The Corporate Sustainability Reporting Directive (CSRD, Directive 2022/2464/EU) is a landmark regulation that aims to improve the transparency and comparability of sustainability reporting in the European Union (EU). By amending the Accounting Directive (AD, Directive 2013/34/EU, already amended by the Non-Financial Reporting Directive (NFRD, Directive 2014/95/EU)), it extends the scope, content, and standards of sustainability reporting for companies operating in the EU.

Although the CSRD is a European law, it has extraterritorial effects that will apply to many groups that are neither based nor listed in the EU (non-EU groups). These are well advised to identify the best a reporting strategy in good time.

 

How does the CSRD affect groups that are headquartered outside the EU?

Most obviously, EU subsidiaries may be obliged to report. The following schedule applies:

  • From 2025: Large companies and parent undertakings of large groups provided that they are public-interest (in particular listed) entities, and the company or group respectively has more than 500 employees. (Already subject to the NFRD reporting.)
  • From 2026: All other large companies and parent undertakings of large groups.
  • From 2027: Small and medium sized public-interest entities and certain other institutions and undertakings.

Only micro-enterprises and non-public-interest SMEs are exempted from CSRD reporting. According to the CSRD, a non-listed company or group is already deemed large when at least two of the following criteria are met:

  • Balance sheet total: EUR 20 million;
  • Net turnover: EUR 40 million; and/or
  • Average number of employees during the financial year: 250.

Thus, we expect that a significant number of non-EU groups will need to deal with CSRD reporting of their EU subsidiaries by 2026.

Until 6 January 2030, EU subsidiaries have the possibility to publish a joint report under the leadership of the largest EU subsidiary that generated the greatest turnover in the EU. This may ultimately facilitate CSRD reporting but requires an increased coordination effort. Moreover, sustainability reports of EU subsidiaries of non-EU groups need to contain certain group-wide, i.e. also extraterritorial, information from 2029 when the following conditions are met:

  • Non-EU group has a consolidated EU-wide turnover of more than EUR 150 million for each of the last two consecutive financial years; and
  • EU subsidiary has a turnover above EUR 40 million in the preceding financial year.

Also, many non-EU parent undertakings will already publish a group-wide sustainability report and EU reporting will significantly overlap with it. Consequently, non-EU parent undertakings will ask themselves whether a group-wide harmonised approach may facilitate reporting. Indeed, EU subsidiaries or (sub-) groups are exempted from the obligation to publish their own sustainability report when they are included in the reporting of the non-EU parent’s sustainability report and the reporting has been carried out in accordance with one of the applicable standards.

What are the standards for CSRD reporting?

  • ESRS: The European Sustainability Reporting Standards (ESRS), drafted by European Financial Reporting Accounting Group (EFRAG) as set out in the AD and Delegated Regulation of Commission on 31 July 2023.
  • Equivalent reporting standards: The CSRD acknowledges equivalent sustainability reporting frameworks and/or alternative standards. For instance, in a joint statement with EFRAG, the Global Reporting Initiative (GRI) confirmed that the GRI Standards are at a high level of interoperability with the ESRS.
  • Standards for non-EU companies: The CSRD foresees standards for non-EU undertakings that are yet to be published. It is expected that these standards will be adopted by the European Commission by the end of June 2024.

 

Recommendations for non-EU companies

  • In light of the CSRD criteria, non-EU groups should conduct a boundary assessment to determine whether their subsidiaries fall within the scope of the CSRD.
  • Finding the most effective and progressive sustainability reporting strategy for the group will improve operational efficiency and ensure compliance with the CSRD and other applicable laws and standards.
  • Tracking the implementation of the CSRD in each EU Member State will help non-EU companies to align their practices with the specific requirements of each Member State’s law at an early stage.
  • Conducting a thorough comparison between the company’s existing reporting standards and the ESRS will ensure compliance with all applicable reporting standards.
  • The use of advanced technology solutions ensures efficient data management and streamlined reporting.