The proposal followed a study by the Commission concluding that the information companies currently disclose is insufficient. According to the study, sustainability reporting often omits information that investors, consumers, policymakers and other stakeholders consider important, information can be hard to compare from company to company, and users are unsure as to how trustworthy reported information is.

The CSRD defines a common reporting framework for non-financial data for the first time.

The proposal would:

1. extend the scope of the reporting obligation to all large companies and all companies listed on regulated markets (except listed micro-enterprises);
2. require audit assurance of reported information;
3. introduce more detailed reporting requirements, and a requirement to report according to mandatory EU sustainability reporting standards;

Scope

Whereas the NFRD applies only to large (i.e. non-SME) “public interest entities”, meaning listed companies, banks, and insurance companies with over 500 employees, the changes made by the CSRD would capture all large companies (whether listed or not) – i.e companies with more than 250 employees and more than €40M turnover and/or more than €20 Million in total assets – as well as all listed companies (except micro-enterprises).

Notably, the CSRD will extend the scope to include listed SMEs, with the exception of listed micro-enterprises.

In addition, the changes agreed in June 2022 bring non-EU companies with substantial activity in the EU market within the scope of the CSRD. Third-country companies which meet the relevant thresholds will have to follow equivalent reporting rules.

Audits

The long-term vision of the CSRD is to implement a mandatory EU-wide assurance requirement, allowing member states to select audit firms to carry out the assurance of sustainability information.

Reporting requirements

EU Sustainability Reporting Standards will be developed and adopted in the form of delegated acts to set requirements on the contents of the disclosures. The Standards are expected to be comprehensive in their coverage of Environmental, Social and Governance (ESG) issues.

The draft Standards will be developed by the European Financial Reporting Advisory Group (EFRAG) and will be adopted from 30 June 2023. Sustainability reporting standards for SMEs will be adopted at the latest by 30 June 2024.

Reports will be included in the company’s Management Report in a ‘digital machine-readable format’.

Companies will be required to report on:

• business model and strategy to address priority stakeholder sustainability interests;
• targets and your progress in achieving them;
• governance of sustainability matters;
• policies;
• implemented sustainability due diligence processes;
• descriptions of your principal risks and relevant indicators.

Principal risks must be considered on a ‘double materiality’ basis and companies will have to report on the process to select material topics for stakeholders.

How will the requirements be enforced?

Like the NFRD, the CSRD requires Member States to provide for penalties for infringements of the reporting duties.

The CSRD specifies that Member States shall establish a sanctions regime for companies that fail to comply with the reporting requirements, including the following administrative sanctions:

• a public statement outlining the nature of the violation and indicating the responsible person/entity;
• a cease-and-desist order against the responsible person/entity; and
• administrative pecuniary sanctions.

Next steps

The European Parliament are currently expected to vote on the provisionally agreed text of the CSRD in the full assembly on 17 October 2022. Under the ambitious timescale, Member States will be required to implement the CSRD by 1 December 2022, leaving organisations with a limited amount of time to prepare. Companies will then have to report from 2024 on their sustainability performance throughout the 2023 financial year.

What does this mean for business?

Firstly, far more than the 11,000 companies currently captured by the NFRD will be within the new extended scope, covering 49,000 companies and 75% if the total company turnover within the EU.

The second critical impact on business is that the contents of reports will have to conform to more stringent requirements and is more likely to be scrutinised by stakeholders such as investors. Businesses must assess whether they are currently able to obtain accurate information, including quantitative KPIs, on the mandatory disclosure areas. In this respect, the CSRD has the potential to signal a step-change in sustainability reporting, which has historically not facilitated comparisons between different organisations’ performances or required third-party assurance.

Key considerations for business:

• Risk assessment: Organisations that will be required to report will need to get to grips with their principal sustainability risks on a ‘double materiality’ basis;
• Stakeholder engagement: Organisations will need to map their stakeholders in order to incorporate their priorities and how they feed into the risk assessment, strategy and reporting process;
• Data: Organisations should consider the need for more efficient digital solutions for data collection and management to ensure reliable and accurate data is collected for reporting purposes;
• Communication and reporting: Organisations that were not previously within the scope of the NFRD may have to consider their approach to annual public reporting for the first time.

Ardea has produced a longer analysis for Lexis PSL.

How can Ardea help?

Ardea International has been supporting business internationally to develop their due diligence frameworks.

We can benchmark your operations to establish gaps in your processes and policies and support in the development or strengthening of policies.

We provide a wide range of training for companies and directors to gain more technical knowledge about issues.

Working in collaboration with our data partner ANYdata we can help develop a supplier due diligence assessment human rights and environment) and collate all key contractual information