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EC publishes proposed Corporate Sustainability Reporting Directive

  • European Union Image

21 Apr 2021

In its efforts to revise the EU Non-Financial Reporting Directive (NFRD), the European Commission (EC) has today published a proposal for a Corporate Sustainability Reporting Directive (CSRD).

The objective of the proposed CSRD is to improve sustainability reporting to better exploit the potential of the European single market and to contribute to the transition to a fully sustainable and inclusive economic and financial system in line with the European Green Deal and the UN Sustainable Development Goals. The proposal also notes that the COVID-19 pandemic has accelerated the increase in users’ information needs, in particular as it has exposed the vulnerabilities of workers and of undertaking’s value chains.

The key proposals include a massive broadening of scope of the NFRD from 11,600 to approximately 49,000 entities in the EU including foreign subsidiaries. Companies coming under the CSRD would be:

  • all companies listed on a regulated EU market (with the exception of micro entities), and
  • large companies that are not listed on a regulated EU market; large companies are defined as companies that exceed at least two of the following three size criteria at the balance sheet date:
    • Balance sheet total: EUR 20,000,000;
    • net revenue: EUR 40,000,000;
    • average number of employees during the financial year: 250.

In order to take into account the limited capacities and resources of the SMEs concerned and to allow them sufficient time to prepare for the first-time application of the requirements, the proposal provides that SMEs may use separate sustainability reporting standards for SMEs and do not have to start reporting until three years after the effective date (i.e. 1 January 1 2026).

Entities coming under the new CSRD would have to report on:

  • their business model and strategy,
  • the sustainability targets set and the progress made towards achieving them,
  • the role of the administrative, management and governance bodies in relation to sustainability factors,
  • their policies in relation to sustainability matters,
  • the company's most significant negative impacts on sustainability factors,
  • a description of their principal risks related to sustainability matters, including their principal dependencies on such matters, and how they manage those risks, and
  • the manner in which they have identified the information on which they report.

The CSRD would require companies to provide qualitative and quantitative information, forward-looking and retrospective information, and information that covers short, medium and long-term time horizons. Where appropriate, report content should also include information about the company's value chain, including the company's own operations, products and services, business relationships and supply chain.

The information would have to be provided mandatorily as part of management report, and entities would have to report using European sustainability reporting standards (still to be developed with a first set standards expected by October 2022, a second one year later). The proposed CSRD includes mandatory audit of the information provided (limited assurance) and mandatory digital reporting in ESEF format with corresponding labeling of sustainability information using a taxonomy yet to be developed.

Envisaged content areas of the European sustainability reporting standards are:

  • Information with regard to environmental factors, including:
    • climate change mitigation and adaption;
    • water and marine resources;
    • resource use and circular economy;
    • pollution; and
    • biodiversity and ecosystems.
  • Information with regard to social factors, including:
    • equal opportunities, including gender equality and equal pay for equal work, training and skills development, and employment and inclusion of people with disabilities;
    • working conditions, including secure and adaptable employment, wages, social dialogue and the involvement of workers, work-life balance, and a healthy, safe and well-adapted work environment; and
    • the human rights, fundamental freedoms, democratic principles and standards.
  • Information with regard to governance factors, including:
    • supervisory bodies, including with regard to sustainability factors, and their composition;
    • business ethics and corporate culture, including anti-corruption and anti-bribery;
    • political engagements of the undertaking, including its lobbying activities;
    • the management and quality of relationships with business partners, including payment terms; and
    • the company's internal control and risk management systems, including in relation to the reporting process.

The EC proposes a transposition of the CSRD into national law by member states by 1 December 2022, so that the amendments would be applicable for the first time for fiscal years beginning on or after 1 January 2023.

The CSRD also comments on the context of the proposal and in the introductory explanatory memorandum especially notes the IFRS Foundation's proposal to establish a new international Sustainability Standards Board:

There are a number of important international initiatives in place. Their aim is to help to achieve the worldwide convergence and harmonisation of sustainability reporting standards. […] EU companies and investors that operate globally will benefit from such convergence and harmonisation. […] The proposals of the International Financial Reporting Standards Foundation to create a new Sustainability Standards Board are especially relevant in this context, as is the work already carried out by established initiatives […]. This proposal aims to build on and contribute to international sustainability reporting initiatives.  

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