The ever-expanding world of corporate sustainability reporting


The EU continues to beat a path to a more sustainable future. Nothing too new there, perhaps, but it is increasingly determined to bring the rest of the world along with it. It first proposed a directive on corporate sustainability reporting ("CSRD") in February 2021, which when proposed caused a stir for the significant expansion of non-financial information obligations on non-listed corporates. 

In the last few weeks, the EU Council and EU Parliament have reached a political agreement on a revised text that would also bring into scope entitles with a branch or subsidiary and significant turnover in the EU. Though reporting obligations are not imminent, entities with EU operations should already take note, as the combination of extraterritorial scope and the extent of the draft reporting obligations have the potential to pose a considerable burden for covered companies.

Large companies and listed SMEs

As we reported in our briefing at the time the proposal was first published, it was notable in significantly increasing the number of companies obliged to report non-financial information including on "environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters". The CSRD revises Article 19a and related articles of the Accounting Directive 2013/34/EU, as introduced by the Non-financial Reporting Directive 2014/95/EU ("NFRD").

As well as public interest entities, the CSRD will now cover:

  • "large" companies, ie. those meeting two of the three criteria: balance sheet of EUR 20m, turnover of EUR 40m or 250 average number of employees,
  • any listed company excluding micro-enterprises, and
  • large or listed insurance undertakings or credit institutions.

There are no thresholds for public interest entities.

Financial market participants

The draft text now contains an explicit carve-out for certain financial products listed in Article 2(12)(b) and (f) of the Sustainable Finance Disclosure Regulation (EU) 2019/2088 ("SFDR"), namely AIFs and UCITS. For other financial market participants meeting the thresholds, there is no indication that the overlap with SFDR will result in their exclusion from the scope of the CSRD. Furthermore, at the press conference where the agreed text was announced, the rapporteur responsible for the legislative file indicated that asset managers would be expected to report information on and from their portfolio companies. In our view, the position may not be so clear cut for several reasons, including that asset managers are often not reporting on a consolidated basis, may not hold the investments directly, and the investee companies may not form part of the asset manager's "value chain".

Non-EU entities

The agreed text expands the scope even further than initially proposed. The European Parliament specifically insisted that non-European entities with significant operations in the EU are covered by the reporting obligation, to level the playing field and ensure accountability of companies active on the EU internal market. The criteria for inclusion of non-EU companies are as follows:

  • Turnover of EUR 150 million or more in the EU for each of the last two consecutive financial years
  • An EU branch with turnover of EUR 40 million or more in the EU OR an EU subsidiary ("large" or listed)

There is no employee test for non-EU companies, where nexus is through a branch or a listed subsidiary (and the employee threshold for large non-listed subsidiaries need not be met if the turnover and balance sheet thresholds are met).

The branch or subsidiary itself will be responsible for publishing the information, but it must be accompanied by an assurance opinion by an entity duly authorised in the non-EU company's home country. The text recognises that branches and subsidiaries may not always have access to the information needed from the non-EU parent, and also that lack of an assurance opinion is not within the EU entity's control and may not always be provided. The EU Commission will maintain a list of non-EU entities filing reports on its website. It is envisaged that within 3 years the Commission will reconsider whether to continue limiting reporting by non-EU companies to those with a branch or subsidiary in the EU, or whether to expand it to those who operate with no legal presence.

Treatment of groups

In-scope undertakings which are subsidiaries and part of a group consolidated management account need not report separately from their EU parent undertaking, provided that the parent reports in accordance with the prescribed standards (see below) and the subsidiary's report contains certain information about reporting status, such as a link to the parent report. This exemption also applies to EU subsidiaries of non-EU parents, provided the parent has reported on sustainability either in line with the prescribed standards or an equivalent standard, a list of which will be drawn up by the EU Commission. In practice, considering the extensive nature of the draft standards produced by EFRAG, it is currently difficult to envisage any equivalent standards which cover not only the "E" but also the "S" and "G" parts of the report.

Further conditions apply where group reporting is used, which could include, at the member states' discretion, providing a translation of the group report into a language accepted by the governing member state of the subsidiary undertaking.

Parent undertakings of large groups (ie. those meeting two of the three criteria outlined for large companies above on a consolidated basis) also need to report on sustainability matters in the consolidated management report, highlighting any significant differences between risks and impacts of the group versus those of the subsidiaries. Where complex structures result in many sub-groups, only the highest parent undertaking needs to report, with intermediate entities and their subsidiaries being exempt from reporting provided they fulfil the criteria mentioned above such as linking to the ultimate parent's report.

When will reporting start?

Given the complexity of the proposed reporting obligations, there is a welcome staggered implementation of the requirements:

  • Financial years beginning on or after 1 January 2024 - application to public interest entities already subject to NFRD/non-financial reporting
  • Financial years beginning on or after 1 January 2025 – application to large undertakings and parents of large groups that are not PIEs,
  • Financial years beginning on or after 1 January 2026 – application to listed SMEs, small and non-complex credit institutions and captive (re/)insurance undertakings
  • Financial years beginning on or after 1 January 2028 – application to non-EU entities
What needs to be reported?

