The Corporate Sustainability Reporting Directive and its impact on EU and non-EU companies

• Any EU undertaking whose securities (debt or equity) are admitted to trading on an EU regulated market, unless it is a “micro undertaking” (being an undertaking which has at least two of the following:
  • a net turnover of less than € 700 000;  
  • a balance sheet total of less than € 350000; 
  • an average number of less than 10 employees per financial year.)
• Any EU undertaking which does not have any securities admitted to trading on an EU regulated market but is a “large undertaking” (being an undertaking which has at least two of the following:
  • a turnover of above €40 million;  
  • a balance sheet total of over €20 million; 
  • an average number of over 250 employees per financial year.) 

• Any non-EU undertaking whose securities (debt or equity) are admitted to trading on an EU regulated market, unless it is a “micro undertaking” (see criteria above).
• Any non-EU undertaking which does not have any securities admitted to trading on an EU regulated market but which has:

a) a turnover at group level of over €150 million in the EU; and

b) an EU subsidiary that is subject to the CSRD requirements because it has securities admitted to trading on a regulated market or is a large undertaking (see above) or an EU branch that has generated a net turnover of more than €40 million in the EU.

Information must be clearly identifiable in a section of the management report and will cover sustainability matters including (amongst others): 

• The undertaking’s business model and strategy, noting resilience to risks and opportunities.
• The plans of the undertaking to (including implementing actions and investment plans) to ensure its business model is compatible with the transition to a sustainable economy and with limiting global warming to 1.5 °C in accordance with the Paris Agreement and achieving climate neutrality by 2050.
• Relevant policies and roles of administrative, management and supervisory bodies. 
• The principal risks to the undertaking related to sustainability matters, including a description of the undertaking’s principal dependencies on those matters, and how the undertaking manages those risks.

Where applicable, the information included in the management report shall also include information about the undertaking’s own operations and about its value chain, including its products and services, its business relationships and its supply chain.

Small and medium-sized undertakings, small and non-complex institutions and captive insurance and reinsurance undertakings may choose to limit its sustainability reporting as long as certain standards are met.

Sustainability reporting will be done at group level by parent entities of a large group (meeting the same criteria as for large undertakings but at group level). The sustainability reporting should be reflected in a dedicated section of the consolidated management report and include information necessary to understand the group’s impacts on sustainability matters, and information necessary to understand how sustainability matters affect the group’s development, performance and position.

If a parent’s consolidated management report contains all relevant information, ‘in scope’ subsidiaries may be exempt from sustainability reporting.

Undertakings will be required to report on sustainability according to mandatory reporting standards. The European Financial Reporting Advisory Group (EFRAG) are developing a framework of reporting standards which will apply to (i) topics and (ii) sectors. 

Topical standards were drafted by EFRAG on 23 November 2022 which cover the following topics:

• Environmental: climate change, pollution, water and marine resources, biodiversity and ecosystems and resource use. 
• Social: information on the use of the workforce, diversity and inclusion, communities impacted by business operations. 
• Governance: business conduct internally including for example diversity and company boards, and externally including anti-corruption and bribery.

Sectorial standards will be developed by EFRAG to cover:

• Global Reporting Initiative (GRI) sectors: agriculture, coal mining, mining, oil and gas (separately for upstream and mid-to downstream); 
• High-impact sectors: energy production, road transport, motor vehicle production, food and beverages, and textiles.

Separate reporting standards for small and medium-sized undertakings and third-country undertakings will also be developed.

The European Commission is expected to adopt the standards in their final form in June 2023 and 2024 respectively.

Mandatory requirement for review of disclosures and assurance by a statutory auditor or independent assurance services provider that there has been no material misstatement in company’s disclosures.

Until the appropriate standards for a reasonable assurance of sustainability reporting are put in place (expected to be in place no later than 1 October 2028), assurance will need to be given on a limited assurance basis. In such case, the conclusion would be provided in a negative form of expression by stating that no matter has been identified to conclude that the matters in the sustainability reporting are materially misstated. Once the relevant standards have been adopted, assurance will need to be given on a reasonable assurance basis whereby more procedures and substantive testing will be involved and a conclusion is provided in a positive form of expression and results measured against pre-defined criteria.   

Issuers are required to make public the annual report at the latest 4 months after the end of each financial year and continue to make it available for at least 10 years. The annual report must include a statement by persons responsible within the issuer to the effect that, to the best of their knowledge, the management report is prepared in accordance with the applicable sustainability reporting standards.

The auditor’s sustainability related assurance report must also be disclosed in full to the public together with the annual financial report.

Under the proposed EU Listing Act’s amendments to the EU Prospectus Regulation, any sustainability reporting included in the management reports and audit reports would be able to be incorporated by reference in a prospectus. 

EU and non-EU undertakings whose securities are admitted to trading on an EU regulated market and that satisfy both of the following:

• More than 500 employees
• Net turnover that exceeds €40 million and/or a balance sheet that exceeds €20 million

EU undertakings that meet the criteria for large undertakings (see above) but whose securities are not admitted to trading on an EU regulated market.

Non-EU undertakings whose securities are admitted to trading on an EU regulated market and who meet the criteria for large undertakings (see above) but have less than 500 employees. 

All other EU and non-EU undertakings whose securities are listed on an EU regulated market (i.e. those who are neither large nor micro undertakings – see above)

[*: For a transitional period of two years, small- and medium sized EU and non-EU undertakings with securities on an EU regulated market have the possibility to opt-out from CSRD reporting requirements, provided that they briefly explain in their management report why the required sustainability information has not been included.]