Corporate Sustainability Reporting Directive

Introduction

Directive (EU) 2022/2464, commonly known as the Corporate Sustainability Reporting Directive (CSRD), is a landmark piece of EU legislation that amends the Accounting Directive (2013/34/EU), the Transparency Directive (2004/109/EC), the Audit Directive (2006/43/EC), and the Audit Regulation (537/2014). It fundamentally revises the non-financial reporting requirements previously established by the Non-Financial Reporting Directive (NFRD).

Main Goal

The primary objective of the CSRD is to ensure that investors and other stakeholders have access to the information they need to assess investment risks arising from climate change and other sustainability issues. It aims to create a culture of transparency about the impact of companies on people and the environment (the "double materiality" principle) and to put sustainability reporting on an equal footing with financial reporting.

Who It Applies To

The Directive significantly expands the scope of reporting obligations to include:

• Large undertakings (both listed and non-listed) that exceed at least two of three criteria (balance sheet total, net turnover, average employees).
• Listed SMEs (excluding micro-undertakings).
• Non-EU companies with substantial activity in the EU (net turnover > €150 million) and a branch or subsidiary in the EU.
• Credit institutions and insurance undertakings meeting the size criteria.

Key Provisions

• Double Materiality: Companies must report on how sustainability issues affect their business (outside-in) and how their business impacts people and the environment (inside-out).
• ESRS Adoption: Reporting must be done in accordance with European Sustainability Reporting Standards (ESRS) developed by EFRAG.
• Location of Reporting: Sustainability information must be published in a dedicated section of the management report, not in a separate report.
• Assurance: Introduces a mandatory requirement for limited assurance of sustainability reporting, with a potential move to reasonable assurance in the future.
• Digital Tagging: Reports must be prepared in XHTML format and digitally tagged (using the XBRL taxonomy) to ensure machine readability.

Obligations & Requirements

Impacted entities are required to disclose information on:

• Environmental factors (climate change mitigation/adaptation, water, pollution, biodiversity, circular economy).
• Social factors (equal treatment, working conditions, human rights).
• Governance factors (role of management bodies, internal controls, business ethics, lobbying).
• Forward-looking info: Targets, strategy, and progress reports.
• Value Chain: Information regarding the company's own operations and its value chain.

Penalties

Penalties for non-compliance are determined by individual Member States but must be effective, proportionate, and dissuasive. Depending on national transposition, these may include public statements (naming and shaming), cease and desist orders, or financial sanctions/fines.