At first glance, not too much has changed: the obligation to report on sustainability matters covers "environmental, social and human rights, and governance factors, including sustainability factors as defined in [Article 2(24) of SFDR]." The information needs to be clearly identified within the management report, in a separate section.

One notable feature of the agreed draft text is that covered undertakings should describe plans to ensure that their business model and strategy are compatible with the Paris Agreement goal of 1.5 degrees of warming, as well as the achievement of climate neutrality by 2050 and specifically, the exposure of the undertaking to fossil fuel related activities. In effect, therefore, the CSRD requires disclosure of a Paris-aligned transition plan and a 2050 net zero plan, suggesting perhaps that the former should focus on a near term view and the latter on the longer term. This, to some degree, aligns with and supports the requirement in the parallel draft directive on Corporate Sustainability Due Diligence ("CSDDD") (see our briefing). Entities in the scope of that draft directive would need to produce a Paris-aligned transition plan, but we would hope that the potential duplication (and lack of absolute consistency) between the obligations in the two draft texts will be resolved before starting to bite on organisations.

Similarly in line with the CSDDD, the undertaking's reporting must cover not only its own operations but also that of its value chain, including products and services, business relationships and supply chain. In the first 3 years, a "comply or explain" regime will be in effect; though not explicitly stated, by implication, failure to report on the value chain after the 3 year grace period will be subject to penalties, as any other non-compliance, to be determined by national laws.

Listed SMEs, small and non-complex credit institutions and captive insurance undertakings may all benefit from a simplified reporting requirement (excluding, for example, the need for a Paris-aligned transition plan) and in due course a dedicated set of reporting standards will be produced for such entities.

EFRAG draft standards

The European Financial Reporting Advisory Group ("EFRAG"), which provides technical advice to the Commission on the reporting standards, has already published exposure drafts of how it foresees the detailed reporting to look in practice. The draft standards, a suite of 13 in total covering cross-cutting issues, environment, social and governance, are extremely comprehensive with more than 100 individual disclosure requirements. The draft standards contain a good deal of helpful narrative, but will nonetheless prove very challenging to adhere to in full. The consultation period is open until 8 August.

Though it notes the relevance of international standards setters, such as the ISSB, the Commission has been clear that its sustainability reporting is broader than any international standard to date, and as such it will not rely on any existing standard. The text also notes that the Commission should take account of existing reporting obligations including under SFDR and the Taxonomy Regulation (EU) 2020/852 when adopting delegated acts on reporting. EFRAG has produced a table mapping its own draft reporting requirements to the principal adverse indicators ("PAIs") under SFDR, thereby ensuring that the information being reported under the CSRD in turn facilitates SFDR reporting by financial market participants (and may even encourage more to undertake the detailed PAI reporting exercise if the required information is more readily available).

Taxonomy reporting

As previously noted, and as explicitly recognised in the recitals to the draft text, any newly scoped-in entities will be required to report not only under the CSRD itself but also under the Taxonomy Regulation, Article 8 of which requires reporting of the proportion of Taxonomy aligned business, investments and lending activities by any entity in the scope of the non-financial reporting obligation under the Accounting Directive - see our briefing.

The provisions of the CSRD on group reporting make clear that a non-EU parent's consolidated management report, which covers subsidiaries who need to report Taxonomy alignment under Article 8, will need to include that information in the group report. Though logical that consolidated accounting and reporting should not result in a "free pass" for in-scope subsidiaries to avoid Taxonomy reporting, a section of a non-EU group management report on alignment with the EU Taxonomy may need some narrative explanation in order to be easily comprehensible for readers not familiar with it. Equally, groups of companies may begin to feel pressure to run a Taxonomy-eligibility and alignment assessment on the rest of the group given that they already need to highlight this area to stakeholders.


Enforcement of the regime is interesting, in that proper enforcement of poor performance on environmental and human rights matters is entirely dependent on other regimes. CSRD itself will only yield penalties (to be determined by national legislation) for failure to comply with the reporting obligations. It would theoretically be possible for an organisation to report below-market standard practices in terms of sustainability, without any direct negative effects under the CSRD (provided they did not equate to a breach of law and setting aside reputational and investor impacts). However, the interaction between CSRD and other regimes, mostly notable CSDDD, means that doing nothing is not an option. CSDDD will bring penalties for failure to properly diligence environmental and human rights impacts in the supply chain, and these will be exposed via CSRD.

What next?

Though the text was announced as agreed, it still has to be voted on in the European institutions, then translated into the official languages of the EU before publication. Further changes are possible but unlikely. On the other hand, the EFRAG standards are merely exposure drafts, meaning that they could undergo significant change before being published as delegated acts by the European Commission, expected in June 2023. As well as tracking the reporting standards, it will be particularly interesting to see whether the EU aligns the scope of the draft CSDDD, in its next iteration, with the scope of the CSRD. We will continue to update our clients as these two measures progress.

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