Corporate Sustainability Reporting Directive

Published Date
May 11, 2021
An EU-wide sustainability reporting standard has been proposed by the European Commission ahead of a possible new international reporting standard on sustainability. The EU proposals expand the scope of non-financial reporting, require undertakings to explicitly disclose their net zero strategies and introduce new mandatory reporting standards.

The need for consistent, comparable and verifiable data on sustainability matters is critical for the transition of the economy towards net zero and other sustainability objectives. Such data is an essential factor in the quality of disclosure, ratings, classification and supply chain monitoring. It is central to the ability of businesses to incorporate climate and environmental risk and opportunities into their strategies and risk management frameworks, and for investors to be able to take account of sustainability considerations when making their investment decisions.

The Commission committed to strengthen sustainability disclosure in the 2018 Sustainable Finance Action Plan. Following the establishment of the European Corporate Reporting Lab under the auspices of the European Financial Reporting Advisory Group (EFRAG) and a number of reviews, consultations and research, it published its proposal for a directive to amend the existing non-financial reporting framework in April 2021.

By integrating sustainability disclosures with financial data, we would create a 'one-stop shop' for all critical information about a company, including its green credentials, which would be immensely useful for investors.

Christine Lagarde

President of the ECB


Non-financial reporting is disclosure on aspects of a company’s performance other than financial performance. There are a number of regulations and reporting initiatives in the EU and UK that require disclosure on various topics under the non-financial reporting umbrella, the principal of which is the Non Financial Reporting Directive (NFRD).1

The NFRD amended the Accounting Directive2 to require certain companies (large public interest entities (PIEs) with more than 500 employees in the preceding financial year) to disclose information on environmental protection, social responsibility and treatment of employees, human rights, anti-corruption, anti-bribery and board diversity. It is based on a “double materiality” principle, where companies must not just disclose how externalities impact them but also how they impact those externalities.

Reporting entities currently can use a number of guidelines/frameworks to produce their disclosure statements, including the UN Global Compact, OECD Guidelines for Multinational Companies and ISO 26000 on social responsibility.  The Commission has also published guidelines on non-financial reporting, which focus on environmental, social and governance-related information, and a supplement to those guidelines on reporting climate-related information.

The CSRD makes a number of further changes to the Accounting Directive, as detailed below.

Why not NFRD II?

The usual naming conventions of EU legislation may have led to an expectation this regulation would be called NFRD II. The change of nomenclature to CSRD is deliberate - it aims to remove the potential implication that “non-financial” means that sustainability considerations do not have financial relevance.

This also aligns with the approach that the EU and other policymakers have taken more broadly over the past few years – shifting the concept of ESG from a loose collection of non-financial objectives towards a sustainability policy programme focused on implementing the Paris Agreement and UN Sustainable Development Goals.

Change to scope of application

The proposed new requirements would apply to large undertakings3 and those small and medium-sized undertakings (SMEs) which are listed on EU regulated markets.4 Listed SMEs would be allowed an additional three years to prepare for the new requirements. The proposal also suggests in its recitals that unlisted SMEs could choose to comply with the standards on a voluntary basis.

The Commission states in its Communication that this would expand the scope from approximately 11,000 entities under the NFRD to 49,000 entities.

At present, the proposals would only apply to those entities within the scope of the Accounting Directive; however, the proposal mandates the establishment of an equivalence mechanism, similar to those seen in financial services regulation, which would allow the Commission to determine what the equivalent standards would be in third country jurisdictions. The application of the proposal to third countries is likely to be the subject of debate during the future legislative process. At the Commission’s High Level Conference on the proposal last week, the lack of application to non-EU companies with substantial operations within the EU was noted as an area of concern.

Subsidiary undertakings are currently exempted under the NFRD from reporting non-financial information, if this is already included in the consolidated management report of the parent company. The CSRD would require exempted subsidiaries to publish the consolidated management report and note in their own report that they are exempt, including where the parent company is a third country undertaking.

Redefined scope of reporting

The CSRD moves away from the collection of non-financial topics for reporting to a requirement to report on “sustainability matters”; a concept derived from “sustainability factors” in the Sustainable Finance Disclosure Regulation (SFDR).5

Undertakings in scope will now be required to include information in their management report which allows readers to understand how the undertaking impacts environmental, social and employee matters, respect for human rights, anti?corruption and anti?bribery matters, and how such matters impact the undertaking. This will include:

  • A description of the undertaking’s business model and strategy, including plans to ensure compliance with net zero targets, the effect of sustainability risks and opportunities, and how the strategy/plans reflect broader stakeholder interests.
  • Sustainability targets and progress against them.
  • Due diligence processes implemented for sustainability matters.
  • Principal and potential adverse impacts throughout the value/supply chain.
  • The role of management in sustainability matters.
  • Principal risks of the undertaking related to sustainability matters.

