Scope of the directive
First, the directive applies to all companies listed on the EU regulated markets, except for listed micro companies. 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 applies 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 Directive 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 applies 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.
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.
Companies already covered will need to comply with the amended rules from 1 January 2024.
The rules will start applying between 2024 and 2028:
· From 1 January 2024 for large companies (with over 500 employees) already subject to the Non-financial Reporting Directive (NFRD), with reports due in 2025;
· From 1 January 2025 for large companies that are not presently subject to the NFRD (with more than 250 employees and/or €40 million in turnover and/or €20 million in total assets), with reports due in 2026;
· From 1 January 2026 for listed SMEs and other undertakings, with reports due in 2027. SMEs can opt-out until 2028.
What companies will need to do in practice
Provide additional disclosures
All sustainability information disclosed should apply a forward-looking and retrospective view and should be qualitative and quantitative. It should also consider short-, medium- and long-term horizons and consider the company’s whole value chain.
Report in accordance with new sustainability reporting standards
Companies will use the new sustainability reporting standards to disclose information as part of their management report, thereby giving users of the report an integrated view of their impact and performance on environmental, social and human rights, and governance (ESG) factors.
It is expected that on 22 November 2022, the European Financial Reporting Advisory Group (EFRAG) will release the first set of European Sustainability Reporting Standards (ESRS), which will then be adopted by the Commission by June 2023.
To respect the principle of proportionality, the European Commission will adopt mandatory sustainability reporting standards for large companies and separate, proportionate standards for SMEs.
Use digital tagging
To make their sustainability information easier for users to search and machines to read, companies will be required to prepare both their financial statements and their management report in a single XHTML format and mark up sustainability information, tagged in accordance with a digital taxonomy.
Evolving roles of audit committees and assurance providers
Audit committees will have enhanced responsibilities under the new directive. Along with monitoring the company’s sustainability reporting process and submitting recommendations to ensure the integrity of the sustainability information provided by the company, they will need to:
· Monitor the effectiveness of the company’s internal quality control and risk management systems and its internal audit functions;
· Monitor the assurance of annual and consolidated sustainability reporting;
· Inform the company’s administrative or supervisory body of the outcome of the assurance of sustainability reporting;
· Review and monitor the independence of the assurance providers.
Role of assurance providers
Under the CSRD, there is a requirement for the company’s statutory auditor, another auditor (according to Member State’s option) or an independent assurance services provider (Member State’s option), to provide limited assurance around a company’s reported sustainability information.
There is also the option of moving toward reasonable assurance — the same level of assurance provided for financial information — at a later stage.
 In order to qualify as a “micro-enterprise”, a company shall remain below at least two of the following: (a) have fewer than 10 employees over the financial year on average; (b) a net turnover of €700.000; and (c) a balance sheet of €350.000.
 Accounting Directive (Directive 2013/34/EU).