Corporate Sustainability Reporting Directive (CSRD)

Corporate Sustainability Reporting Directive (CSRD): large companies and listed companies will soon be subject to new requirements in terms of publication and audit of sustainability information.

1. Environment, social and governance issues (ESG) are becoming increasingly important for companies and European citizens. The EU wants to make companies increasingly aware of their responsibilities on these issues, notably by requiring them to report and publish on them. The underlying idea is that the challenges are so important that companies must be involved and made accountable on these issues, and that public information on this can have an impact to move forward together in a more equitable, sustainable and inclusive society.
   
   The European Corporate Sustainability Reporting Directive (so-called “CSRD”) has been published on 16 December 2022. This Directive amends the reporting obligations of the Non-financial Reporting Directive (so-called “NFRD”). As you may recall, the NFRD required larger companies, the so-called entities of public interest, to report annually on their “environmental, social and human resources issues. In Belgium, these reports are part of the “nonfinancial statement”, which is included in the annual report of the board of directors to the shareholders.
   
   The European Commission considered that the information that has been reported so far under the NFRD was no longer adequate. The term “non-financial reporting” was perceived as misleading. Indeed, ESG does have a financial impact. Instead of non-financial information, or ESG information, the CSRD now uses the term of “sustainability information”. Sustainability issues are defined as environmental, social and employee matters, respect for human rights, including the fight against anti-corruption and bribery matters and governance factors.
   
   
2. By introducing the CSRD, the EU aims to expand its sustainability disclosure requirements, both in terms of scope, and content.
   
   The CRSD applies to large entities of public interest, i.e. the listed companies, the banks and the insurers with more than 500 employees.
   
   The CSRD broadens the scope of the previous NFRD by extending the reporting obligations to large companies (defined according to the rules of accounting law) even if they are not considered as public interest entities, and to listed companies, small or medium-sized included. Only micro-(listed) companies are not in scope.
   
   Even more interesting to note is that according to the new CSRD, companies based outside the EU which have activities within the EU and which meet the same criteria in terms of size and revenues shall also be targeted by the new requirements.
   
   As this stage, the CSRD is a Directive that shall have to be implemented into the national law of each EU member states. The Directive has set the following (gradual) milestones:
   • public-interest entities that were already governed by the NFRD will have report on sustainability in accordance with the CSRD as from 2025 (report on the financial year 2024);
   • larger companies that were not governed by the NFRD will have to report on this as from 2026 (report on the financial year 2025):
   • listed SMEs will have to report on this as from 2027 (report on the year 2026);
   • finally, non-EU companies in scope of the CRD will have to start reporting on their financial year 2028 in 2029.
     
     
3. Sustainability disclosures shall have to be made from a double materiality perspective: it is about the impact of ESG factors on the company, as well as the impact of the company on ESG. This approach (outside-in and inside-out) will allow us to better situate the company in the environment in which it evolves, which it generates and is subject to as well. Each of these two materiality perspectives should be considered in its own right, and information should be provided when it is essential from one or both perspectives.
   
   
4. The CSRD notably requires reporting on the following information: the business model and sustainability strategy, the resilience of the group’s business model and strategy in relation to risks related to sustainability matters, the opportunities for the group related to sustainability matters. The reporting also includes how the group’s business model and strategy take account of the interests of the group’s stakeholders and of the impacts of the group on sustainability matters, the role of the administrative, management and supervisory bodies with regard to sustainability matters, the existence of incentive schemes linked to sustainability matters, the due diligence process implemented by the group with regard to sustainability matters, the actual or potential negative impacts of the business and how they are identified, any actions taken by the group to prevent, mitigate, remediate or bring to an end actual or potential adverse impacts, and the result of such actions. For SMEs, the required information shall be limited.
   
   
5. What is new with CSRD is that sustainability information will have to be published in a standardized and audited way.
   
   On 23 November 2022, the European Financial Reporting Advisory Group (EFRAG) published its first draft EU Sustainability Reporting Standards. These draft standards require reporting on “workers in the value chain”, which encompasses employees and self-employed workers of the company and its upstream and downstream value chain (i.e., suppliers and customers impacted by the company). The EU shall also contribute to a process of convergence of sustainability reporting standards at the global level by supporting the work of the International Sustainability Standards Board. Information will have to be delivered in a digital taxonomy so that it becomes publicly available through the European Single Access Point.
   
   
6. Once the company has fulfilled its reporting obligations, the report itself shall have to be audited by an independent and licensed auditor. This external audit requirement aims to ensure that companies consistently comply with the reporting standards. This is a game-changer: the current “non-financial statement” (under the NFRD) was not subjected to any audit obligations. The audit process implies that management will need to confirm that the sustainability reports comply with the CSRD requirements.
   
   
7. In the wake of the CSRD, the EU is also currently working on due diligence requirements regarding sustainability. The European Commission wants to take the accountability of the companies in terms of sustainability a step further, by focusing on sustainability also in their supply chain. In order to form a response to the growing concern around purchasing goods from suppliers that are less compliant with ESG standards, a proposal for a directive is on the table, according to which companies would be required to start carrying out due diligence on their suppliers and monitor compliance with ESG standards in their supply chain. Claeys & Engels will be following these developments closely.

Thomas Douillet
Attorney – Senior Associate Claeys & Engels

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