Q&A: The EU Corporate Sustainability Reporting Directive – To Whom Does It Apply and What Should EU and Non-EU Companies Consider?

October 20, 2023

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by Greg Norman, Simon Toms, Adam M. Howard, Kathryn Gamble (Skadden, Arps, Slate, Meagher & Flom LLP) As part of its commitment to strengthen sustainability disclosure in its 2018 Sustainable Finance Action Plan, the European Commission (EC), together with the European Financial Reporting Advisory Group (EFRAG), has conducted a number of reviews and consultations over the last few years in an aim to improve existing European legislation in this area, including the so-called Non-Financial Reporting Directive (2014/95/EU) (NFRD).

On 28 November 2022, the European Parliament adopted, with amendments, the EC’s April 2021 proposal for a Corporate Sustainability Reporting Directive (CSRD), and it came into force on 18 December 2022. According to the EC, this will expand the scope of the reporting requirements from approximately 11,000 entities under the NFRD to approximately 49,000 entities under the CSRD. The CSRD amends and updates the NFRD not only by expanding the scope, but also by broadening the reporting requirements to include environmental considerations.

Unlike the NFRD, the CSRD specifies the format of disclosure and standards that companies will have to meet for their reports. The CSRD also emphasises “double materiality” — meaning companies will need to detail both their impacts on the environment and the climate-related risks they face. Further details on these obligations and reporting standards are summarised below.

1. Which companies will be affected and when?

The CSRD will be phased in as follows:

From 1 January 2024 for full year (FY) 2024 with reports due in 2025:	Any EU-incorporated company already subject to the NFRD.
From 1 January 2025 for FY 2025 with reports due in 2026:	All large companies incorporated in an EU member state and EU-incorporated parents of large groups (which will include any non-EU subsidiaries of the parent), including captive insurance1 and reinsurance undertakings2 as well as small and non-complex institutions that meet the large company requirements.
From 1 January 2026 for FY 2026 with reports due in 2027:	Small and medium-sized entities (SMEs) that are listed on an EU regulated market.
From 1 January 2028 for FY 2028 with reports due in 2029:	Companies whose ultimate parent company is outside the EU but that have a significant presence in the EU must report on the whole global group, including non-EU group companies.

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2. What obligations will the CSRD impose?

Under the CSRD, a company will need to include in a dedicated section of its management report the information necessary to understand the company’s impacts on sustainability matters as well as how sustainability matters affect the company’s own development, performance and position. This reflects the “double materiality” principle emphasised during the development of the CSRD.

The information required to be provided under the CSRD must also include information on a company’s own operations as well as its value chain.

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3. What are the reporting standards under the CSRD?

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10. Next steps: What can companies do to prepare?

Companies, whether they have subsidiaries incorporated in the EU or not, should review the CSRD and seek legal advice on whether the directive will apply to them and, if so, when they will need to begin reporting. Given the potential reach of these rules, companies may wish to consider at what level in their corporate structure they should report.

In particular, non-EU companies that may be held to have a significant presence in the EU need to consider the interplay between the CSRD and liability provisions in their jurisdictions of incorporation. This will include weighing the risks of providing different levels of detail for subsidiaries in different countries or choosing to report according to one regime for all subsidiaries and affiliates with supplemental information as required. READ MORE

What US companies need to know about the EU’s CSRD (PWC; includes VIDEO)

What US companies need to know about the EU’s CSRD (GreenBiz)

U.S. companies scramble ahead of EU climate disclosure rules (E&E Climatewire)

More than 50,000 companies to report climate impact in EU after pushback fails (Financial Times)

U.S. companies scramble ahead of EU climate disclosure rules (E&E News Climatewire)

Checklist: Preparing for the SEC Climate Disclosure Rules (GreenBiz)

Excerpt from PWC: ESG reporting is evolving rapidly with the release of major proposals in the European Union, the United States and globally by the International Sustainability Standards Board. These proposals have the potential to affect companies worldwide, but perhaps the most immediate concern is the EU’s Corporate Sustainability Reporting Directive (CSRD), which went into effect in January 2023. The directive is aimed at driving change in the business behavior of companies that operate in the EU, which includes US companies with EU subsidiaries that meet certain criteria. Given the complexity of the directive, your company should act now to avoid scrambling to comply. READ MORE

Excerpt from E&E News Climatewire: Major U.S. companies are getting ready to meet sweeping climate disclosure requirements from the European Union — even as the U.S. Securities and Exchange Commission struggles to finalize its own disclosure rule.

Starting as soon as January, the largest U.S. companies that raise money on European stock exchanges will be forced to begin compiling information about their climate risks, strategies and emissions. But those limited number of companies — estimates of which remain difficult to pin down — are expected to increase to more than 3,000 U.S.-based companies by 2025, when more expansive European rules take effect.

They include any U.S.-based business that has an E.U. branch with more than 250 employees, more than $42 million in local revenue or a balance sheet above $21 million.

Six experts who work closely with U.S. companies on corporate climate disclosure said the E.U.’s looming compliance dates mean their clients can no longer afford to wait and see what U.S. regulators will do, and they have started preparing for mandated climate disclosure in earnest.

That’s the case in large part because complying with the E.U. rules will mean tackling thorny financial and legal questions that could take months — if not years — to get right. Among them: which parts of their business are subject to the rules, and how they should go about compiling the data.

The Securities and Exchange Commission, meanwhile, proposed a narrower climate disclosure rule more than a year ago.

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“We had a lot of companies say, well, the SEC rule has been put on hold, so we’re just going to wait and see what happens,” said Maura Hodge, KPMG’s environmental, social, and governance audit leader.

But with the recent passage of climate disclosure legislation in California and looming compliance deadlines in Europe, Hodge added, “there’s been a clear uptick in interest and focus on the need to move forward.”

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They also require companies to assess and disclose not only the ways climate change and other sustainability issues could impact profits, but also how their business impacts society.

“That’s where most angst is for the U.S. companies,” said Farzad Damania, a partner at Katten Muchin Rosenman who represents companies on securities law compliance issues. “Most U.S. companies don’t know how to do that, so that’s where the stress point is.”

Damania highlighted several major differences between the approach of the E.U. compared with the SEC. One notable divergence is that the SEC focuses on climate risks to companies but sidesteps broader sustainability issues as well as companies’ impacts on society.

Also important is that the SEC’s proposal, like the E.U.’s, does say some companies would be required to report their Scope 3 emissions. But Chair Gary Gensler has repeatedly signaled that the highly controversial provision could be watered down or removed from the final rule amid industry opposition. READ MORE