5.1 Overview and Current Framework in the EU

On January 5, 2023, the “Corporate Sustainability Reporting Directive” (CSRD) came into force. It modernizes and reinforces the provisions of the “Non-Financial Reporting Directive” (NFRD), which has been in effect since 2018. The new directive aims to ensure the necessary comparability of non-financial information through more detailed disclosure requirements.

The “European Sustainability Reporting Standards” (ESRS) now specifically mandate how companies must report on the impact of their activities on people and the environment, as well as on the risks and opportunities arising from social and environmental issues. They must be applied by all companies subject to the reporting requirements under the CSRD. This ensures that companies across the EU provide comparable and reliable sustainability information. 

CSRD: Expansion of the Scope of Affected Companies

A central element of the proposal is the expansion of the scope of companies subject to reporting obligations. It will now also include the following companies: 

• All EU-listed companies within or outside the EU, regardless of their size (excluding micro-enterprises or very small businesses)

• All large companies (regardless of an exchange listing) which meet at least two of the three criteria: more than 250 employees, more than EUR 50 million in sales revenue, and/or more than EUR 25 million in total assets)¹

• Companies from third countries (meaning non-EU) with consolidated net sales revenue of EUR 150 million in the EU and at least one subsidiary or a branch in the EU generating more than EUR 40 million in sales revenue. 

A European subsidiary (or sub-group) can meet its individual reporting obligations if it is included in the CSRD report of an EU or non-EU parent company. Alternatively, the requirement can be fulfilled if the European subsidiary is included in a CSRD report created using “artificial consolidation” (i.e., a CSRD report that combines the information of all relevant EU subsidiaries, similar to consolidated financial statements). 

For (listed) small and medium-sized enterprises (SMEs), the European Commission proposes drafting separate standards that are proportionate to the limited resources of those companies. Listed SMEs have until January 1, 2026, to comply with the reporting requirements but can decide not to provide sustainability reporting until 2028, if they include a justification of its absence in the management report.

Separate standards for sustainability reporting by companies from third countries are also planned through a delegated act by the Commission. However, the specifics of these developments are not yet clear.

The generally extended scope of disclosure accounts for the fact that both retail and institutional investors, such as asset managers, are increasingly dependent on sustainability information. They refer to it to reliably invest according to their individual sustainability preferences or, in the case of asset managers, to meet the increasing requirements under the “Sustainable Finance Disclosure Regulation” (SFDR).

CSRD: Mandatory (External) Third-Party Assurance

The CSRD also introduces an EU-wide requirement for independent external assurance on sustainability information to enhance the credibility of the information reported. For the time being, only a limited assurance engagement is required, which provides for less extensive procedures than reasonable assurance. However, the scope of assurance is set to be gradually expanded. By October 2028, the Commission will establish common standards for reasonable assurance.