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EU Corporate Sustainability Reporting Directive

  • United Kingdom
  • Financial services and markets regulation
  • Financial services


On 21 April 2021, the EU published documents relating to key elements in the EU’s Sustainable Finance Package – the Taxonomy Delegated Act1, amendments to the UCITS, AIFMD, MiFID and other key product directives2 and a proposed directive focused on corporate sustainability reporting – the Corporate Sustainability Reporting Directive (“CSRD”).  Whilst these measures were anticipated, they will add further complexity to an already overwhelming set of requirements and cause the EU to diverge further from the position the UK is taking in relation to corporate reporting.

The CSRD explicitly seeks to support the firms which, downstream, rely on corporate reporting for aggregated portfolio-level reporting.

This modified regime casts its net broader and trawls deeper than its predecessor, the Non-Financial Reporting Directive (the “NFRD”).  It requires more disclosure, from a greater pool of firms, with more consistency of approach, and with better quality assurance than previously. 

It cuts an imposing figure on the corporate reporting horizon.  For some firms it represents yet another measure firms need to add to their horizon scanners.  For others this will be their first taste of the EU’s sustainability agenda and will likely seem like a lot to achieve in a small space of time.

In particular, the CSRD seeks to extend the scope of the current requirements imposed on in-scope companies under the NFRD by:

  • extending the types of disclosure that companies have to make
  • requiring reporting to be made as part of the financial statements and in a digital format
  • broadening the types of companies that are caught by the reporting requirements
  • aligning corporate reporting with the requirements of the EU’s Taxonomy regime (“Taxonomy”) and the Sustainable Finance Disclosure Regulation (“SFDR”), so that financial market participants (“FMPs”) and financial advisers who are required to disclose under the Taxonomy regime can obtain the requisite information from the companies they invest in to satisfy their own requirements
  • requiring assurance of the disclosures made

What is the current position under NFRD?

NFRD currently requires companies within its scope to make certain sustainability disclosures on an annual basis.  The scope is narrow – it applies to listed companies, banks, insurance companies and large companies with over 500 employees – and the EU estimates that in total NFRD applies to only 11,700 companies.  NFRD requirements only began to apply in 2018 (in respect of the financial year 2017) and have only been in place for a short time.

Firms in scope are required to report on:

  • how sustainability issues affect performance, position and development
  • the firm’s impact on people and the environment  

There are guidelines in place to assist with the relevant disclosures.   At a minimum in-scope firms are required to report information on environmental, social and employee matters, respect for human rights and anti-corruption and bribery matters.  Under these headings, disclosure has to be made on the business model, policies (including due diligence), the outcome of polices, risk and risk management, and KPIs relevant to the business.

Consumer feedback is that sustainability reports produced in line with NFRD are lacking in many respects.  The implementation of SFDR and the preparation for using the Taxonomy means that FMPs and financial advisers preparing their own disclosures require enhanced information from the companies they invest in, so the quality of sustainability reports has come under greater scrutiny.  From 1 January 2021, the Taxonomy will require these FMPs and financial advisers to disclose the proportion of their turnover which is taxonomy aligned and the amount of capital and operating expenditure related to activities or processes which are taxonomy aligned.

How will CSRD change the landscape? 

CSRD revises and expands various requirements of NFRD and other relevant directives including the Accounting Directive, the Audit Directive, the Audit Regulation and the Transparency Directive, rather than creating its own stand-alone requirements.  The aim of CSRD is that: “Reported information should be comparable, reliable and easy for users to find and make use of with digital technologies”.

The key elements of CSRD are:

In-scope firms must make disclosures enabling investors and other stakeholders to understand:

  • the firm’s impact on sustainability matters
  • how sustainability matters affect the firm’s development, performance and position

The proposals require the following additional disclosures on forward looking, retrospective, qualitative and quantitative bases:

  • business model and strategy
  • sustainability targets set and progress made towards achieving them
  • the role of their administrative, management and governance bodies in relation to sustainability factors
  • their policies in relation to sustainability matters
  • the company's most significant negative impacts on sustainability factors
  • a description of their principal risks related to sustainability matters, including their principal dependencies on such matters, and how they manage those risks
  • the manner in which they have identified the information on which they report

The Commission will publish delegated standards (“Standards”) to assist firms with their reporting, which will include:

  • further detail on content
  • a format for reporting to ensure consistency of approach
  • sector specific requirements

A review will take place every few years to take account of developments in international standards.  The Standards will ensure that the content of sustainability disclosures align with the information FMPs and financial advisers need to obtain so that in turn they can to comply with SFDR and the Taxonomy.

