The Corporate Sustainability Reporting Directive (CSRD) marks a small revolution in the disclosure of non-financial information by companies. The main changes compared to the regime under the current Non-Financial Reporting Directive 2014/95/EU (NFRD) are:

1. a significant expansion of the number of entities that will have to report under the CSRD;
2. the reporting standards;
3. the obligation to verify the reported information by an auditor;
4. sustainability reports will be submitted in an electronically readable form, i.e. in the European Single Electronic Format, ESEF.

Why is this little revolution happening?

As the name suggests, the CSRD modifies several existing directives and regulations, such as the NFRD. These changes are part of the legislative changes at the European Union level under the Action Plan on Financing Sustainable Growth from 2018. The Plan also aims to mobilise funding from the private sector, and, in the area of private financing, it included requirements for sustainability factors to be taken into account in all areas of decision-making by financial institutions. In practice, this means that most of the directives and regulations governing the European Union’s single financial market have been amended.

To help financial institutions make good decisions, new obligations for companies to disclose sustainability information have been introduced. One of these new obligations is the CSRD, and the other concerns the disclosure under the EU taxonomy for sustainable activities.

For more information, see A European Green Deal (europa.eu) and Renewed sustainable finance strategy and implementation of the action plan on financing sustainable growth (europa.eu)

Let’s take a closer look at the changes brought about by the CSRD.

1. Expansion of the number of reporting entities

According to the NFRD, only large companies and groups that are public interest entities and those with more than 500 employees report non-financial information.

According to the CSRD, the following companies will also be subject to the reporting obligation:

• all privately owned companies that meet two of the three conditions (turnover of more than EUR 40 million, assets exceeding EUR 20 million, and at least 250 employees), i.e. large companies;
• small and medium-sized enterprises that are public interest entities with a turnover of more than EUR 8 million, assets exceeding EUR 4 million and at least 50 employees;
• companies owned by entities outside the European Union that reach a turnover of EUR 150 million in the European Union and have at least one subsidiary in the EU that meets the CSRD reporting requirements or have at least one branch with a turnover of at least EUR 40 million.

Except for companies that are issuers of investment securities admitted to trading on a European regulated market, other companies may take advantage of an exemption whereby a consolidating parent company will report on their behalf if they meet the following conditions.

The management report of an exempt subsidiary shall include all the following information:

• the name and registered office of the parent company that reports information at a group level in accordance with this article or the manner specified herein;
• web links to the parent company’s consolidated management report or, where applicable, the parent company’s consolidated sustainability report;
• the parent company meets the CSRD conditions, i.e. reporting under EFRAG standards and the report is audited;
• declaration that the subsidiary is exempt;
• if the parent company is from a country outside the European Union, additional conditions need to be met, such as ensuring that reporting respects the EU taxonomy for sustainable activities; however, it is still possible to report under equivalent standards (which ones has not yet been defined).

The reporting obligation will not come into effect for all companies at once but gradually:

• on 1 January 2024, the obligation will apply to those public interest entities currently subject to the NFRD, i.e. large entities (more than 250 employees);
• on 1 January 2025 for large companies (including public interest entities);
• on 1 January 2026 for SMEs that are public interest entities;
• on 1 January 2028 for entities owned by the entities established outside the European Union.

The years above are the years for which the information is reported for the first time. The reporting is done for the following year, which is also when the audit takes place. In total, the European Union estimates that the number of entities reporting under the CSRD will rise to 50,000.

However, reporting under the CSRD will also have implications for other entities – this is because reporting entities will have to report certain sustainability data in their value chain (supply chain), e.g. CO₂ emissions. They can therefore be expected to require this information from their suppliers and customers.

2. The reporting standards

The CSRD envisages that the sustainability report will be part of the annual report (management report on performance under CSRD). The report will be prepared in accordance with the ESRS (European Sustainability Reporting Standards) issued by EFRAG. EFRAG and the European Commission plan that three sets of ESRS standards will be available.

• thematic standards, a draft of which already exists today, which will be binding on all reporting entities;
• sector standards, which EFRAG is currently drafting and which will contain additional requirements for reporting entities in certain industries (e.g. energy or banking);
• simplified standards for small and medium-sized enterprises (SMEs).

A draft of the thematic standards is already available and has been submitted by EFRAG to the European Commission for approval. The final version, i.e. a delegated regulatory technical standard issued by the European Commission, is expected in mid-2023.

3. The obligation to verify the reported information by an auditor

The initial level of sustainability information verification will involve limited assurance, which is an equivalent level of assurance provided by a review of the financial statements. By comparison, an audit of the financial statements provides reasonable assurance, and the auditor’s opinion is positive. In the case of the verification of sustainability reports, the verification is expected to be at a reasonable assurance level in the future. According to the CSRD, the verification of a report may be performed by the company’s statutory auditor or another auditor. The CSRD also expects that it will be possible for the verification to be carried out by so-called independent verification providers if the law of the relevant Member State where the company is established allows it.

4. Sustainability reports will be submitted in an electronically readable format

Based on the feedback received, the European Commission plans to adopt the same regime as for issuers of securities listed on regulated markets in the European Union, i.e. the European Single Electronic Format (ESEF). This basically means that the annual report must be sent to a central data repository in each Member State (in the Czech Republic, the Czech National Bank is the administrator of this data repository) in the XBRL format. The European Commission is also planning a central pan-European repository of electronically verified financial and non-financial information from 2026, the European Single Access Point (ESAP).

For more information, see Deloitte’s publication iGAAP in Focus February 2023.

Sources: First Set of draft ESRS – EFRAG, Publications Office (europa.eu)