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On December 14, 2022, the European Parliament and Council adopted the Corporate Sustainability Reporting Directive (“CSRD”) as part of the European Green Deal. This directive requires companies within its scope to produce an annual standardized sustainability report to replace the obligations under the Non-Financial Reporting Directive (“NFRD”). The primary objective of the CSRD is to inform relevant stakeholders about the company’s sustainability policy.


Phased introduction
The introduction of the CSRD is being phased in. As of year 2024, listed companies and financial institutions with more than 500 employees, including non-EU companies listed on European stock exchanges, will have to comply with the requirements set forth in the CSRD.

As of fiscal year 2025, the CSRD will also apply to EU companies not yet subject to the NFRD and exceeding two of the three limits described below:

  • employ at least 250 employees within the EU;
  • have a turnover of more than 40 million euros within the EU; or
  • have total assets of 20 million euros within the EU.

As of fiscal year 2026, the CSRD will apply to listed SMEs, with an opt-out option until 2028.
Companies outside the European Union that meet the conditions below must also comply with the obligations under CSRD from fiscal year 2028 onward:

  • a net turnover of more than €150 million within the EU for each of the last two consecutive fiscal years, and;
  • having at least one large or listed subsidiary or a European branch with a turnover of at least €40 million in the previous fiscal year.

Listed SMEs have more flexibility in their reporting requirements and may use separate, proportionate standards that are less demanding than the European Sustainability Reporting Standards ("ESRS"). The first version of these simplified reporting standards is expected later this year. In addition, listed SMEs will be subject to a cap on the information that larger companies can require from them.
Finally, voluntary standards will be developed for unlisted SMEs so that they can respond in an efficient and proportionate manner to requests from customers, banks, investors and other stakeholders about the relevant data under the CSRD.

Materiality guidelines
The CSRD introduces the dual materiality concept, requiring reporting companies to perform a dual materiality assessment. It refers to the fact that companies reporting on sustainability should consider the relevance of a sustainability issue from two perspectives. On the one hand, organizations affect people and the environment, and on the other hand, sustainability-related developments and events create risks and opportunities for companies.

Although the CSRD provides some guidance, it is up to the company to determine whether an issue is material. Choices made must be well substantiated, which means that companies can no longer determine the content of the report at their own discretion and preference.

Sustainability reporting

Since not every company deals with sustainability and its reporting is not uniform, investors and other stakeholders often experience difficulties in comparing this information. The lack of consistency, transparency and comparability of non-financial information is one of the main reasons why the European Commission introduced standardized standards for sustainability reporting through the CSRD.

The sustainability report, a crucial element of this directive, aims to provide readers with an understanding of how the company integrates sustainability into its policy and how this affects the company's development, position and performance. The sustainability report keeps stakeholders informed about the company's sustainability practices in a consistent and reliable manner. The report serves as a transparent window through which stakeholders can understand how sustainability is integral to the company's operations and decision-making.

The ESRS consist of 12 standards: the first two standards contain general principles for reporting on strategy, governance, and materiality, the remaining 10 focus on various aspects of Environmental, Social, and Governance (ESG). Each of the 12 standards contains "Disclosure Requirements" and "Application Guidance," with detailed instructions for implementation. In addition to the general standards, industry-specific standards will be released in the future.

These standards create an obligation for companies to develop and publish a holistic view of sustainability. Users of this information should be able to form a picture of how the company is implementing sustainability, now and in the future. It is noteworthy that, unlike in its financial reporting, the company must specifically state its objectives regarding sustainability.

Additionally, following the implementation of CSRD, an external auditor will be required to provide assurance on sustainability reporting. Initially, this will be limited, but in the future, it will increase to a reasonable level of assurance. This external verification ensures that the reported information is independently verified, which will result in more accurate, more transparent, and more harmonized reporting across different companies.

Where, how and by whom will this information need to be disclosed?

Information from the sustainability report must be disclosed in several ways. The sustainability report will be required as part of the annual report, with specific reporting standards. In addition to being integrated into the annual report, companies must also make the sustainability report electronically accessible on their own websites and on future platforms, such as the European Single Access Point. This platform aims to centralize all financial and sustainability reporting and make it accessible to the public.

Specifically, companies must assess which topics are most relevant and should be included in the sustainability report. This assessment determines which reporting standards, disclosures and data points should be included and which can be omitted. The CFO and audit committee bear the ultimate responsibility, but within the organization, it must be determined who will perform this assessment.