The scope of CSRD will initially include all companies listed on EU regulated markets (except micro-companies) and large companies, being those which on their balance sheet date meet at least two of the three following criteria:

(a) a balance sheet total of at least EUR 20,000,000

(b) a net turnover or at least EUR 40,000,000

(c) an average of 250 employees during the preceding financial year

The scope is extraterritorial, capturing companies incorporated outside the EU but listed on its markets along with EU domiciled subsidiaries of non-EU companies.  Together with the inclusion of listed companies, the impact assessment estimates that the change in scope takes the number of in-scope firms to approximately 49,000 companies.

Groups will be able to submit consolidated reports.  Subsidiaries can avoid individual reporting provided their own report states they are exempt from reporting sustainability information and they publish their parent’s consolidated report.

Disclosures will be made in management reports which form part of the financial statements and in a digital, machine readable format, known as “digital tagging”, so that the data will be in a form accessible through the proposed European Single Access Point (“ESAP”).

The proposals have considerable impact for auditors.  The continuing professional development  aspects of the Audit Directive will be amended to ensure that auditors have sufficient knowledge of sustainability reporting.  There will be a requirement to quality assure the sustainability reporting against the Standards.  The assurance need not be carried out by the auditor and can be prepared by an independent assurance provider but, where this is the case, the assurance opinion will need to be presented in a separate report.  Initially this will be on a limited assurance basis.

What is the proposed timing?

It is likely that the CSRD will come into force on 1 December 2022 and so will apply in relation to financial years commencing on or after 1 January 2023, with the first CSRD reports published in 2024.  The European Parliament and the Council need to finalise the text of the CSRD and the Standards must be drafted.  A first draft of the Standards is expected by mid-2022 in order to give firms time to consider the kinds of data they need to capture and report.  The requirements will only be extended to SMEs listed on EU regulated markets 3 years after the general application of the rules, in recognition of the difficulties faced by such firms following the COVID crisis.

How does the CSRD compare to the position in the UK?

The UK is rapidly developing its approach to corporate reporting.  The Taskforce on Climate related Financial Disclosures (“TCFD”) already applies to premium listed issuers.  The Department for Business, Energy and Industrial Strategy (“BEIS”) is currently consulting on extending the requirements to other listed companies, as well as large companies and limited liability partnerships (those with a turnover of more than £500 million and more than 500 employees) from 6 April 2022.  A further consultation to extend the requirements to asset managers is expected shortly.

The TCFD requires firms to make disclosures under four key headings: Governance, Strategy, Risk Management and Metrics.  Like the CSRD, the TCFD provides additional guidance on the disclosures required and adaptations for specific sectors such as asset managers, asset owners, banks and insurance companies.  The disclosures are required to be made in “mainstream financial disclosures” – ie the report and accounts of an in-scope firm.

Unlike the CSRD, however, there are no requirements for assurance of disclosures or any prescribed format for the disclosures, although the principles for disclosure do recommend that the disclosures should allow for meaningful comparisons across organisations and within sectors and jurisdictions.  The recitals to the proposed CSRD suggest that the Standards should have reference to other international standards and specifically reference the TCFD, amongst others

1. Read the draft Taxonomy Delegated Act, draft Annex 1 and draft Annex 2.

2. Read the proposed amendments to the Insurance Distribution Directive, the proposed amendments to Commission Delegated Directive (EU) 2017/593 on safeguarding of financial instruments and funds belonging to clients etc and the proposed amendments to Commission Delegated Regulation (EU) 2015/35 on insurance and re-insurance (Solvency II).