December 5, 2022
On November 28, 2022, the Council of the European Union (EU) formally adopted the Corporate Sustainability Reporting Directive (CSRD), following the European Parliament’s formal adoption of the directive earlier last month. The CSRD is a broad environmental, social, and governance (ESG) reporting framework that will impose uniform, mandatory reporting requirements on many companies with European operations, including companies not based in Europe.
The CSRD is not the first corporate ESG reporting regime in the EU; the Non-Financial Reporting Directive (NFRD) has been in effect since 2018 and has required disclosures across ESG pillars. But the CSRD, which replaces the NFRD, represents a step-change in mandatory ESG reporting nonetheless. And the CSRD is just one component of the EU’s sustainable finance framework, which also includes ESG disclosure requirements for financial market participants, with the Sustainable Finance Disclosure Regulation (SFDR), and the EU Taxonomy Regulation, a system requiring both companies and financial market participants to classify their “sustainable” economic activities under defined criteria.
The scope of entities subject to the CSRD is far greater than under the NFRD. An estimated 12,000 European companies are subject to the NFRD, representing only the largest, so-called “public interest” entities – primarily companies with securities listed on EU regulated markets, banks, and insurance companies with 500 or more employees. By contrast, the European Commission estimates that roughly 50,000 companies will fall under the CSRD’s reporting obligations. In addition to those companies currently subject to the NFRD, this will include:
The breadth of these categories means that the CSRD will have impacts on companies based in the US and elsewhere, provided they have European operations above the established thresholds. The CSRD provides for an exemption for the EU subsidiaries or branches of a non-EU parent if the EU operation was included in the parent undertaking’s consolidated management report that had sustainability disclosures deemed to be “equivalent” to those required under the CSRD. But, because the process for determining equivalence is as yet unclear, there is considerable uncertainty as to how this may apply in practice. For US companies, there is further skepticism that the far more limited scope of the US Securities and Exchange Commission’s (SEC) climate change disclosure proposal, which if finalized would address only climate-related disclosures, would be deemed equivalent to the CSRD.
Several other elements of the CSRD are also of particular note:
The CSRD takes a phased approach to implementation, with different categories of companies becoming subject to the reporting requirements along a staggered timeline. Large, “public interest” undertakings already subject to the NFRD and large, listed companies with 500 or more employees will be subject starting January 1, 2024, “large” undertakings not currently subject to the NFRD will be subject beginning January 1, 2025, and “small and medium-sized undertakings” with securities listed on an EU regulated market, as well as small and non-complex credit institutions and captive insurance undertakings, will become subject January 1, 2026. Non-EU companies subject to the CSRD must comply beginning January 1, 2028. For all of these groups, initial reports under the CSRD would be required to be produced the following year.
Now that it has been formally approved, the CSRD will be signed and published in the Official Journal of the EU and will enter into force 20 days later. EU Member States will then have 18 months to transpose the CSRD into their respective national laws. More details on exactly what the mandatory reporting standards will look like will become clear over the coming months, as the EU considers and adopts a delegated act setting forth ESRS by June 30, 2023, and a second, sector-specific set of ESRS by June 30, 2024.
In the meantime, European companies and non-EU companies with European operations should begin the complex evaluation process to determine whether and when they will be subject to the CSRD and its reporting obligations. Companies publicly listed in the US should take care to ensure that any future European disclosures are consistent with their SEC filings and other public disclosures made in the US. And companies with US operations should craft disclosures with due regard to the growing body of regulations and caselaw in the US concerning greenwashing.