The EU is set to adopt the Corporate Sustainability Reporting Directive (CSRD) in October 2022, amending the previously applicable Non-Financial Reporting Directive (NFRD). The CSRD supports the European Green Deal, a set of policy measures intended to combat the climate crisis by transforming the EU into a modern, resource-efficient and competitive economy, with no net emissions of greenhouse gases by 2050.
Furthermore, the directive is part of the bigger Sustainable Finance package, which enables the Green Deal by helping to channel private investment behind the transition to a climate-neutral economy. The Sustainable Finance package includes the EU Taxonomy (with the Climate Delegated Act), which provides clarification around the economic activities that most contribute to meeting the EU’s environmental objectives. In addition, the package features six amending Delegated Acts on fiduciary duties, investment and insurance advice, which aim to ensure that financial firms include sustainability in their procedures and investment advice to clients.
Scope of the proposed directive
The scope of the directive is considerably extended to apply to more entities.
First, the directive will apply to all companies listed on the EU regulated markets, except for listed micro companies.1 Listed small- and medium-sized enterprises (SMEs) have until 1 January 2026 to comply with the reporting requirements, even though there’s an “opt-out” clause until 2028.
Second, it will apply to a “large undertaking” that is either an EU company or an EU subsidiary of a non-EU company. A “large undertaking” is a defined term in the Accounting Directive2 and means an entity that exceeds at least two of the following criteria:
- A net turnover of €40 million
- A balance sheet total of €20 million
- 250 employees on average over the financial year
As a third category, the CSRD will apply to insurance undertakings and credit institutions regardless of their legal form.
There are also exemptions to the application of the CSRD. Most notably, a subsidiary will be exempt if the parent company includes the subsidiary in its report that complies with the CSRD. As mentioned above, listed micro companies and non-listed SMEs fall outside of the scope, but can apply the provisions on a voluntary basis.
To respect the principle of proportionality, the European Commission will adopt mandatory sustainability reporting standards for large companies and separate, proportionate standards for SMEs. While SMEs listed on regulated markets will be required to use the proportionate standards from 1 January 2026, non-listed SMEs may still choose to use them on a voluntary basis.
Non-European companies with substantial activity in the EU market (net turnover of more than €150 million in the EU at consolidated level) and which have at least one subsidiary (large or listed) or branch (net turnover of more than €40 million) in the EU are required to draft a sustainability report at the consolidated level of the ultimate third-country undertaking.
The EU subsidiary or EU branch is responsible for publishing the sustainability report of the third-country undertaking.
The sustainability reports of the third-country undertaking should be prepared according to separate EU reporting standards (i.e., standards different to the ones applying to EU companies). The undertaking can also report according to the standards applying to EU companies, or according to standards which are deemed equivalent according to a Commission’s decision.
In order to ensure the quality and reliability of the reporting, the sustainability reports of third-country undertakings should be published alongside an assurance opinion by a person or firm authorized to give an opinion on the assurance of sustainability reporting, either under national law of the third-country undertaking or of a Member State.