SHE Matters: Overview of the proposed new obligations on large undertakings and non-EU parent companies under the draft Corporate Sustainability Reporting Directive

The upcoming Corporate Sustainability Reporting Directive (CSRD) forms one of the key pillars of the EU non-financial reporting ESG regime.

When it comes into force, the CSRD will implement new laws on mandatory non-financial reporting by certain companies in the EU, superseding and significantly expanding those previously put in place by the Non-Financial Reporting Directive (2014/95/EU) (NFRD) and enforced through the Accounting Directive (2013/34/EU).

Current NFRD requirements

As the law currently stands, the NFRD provisions implemented under the Accounting Directive require certain large “public interest entities” (meaning EU-based listed companies) with more than 500 employees to report on specified non-financial data annually. This data must be included as part of an entity’s annual management report, and should contain (at a minimum) information on the entity’s development, performance, position and impact as it relates to environmental, social and employee, human rights, anti-corruption and bribery matters, including:

• a brief description of the undertaking’s entity’s model;
• a description of the policies pursued by the entity in relation to those matters, including due diligence processes implemented;
• the outcome of those policies;
• the principal risks related to those matters linked to the entity’s operations including, where relevant and proportionate, its business relationships, products or services which are likely to cause adverse impacts in those areas, and how the entity manages those risks; and
• non-financial key performance indicators relevant to the particular business.

Upcoming expansion under the CSRD

For reporting on financial years commencing on or after 1 January 2025 (i.e. for reports due in 2026), Article 19a of the CSRD will broaden these obligations, including by establishing sustainability reporting obligations for both listed and non-listed entities which are “large undertakings”, defined as an undertaking that meets two out of three of the following criteria:

1. balance sheet of EUR20 million;
2. turnover EUR40 million;
3. 250+ employees.

The EU Commission has indicated that this will significantly increase the scope of non-financial reporting, from approximately 11,600 companies to 49,000 companies within the EU.

The information to be reported is also set to be expanded, and includes information as it relates to sustainability on a range of matters, such as:

• the reporting undertaking’s business model and strategy;
• any time-bound targets in place;
• the role and expertise/skills of the undertaking’s administrative, management and supervisory bodies;
• the existence of incentive schemes offered to members of the administrative, management and supervisory bodies;
• due diligence processes implemented;
• the principal actual or potential adverse impacts connected with the undertaking’s own operations and with its value chain; and
• any actions taken by the undertaking, and the result of such actions, to prevent, mitigate, remediate or bring an end to actual or potential adverse impacts.

Proposed Article 29b of the CSRD empowers the EU Commission to produce detailed binding reporting standards, elaborating on the above information to be reported and the structure that reporting should take. The first set of standards are due to be published in their finalised form by 30 June 2023, with drafts currently being developed by the European Financial Reporting Advisory Group (EFRAG).

Proposed new requirements impacting non-EU parent companies

In what has been a particularly controversial development, proposed Article 40a of the most recent version of the CSRD also adds an entirely new reporting obligation. This covers sustainability information relating to large non-EU parent companies with a significant presence in the EU (specifically, where such a non-EU company generates a net turnover of more than EUR150 million in the EU for two consecutive financial years). This obligation is set to apply slightly later than the Article 19a obligation discussed above, with the first reporting requirement to take place in 2029, covering financial years commencing on or after 1 January 2028.

The actual reporting obligation does not technically rest on those non-EU parent companies, but instead is placed on their qualifying EU-based subsidiaries and/or branches. Article 40a appears to have been drafted in this way to avoid any suggestion that the EU Commission is exercising extra-territorial jurisdiction by placing obligations on entities based outside the EU. Despite this, Article 40a requires that specified information should be reported at the “consolidated level” of the ultimate third-country parent undertaking.

Although not confirmed, the use of the word “ultimate” here strongly suggests that the obligation is intended to apply to the highest-level non-EU entity in a group, capturing information relating to every entity that sits underneath the top parent undertaking in qualifying companies.

Under new Article 40b, the Commission is required to adopt (by June 2024) sustainability reporting standards that specify the information to be included in Article 40a reports. These standards are expected to provide additional information on exactly how the obligations under Article 40a should be interpreted, and many of the world’s largest companies will be watching with great interest to see how the matter develops.

Status of the CSRD

The latest version of the CSRD reflects an agreement reached through Trilogue discussions between the EU Parliament, the Council and the Commission. The agreed text is yet to be formally adopted by the Commission, but this is expected to take place within the next few months once it has been finalised and translated into the language of each of the EU Member States.