Reporting Directive (the CSRD) was adopted by the EU in April 2021 to meet its Paris Agreement climate change goals. Modernizing and strengthening the rules concerning the social and environmental information that companies must report, CSRD came into force in January 2023 and now requires all large companies and most listed companies (micro-enterprises being exempt at this stage) to disclose information on what they see as the risks and opportunities arising from social and environmental issues, and on the impact of their activities on people and the environment. 

This directive allows investors, organizations, consumers, and other stakeholders to evaluate the sustainability performance of companies as part of the European Green Deal which aims to make Europe the first climate-neutral continent.

In scope companies include those admitted to trading on an EU-regulated market (regardless of where they are incorporated- EU or not), large EU companies and groups, and non-EU companies generating annual EU revenues surpassing €150m ($166m), with an EU branch annual net turnover of €40m ($44).  All of these will have granular reporting requirements on their ESG activities which must be published alongside the company’s financial statement.

Increased transparency for green reporting

The key objective of the CSRD is to require businesses to increase transparency and accountability in their “green” reporting. With a staggered implementation timeline, between 2024 and 2028, the next in-scope companies required to apply the new rules for the first time will need to do so this financial year for reports to be published in 2025. The size of the company, the business activities undertaken and where the company is incorporated will all affect the deadline for reporting under CSRD.

The first reporting deadline was for all companies with securities listed on EU-regulated market and reporting commenced for financial years starting on January 1, 2024.  The second deadline applies to large EU companies or EU groups. They are considered “large” if they meet two of the three following criteria:

• balance sheet of €25m ($28m) (determined in accordance of accounting principles of the relevant jurisdiction);
• net turnover of €50m ($55m) (determined in accordance of accounting principles of the relevant jurisdiction);
• an average number of 250 employees in a year (unless the company is an issuer or public interest entity).

Companies subject to the CSRD will have to report according to European Sustainability Reporting Standards (ESRS) which were developed by the European Financial Reporting Advisory Group (EFRAG), the independent body bringing together various stakeholders with a mission is to serve the European public interest in both financial and sustainability reporting by developing and promoting European views in the field of corporate reporting. 

The ESRS standards are tailored to EU policies building on, and contributing to, international standardization initiatives and apply to companies under the scope of the CSRD regardless of the sector that they operate in.

Demand for transparency

There is an increasing demand for transparency from investors, clients, and other stakeholders who want to select products and services that align with their ESG values. With a view to ensuring that investors and other stakeholders have access to the information they need to assess the impact of companies on people and the environment and the financial risks and opportunities arising from climate change and other sustainability issues, it is crucial to consider these new reporting requirements to stay competitive within the markets in which they operate.

As with any new compliance rules, there is much concern for organizations to get the reporting right, and of course the costs to do so.  It is hoped, however, that reporting costs will be reduced for companies over the medium-to-long-term by harmonizing the information to be provided. 

This is all a work in progress at the moment. It is important to remember that non-compliance with the CSRD could lead to significant financial and/or criminal penalties, depending on how the CSRD is implemented in each European member state, so adherence must be taken seriously.

Neil Robson, Financial Markets and Funds partner at Katten Muchin Rosenman UK LLP.