Large companies in the EU have been required to make sustainability disclosures under the Non-Financial Reporting Directive (NFRD) since 2018. But on 5 January 2023, Europe’s Corporate Sustainability Reporting Directive (CSRD) entered into force. The new regulation is designed to expand the scope and reporting requirements of NFRD, most notably extending its reach to more companies. Per the regulator, “A broader set of large companies, as well as listed SMEs, will now be required to report on sustainability—approximately 50,000 companies in total.”
Starting with reports generated in 2025 for fiscal year 2024, companies currently under the scope of NFRD will begin reporting. From 2026 for fiscal year 2025, more large companies will be required to make sustainability disclosures to EU regulators than ever before. While the initial threshold applies to large companies, small- to medium-sized companies will come into scope in 2027 for 2026 reports.
The new directive represents a significant lift for compliance teams, which must begin preparations now for the reporting rules on the horizon. In addition to required disclosures, the new rules also introduce a mandatory audit and assurance regime to sidestep attempts at greenwashing.
As with the recent updates to SFDR, CSRD’s updated reporting rules are intended to ensure that investors have access to the information they need to assess sustainability-related investment risks. The European Commission also cites a stated objective to “create a culture of transparency about the impact of companies on people and the environment.”
Which companies will be impacted by CSRD?
As mentioned above, an estimated 50,000 companies are expected to fall under CSRD. Fewer than 12,000 were required to report under NFRD, so this change represents a massive increase. In its initial phase, CSRD will apply to all large companies that exceed at least two of the following benchmarks:
- 250 employees (down from the current 500-employee threshold)
- Turnover of €40 million
- Total assets of €20 million
Companies with securities listed on an EU-regulated market, regardless of where the issuer is established, will also fall under CSRD. Non-EU companies with a subsidiary/branch in the EU and with more than €150 million net EU turnover are also in scope. Listed micro-enterprises will remain exempt.
CSRD will take effect for fiscal years starting from 1 January 2024 or after, with initial reports expected in 2025. Large companies presently outside the scope of NFRD will fall under CSRD starting in 2025 and will report in 2026.
Updated EU sustainability reporting standards under CSRD
Companies in scope of CSRD will be required to report on their sustainability-related impacts, risks and opportunities, including those presented by their value chain. The term ‘sustainability’ applies to both internal and external perspectives, so companies must look beyond their financial performance to consider the bigger picture.
In addition to current reporting requirements under NFRD, large companies will have to publish information on not just environmental factors but a whole range of social and governance factors.
The reporting will be as per the EU sustainability reporting standards (ESRS) that are being finalised by the EU Commission, taking into consideration other initiatives including SFDR and Taxonomy Regulation.
How should companies prepare for CSRD?
Reading this article is a great place to start! Executives should start to understand the new reporting requirements and the timeline that will apply to their company. Although reporting will not begin until 2025, companies should prepare as soon as possible to align with the updated requirements, assessing current reporting and internal control processes to identify any gaps.
CSRD and other disclosure requirements may well require additional resources over the coming years—but in the meantime, IQ-EQ’s global team of experts is here to help. Get in touch today for CSRD consulting and implementation support.
