European Council and Parliament finalise political compromise on the Corporate Sustainability Reporting Directive (CSRD)

25 August 2022

Keywords: Mazars, Thailand, Sustainability, NFRD, CSDR, PIEs, SMEs, ESRS

(see the Council press release available here and the statement from the Parliament available here).

An amended version based on this compromise was finally endorsed by the Council and sent to the Parliament for approval during its plenary session in early July (available here). The directive will be final once it is published in the Official Journal of the European Union, and particular attention should be paid to the details of the final provisions. The Member States will then have 18 months in which to transpose it into national law.

All the transformative guidelines of the initial draft CSDR issued in April 2021 have been confirmed and the amendments are in fact fairly limited. The main elements are as follows.

Mandatory European Sustainability Reporting Standards

• The sustainability reports published by European companies concerned will have to be prepared in accordance with the European Sustainability Reporting Standards (ESRS).
• EFRAG is confirmed in its role as technical advisor to the European Commission for the development of ESRS, which will have to be endorsed by the European Commission via delegated acts (see the EFRAG press release available here).

Mandatory audit of sustainability reports 

• Sustainability reports drawn up under ESRS will be subject to mandatory audit in every EU Member State (readers will recall that the 2014 Non-Financial Reporting Directive allowed individual Member States to decide whether or not to introduce mandatory audits; only three countries – Spain, France and Italy – opted to do so). This audit will initially be based on a limited assurance engagement, and subsequently on a reasonable assurance basis (6 years after the CSRD comes into force).
• The definition of sustainability audit standards is entrusted to European Commission, which should issue delegated acts adopting limited assurance standards by October 2026, and reasonable assurance standards by October 2028. In the meantime (i.e. for the 2024 to 2026 reporting periods), Member States are authorised to apply national audit standards.
• Sustainability audits may be carried out by the statutory auditor or by an independent auditor.
  • Member States will be able to allow independent auditors to carry out sustainability audits, provided that they meet the same rules for qualification, quality and independence as statutory auditors.
  • The final choice between statutory auditor and independent auditor will be left to the entity.
• A Parliamentary amendment was also adopted, enabling an entity's shareholders to submit a resolution to the General Meeting requiring a third party other than the auditor of the sustainability report (whether this is the statutory auditor or another auditor) to issue an independent report on some aspects of the sustainability report and to make this independent report available to the General Meeting: 
  • in a listed company subject to Directive 2007/36/EC on the exercise of certain rights of shareholders, if the right to table such a resolution is subject to the condition that the relevant shareholder or shareholders hold a minimum stake in the company, such minimum stake should not exceed 5% of the share capital;
  • in an unlisted entity, not subject to that Directive, this right must be extended to shareholders individually or collectively representing more than 5% of the capital.

Consultation of workers' representative bodies

A new feature in the final version of the Directive is an obligation for entities to consult workers’ representative bodies on the relevance of the sustainability disclosures concerned and how they are audited. Entities will need to ensure that the views of workers’ representative bodies are communicated to the company's management and governance bodies. The text remains rather vague on the details and scope of this new obligation. It will therefore be necessary to monitor transposition into national law, which will have to remedy the imprecision in the European text.

An expanded scope to include some non-European entities

The obligation to produce an ESRS-compliant sustainability report applies to:

• public interest entities (PIEs): entities listed on a European regulated market, credit and insurance institutions and any other entity declared to be in the public interest by a Member State under Article 2 of the Accounting Directive;
• large entities defined as exceeding two of the following three criteria:
  • > 250 employees;
  • net turnover of €40 million;
  • balance sheet total of €20 million.

For the record, the NFRD had made the definition of large companies more flexible by setting the bar at 500 employees, and left the choice of financial thresholds to Member States. The CSRD reverts to the definition of large companies in the Accounting Directive (Articles 19a and 29a) and no longer allows Member States to change these thresholds. Another important clarification removes any ambiguity: as the Taxonomy Regulation refers to Articles 19a and 29a of the Accounting Directive to define its scope, the CSRD stipulates that companies added to the scope defined by Articles 19a and 29a (i.e. those with between 250 and 500 employees and/or exceeding the now very low turnover and balance sheet total thresholds) will have to comply with Taxonomy reporting requirements.

• listed SMEs (except micro-enterprises with fewer than 10 employees);
• non-European entities with at least one branch (which has generated a turnover of more than €40 million during the reporting period) or a subsidiary (no annual turnover threshold) in the European Union and with a net turnover of at least €150m in the EU in the last two reporting periods. A Parliamentary amendment has been adopted to include these entities, which will now be subject to the same mandatory reporting obligations as the European entities concerned.

Unlisted SMEs (those which do not meet the thresholds mentioned above) are not included in the scope of the CSRD and are not subject to reporting requirements. However, as part of the value chain of larger entities subject to such obligations, they will indirectly be required to provide the sustainability information needed by these larger entities. Consequently, the CSRD encourages these unlisted SMEs to publish sustainability information on a voluntary basis, using the SME-specific standards designed for use by listed SMEs subject to the reporting obligation.

Retention of the publication exemption for subsidiaries whose parent company publishes a consolidated report under ESRS

This aspect of the April 2021 draft was hotly debated in the trialogue. Some MEPs supported the publication of sustainability reports by all entities exceeding the thresholds, whether or not they belong to a group publishing a consolidated report. An amendment to this effect was proposed but not adopted.

A subsidiary whose parent company publishes a consolidated sustainability report covering it will therefore be exempt from publishing a sustainability report at its own level, even if it is a large company as defined by the thresholds, as long as it is included in the consolidated group report prepared in accordance with ESRS. This also applies to subsidiaries and branches of non-EU companies, provided that the parent company publishes a consolidated report (or an individual report in the case of a branch) prepared in line with the ESRS or with an equivalence regime to be determined by the European Commission. There is no indication of the date by which the Commission should define this equivalence regime.

However, this exemption will not apply to subsidiaries listed on a European regulated market (whether they are subsidiaries of European or non-European groups), for reasons of investor protection and the enhanced transparency of regulated markets.

A delayed timetable for the adoption of ESRS

Originally planned for October 2022 and October 2023, the adoption of ESRS – currently subject to public consultation – has been pushed back to June 2023 for the sector-agnostic standards (i.e. applicable to entities regardless of their sector of operation) and to June 2024 for sector-specific standards and those specific to SMEs.

A deferred and phased implementation schedule, depending on entity size 

Given the delayed adoption of the first ESRS standards until June 2023, the implementation timetable is also deferred by a year and phased to give companies that do not currently publish sustainability reports sufficient time to prepare to do so.

The first year of implementation will therefore be:

• 2024 reporting periods (i.e. reports published in 2025) for EIPs and large entities already in the scope of the NFRD;
• 2025 reporting periods (i.e. reports published in 2026) for entities not yet in the scope of the NFRD (mainly those with more than 250 employees);

2026 reporting periods (i.e. reports published in 2027) for listed SMEs (between 10 and 250 employees). These, however, may delay this implementation date until 2028 (reports published in 2029) provided they can justify this choice.