New EU Corporate Sustainability Reporting Directive

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New EU Corporate Sustainability Reporting Directive

Sustainability Reporting to the next level

On 21 April 2021, the European Commission (EC) adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD) that radically improves the existing reporting requirements of the EU’s Non-Financial Reporting Directive (NFRD). This ambitious package of measures is likely to have a significant impact on your organisation in the short term. The CSRD covers all relevant Environmental, Social and Governance (ESG) elements and aims to increase investments in truly sustainable activities across the European Union.

Key changes to ESG reporting requirements

The CSRD will be phased in from now until 2023. Notable changes are:

  • If you are not currently subject to NFRD (the current EU Non-Financial Reporting Directive addresses ESG elements) but are considered large—and many companies fit into this category as outlined below—you will have to fully comply with the CSRD. This includes a mandatory requirement for external assurance on the information you provide.
  • If you are already reporting in accordance with NFRD, you must report on the impact of climate change on your organisation. This includes a mandatory requirement for external assurance on the information you provide.
  • If you are a subsidiary of a global non-EU firm, you are also subject to the CSRD.
  • Reporting under the CSRD will be required under the EU Taxonomy. This is a common classification of economic activities significantly contributing to environmental objectives using science-based criteria. The EU Taxonomy itself has reporting requirements that will come into effect partially from January 2022 and fully from January 2023. The CSRD, together with the EU Taxonomy, should be seen as a ‘package’ designed to help improve the flow of capital towards sustainable activities. The EU Taxonomy is still under development and it is anticipated to be complete by the end of 2021.

The EU proposes to start with a 'limited' assurance requirement. We expect this 'limited' assurance to eventually shift to 'reasonable' assurance, especially given the trend to link executive remuneration to sustainability performance indicators. 

Key elements to pay attention to regarding the CSRD

Given the substantial regulatory change triggered by the CSRD, we anticipate that preparing for it in an orderly and timely manner will be challenging. The following key elements require specific attention:

  • Your organisation’s management will be required to certify that an adequate risk and control framework safeguarding and governing reported ESG information under the CSRD has been established.
  • The exemption regime operates independent from the exemption regime for financial reporting. EU large companies with an ultimate parent in a non-EU country who do not prepare consolidated sustainability reports in accordance with the CSRD cannot apply a consolidation exemption. This means that the management of each company to which CSRD reporting requirements apply will be required to report and be accountable for consolidated ESG information for each EU company and its worldwide subsidiaries. This will require your organisation to design and maintain a detailed and extensive controlled ESG information database. For most, this means a drastic change in the governance of ESG reporting throughout the organisation.
  • The ESG reporting landscape is still developing, which means that the design of your ESG reporting framework should be based on agile design principles. This will allow you to absorb regulatory and other changes over the next years. It also means that investors and other stakeholders will increasingly pay attention to an organisation’s sustainability performance and hold executives accountable for their performance. (See our publication Telling the Real Corporate Story.)
  • The CSRD is a significant development that requires knowledgeable resources throughout your entire organisation. From your finance team to risk management and operations: all need to start making decisions on ESG governance over responsibilities and resourcing.

Please refer to our attached summary that can assist you with this.

To which organisations do the CSRD requirements apply?

The proposal will extend the scope of sustainability reporting requirements to all large companies, whether they are listed or not and without the previous 500-employee threshold. This change will result in all large companies being held publicly accountable for their impact on people and the environment. These include:

  • All large companies (2 out of 3 criteria met)
    • Revenues > EUR 40 million
    • Total assets > EUR 20 million
    • > 250 employees
  • All companies with listed securities on EU-regulated markets, except micro-undertakings
  • Listed SMEs, small and medium-sized enterprises benefit from +3 years for implementation

More information

Do you want to learn more about transparent ESG reporting and what you can do now? Please connect with Vanessa Otto-Mentz, Bert Albers or Han Hindriks, via the contact details below.

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