The new directive revises the 2014 Non-Financial Reporting Directive (NFRD), extends the scope of covered companies and strengthens the reporting requirements for in-scope companies. 

Approximately 50,000 companies will eventually be required to report on sustainability, including larger companies, as well as listed SMEs.

1. What are the goals of the new CSRD?

• Enables businesses to increase transparency and accountability of their reporting, with stakeholders gaining insight about sustainability (performance) through analysis, benchmarking and auditing.
• Broadens the scope of sustainability management and reporting to include sustainability risks and opportunities.
• Encourages businesses to develop a strategy to improve on sustainability.

2. What are the new requirements?

The new directive introduces substantial sustainability-related reporting requirements, with small variations for the different companies in scope.

New Disclosure Requirements

Companies will now need to report:

• Specific details about the business model and strategy, with notable reference to sustainability-related opportunities, resilience and plans to ensure compatibility with the transition to a climate neutral economy and the limiting of global warming to 1.5 °C.

• Sustainability targets, including, where appropriate, 2030 and 2050 GHG emission reduction targets and a description of relevant progress.

• The role, expertise and skills of the administrative, management and supervisory bodies for sustainability. The existence of sustainability incentives offered to those members.

• The business policies for sustainability.

• The due diligence process implemented with regard to sustainability matters.

• The principal actual or potential adverse impacts connected with the business operations and value chain.

• Any actions taken to prevent, mitigate, remediate or bring an end to actual or potential adverse impacts, and their results.

• The principal sustainability risks and how those are managed.

All relevant disclosures will now extend to the reporter’s value chain, including products and services, business relationships and supply chain.

Double materiality: Double materiality is a cornerstone of the new CSRD. In-scope companies will now have to report on a double materiality basis, as a result of sustainability risks and opportunities, and the impact of the company on people and the environment. This means that companies will have to identify both the external impact on society and the environment, as well as the impact on the enterprise value.

Sustainability reporting standards: Disclosures will need to be undertaken in accordance with the European Sustainability Reporting Standards (ESRS) by the European Financial Reporting Advisory Group (EFRAG). The Commission shall adopt the first set of Standards by 30 June 2023, and shall specify complementary information to be reported on sustainability matters by 30 June 2024. It is indicated that the sustainability reporting standards shall avoid imposing an administrative burden on companies, hence they shall be considering, to the greatest extent possible, the work of global standard-setting initiatives for sustainability reporting.

Sustainability assurance: Introduction of an EU-wide requirement for limited assurance on sustainability information with the aim to move to reasonable assurance in the longer term. More specifically, under the directive, the Commission must adopt legislation to provide for limited assurance standards (1 October 2026), as well as further legislation to provide for reasonable assurance standards (1 October 2028). The assurance certification must come from an accredited independent auditor or certifier, ensuring that the sustainability information complies with the certification standards that have been adopted by the EU.

3. Which companies are in scope?

Companies already subject to the NFRD. That is, essentially, large EU 'public interest entities' with regulated market listed securities, credit institutions and insurance companies with more than 500 employees.

Parent companies of a large group. Large groups are groups consisting of parent and subsidiary companies included in a consolidation, fulfilling two of the following criteria:

1. a balance sheet total exceeding €20,000,000
2. a net turnover exceeding €40,000,000
3. an average of more than 250 employees during the financial year (on a consolidated basis).

All 'large' EU companies fulfilling two of the following criteria:

1. a balance sheet total exceeding €20,000,000
2. a net turnover exceeding €40,000,000, and iii) an average of more than 250 employees during the financial year.

Listed small and medium-sized enterprises, with lighter disclosure requirements and the ability to opt-out until 2028.

Other EU and non-EU companies (with the exception of micro undertakings) with securities listed on EU regulated markets. Those include debt securities with denominations of less than €100,000 or equivalent listed on an EU regulated market. It is noted that the directive does not apply to securities listed on EU multilateral trading facilities.

4. Application to non-EU companies

Non-EU companies that operate in the EU may also fall under the CSRD scope, regardless of whether they are listed or not.

They shall be required to provide sustainability disclosure if:

• Their net turnover generated in the EU (at the consolidated or individual level) exceeds €150 million for each of the last two consecutive financial years, and
• They have at least one subsidiary in the EU (either a large EU company, or an EU company listed on an EU regulated market which is not a micro undertaking), or an EU branch with an annual net turnover exceeding €40 million in the previous financial year.

5. Milestones of the CSRD implementation

If you would like to discuss any of the points raised, please speak to your usual Grant Thornton contact or your local member firm.

*Although the CSRD will be effective for eligible entities in 2024, companies are advised to begin building their internal ESG reporting mechanism during 2023 in order to be prepared for the CSRD-based disclosure in 2024.