
EU directive imposes increased sustainability reporting obligations
25/10/2024
The Corporate Sustainability Reporting Directive (CSRD) is a pillar of the EU’s sustainability agenda and European Green Deal and has been introduced to strengthen the rules about the social and environmental information companies have to report.
It imposes sustainability reporting obligations on an increased number of EU and non-EU companies. While some companies will have to file their reports in 2025, most companies will have until 2026 to report on the financial year of 2025.
Non-compliance with the CSRD may result in penalties, defined by EU member states’ national laws implementing the directive. Companies are encouraged to develop robust ESG data management practices to facilitate compliance and mitigate risks associated with sustainability reporting.
Companies must conduct a “double materiality” assessment to provide a detailed account of their sustainability practices, including their business model’s impact on climate change, environmental resources, social rights, and human rights.
The Directive entered into force on 5 January 2023 and needed to be transposed into the national laws of the EU 27 Member States by 6 July 2024. However, 17 Member States have failed to notify full transposition of the CSRD into national law by the required date. If the Member States fail to respond to letters of formal notice satisfactorily, then the Commission may issue a reasoned opinion.
The CSRD significantly expands the number of companies that are subject to sustainability reporting requirements, covering all large companies and those listed on regulated markets (except listed micro-enterprises), affecting 50,000 or more companies.
The CSRD now includes:
Any listed companies in the European Union (even non-EU companies listed on European stock exchanges) except for micro companies (companies fewer than 10 employees and an annual turnover or balance sheet below €2m). This includes small and medium size undertakings (SMEs).
Large companies. This includes companies that exceed at least 2 of the 3 following criteria for 2 consecutive financial years:
€25 million balance sheet total
€50 million net turnover
Average of 250 employees
This category also includes subsidiaries of non-EU parent companies.
Non-EU companies which have
net sales of more than €150 million in the EU (for each of the last 2 consecutive financial years), and
at least 1 large company (see above) in the EU, or
an EU-listed subsidiary (see above), or
an EU branch with a net turnover of more than €40 million in the preceding financial year.
Exemptions do apply such as the exemption of subsidiary undertakings from the obligation to report non-financial information where such undertakings and their immediate parent companies are included in the consolidated management report of their ultimate parent undertaking.
There is also the exemption of parent undertakings from the obligation to prepare consolidated financial statements and a consolidated management report where parent undertakings are subsidiary undertakings of another parent undertaking that complies with that obligation.
Timeline of reporting obligations
Large EU and non-EU listed companies (and financial institutions) with more than 500 employees: reporting in 2025 for the financial year 2024.
Large EU and non-EU non-listed companies with more than 500 employees: reporting in 2026 for the financial year 2025.
Listed EU SMEs: reporting in 2027 for the 2026 financial year.
Subsidiaries or EU branches of non-listed non-EU companies: reporting in 2029 for the financial year 2028.
The CSRD reporting must follow strict standards to ensure consistency and comparability. This includes using the European Sustainability Reporting Standards (ESRS), to provide a comprehensive framework for reporting across different sectors and sustainability matters.
Companies are required to report on how sustainability matters affect their business and vice versa how their business impacts on the environment and people, encompassing environmental protection, social responsibility, and governance (ESG) factors.
The CSRD requires that reported sustainability information must undergo an audit by independent auditors or assurance service providers.
Regulatory compliance creates a personal liability for directors and officers. Accordingly, care should be taken to procure comprehensive management liability insurance, to pay for the legal defence and damages awards as a result of wrongful acts. For more information, or a quotation, please contact W Denis Europe or W Denis International:
Southern Europe and the MENA Region
Christos.Hadjisotiris@wdenis.com
LinkedIn: https://www.linkedin.com/in/christos-hadjisotiris-aa513a44/
Eastern Europe
Western Europe &/or elsewhere worldwide