The EU’s Corporate Sustainability Reporting Directive (CSRD) has recently been approved and will be applied to non–EU companies with a large presence in the EU or with securities listed on an EU-regulated market. Once implemented into the national law of member states later this year, it will be phased in from 2024 through 2028. The new rules significantly expand the scope and content of the EU’s existing non-financial reporting regime and will also require US issuers to report on a broader set of ESG topics than under current and proposed SEC rules.
Scope and timing
CSRD will apply to EU companies, including EU subsidiaries of non-EU parent companies, that meet at least two of the following criteria:
- more than 250 employees;
- a turnover of more than €40 million; or
- total assets of €20 million.
CSRD will also apply to companies with securities listed on an EU-regulated market, whether the issuer is established in the EU or a non-EU country. The reporting time will begin from 2024 through 2028 depending on if the company is already subject to the Non-Financial Reporting Directive (NFRD) and the size of the company.
Comparison with SEC’s requirements
For companies with an EU presence, the new disclosure requirements are both significant and unique, with considerable differences from SEC requirements. A few major changes:
- “Double materiality”: Unlike the SEC’s investor materiality standard, CSRD includes an “impact-materiality) standard regarding the company’s impact on the economy, environment, and people.
- Broader coverage: CSRD will require companies to report within the upstream and downstream value chain through direct or indirect business relationships – regardless of the company’s level of control over these value chain entities, enormously expanding the reporting boundaries.
- Due diligence: A description of the company’s due diligence process with regards to ESG is required and a separate corporate sustainability due diligence directive might bring more specific obligations.
Challenges for management and board
With CSRD’s complex and strict requirements, large multinational companies might need to review their current ESG reporting team, traditionally operated by corporate sustainability or social responsibility teams but now evolved to handle legal, financial reporting and internal audit functions. The team should be capable of understanding reporting frameworks and aligning different disclosure requirements from various regions and countries. In addition to building out more robust management-level ESG teams, Cooley suggests that companies covered by the CSRD establish dedicated board committees and integrate ESG-reporting experience into director recruiting plans.