Parent undertakings of large groups will be required to include equivalent information in their consolidated management reports.

This new scope, in part, reflects the principles of the TCFD framework, which is increasingly getting traction internationally. It also aligns with the areas that the Commission has been exploring in relation to a potential sustainable corporate governance directive.

New mandatory reporting standards

Unlike the NFRD and its related guidelines which allowed a more flexible approach to the content of reports, the CSRD would introduce mandatory reporting standards for the EU. The new standards would articulate how undertakings should report on:

  • Environmental factors: These will mirror the environmental objectives of the EU Taxonomy Regulation.
  • Social factors: These will include information about equal opportunities (including gender equality, equal pay for equal work, training and skills development and inclusivity for those with disabilities), working conditions (including workplace safety and work-life balance) and respect for human rights and freedoms established under core international conventions and the Charter of Fundamental Rights of the European Union.
  • Governance factors: These will include information on management’s role in sustainability matters, business ethics/culture (including anti-corruption and anti-bribery), political engagements, third party business relationships (including payment practices) and internal control and risk management frameworks.

The details of the standards, including requirements for sector-specific information, will be specified in delegated acts. Separate standards for SMEs would apply the requirements more proportionately. The standards would be reviewed every three years.

Digital tagging of reported data

The Commission plans to make publicly reported data under various EU regulations and directives more accessible via a common data platform, the European Single Access Point (ESAP). More detail is expected in Q3 2021 when the Commission is anticipated to publish its proposal for an ESAP Regulation, but early indications suggest that the ESAP may also be available for voluntary reporting.

The CSRD anticipates the establishment of the ESAP with a new requirement that undertakings subject to the new sustainability reporting requirements prepare their financial statements and management report using a single electronic reporting format and mark-up their sustainability reporting.6 Disclosures under article 8 of the Taxonomy Regulation will also require this digital approach.

New verification requirements

Sustainability reporting would need to be assured by auditors under new standards under the new proposals. The assurance standards would be developed at a national level, with the Commission able to set out details of the procedure auditors should use via delegated acts.

Professional competence standards for auditors will also be amended to take into account knowledge relevant to the new sustainability reporting requirements.  

Expanded role of EFRAG

EFRAG played a key role in providing technical input towards the development of the proposal, including the publication of a report on proposals for sustainability reporting standard-setting in February 2021.

The CSRD creates a new role for EFRAG as technical advisor7 to the Commission in the preparation of the sustainability reporting standards. EFRAG will also advise on the mandated periodic review of such standards. 

Against this backdrop and at the invitation of Valdis Dombrovskis, the EFRAG Board President published a report on the potential need for changes to the governance and funding of the organisation. The report proposes the creating of a non-financial or sustainability reporting pillar and reporting board to complement EFRAG’s existing financial reporting structures. The new pillar would involve both public and private sector representatives, and be supported by a Technical Expert Group.

The governance structure is expected to be modified accordingly before EFRAG commences its work on the standards.

International context

Following a consultation last year, the IFRS Foundation – the entity that was established to promote and develop the International Financial Reporting Standards (IFRS) – is expected to establish a Sustainability Standards Board (SSB). The SSB would sit alongside the board that administers the IFRS, the International Accounting Standards Board (IASB). The new board is expected to be announced at COP26 this November.

The new SSB is likely to follow a “building blocks” approach – establishing a consistent set of sustainability reporting standards as a global baseline to reporting which can be built upon to meet the local needs of individual jurisdictions.

At the recent European Commission High Level Conference, a Trustee of the IFRS Foundation noted that there was broad consensus for the need for an international solution. He noted that the SSB will engage with stakeholders across the globe, including EFRAG, and will aim to create a standard that is interoperable with approaches such as that proposed by the Commission.

Next steps

If enacted in the current form, the new requirements would apply to large undertakings from 1 January 2023 and to listed SMEs from 1 January 2026. The delegated acts for the sustainability reporting standards would be adopted by 31 October 2022 with at least the information required by financial market participants under the SFDR. Further delegated acts with more detail would be adopted by 31 October 2023.

The EU co-legislators, the European Parliament and Council, will now determine their positions on the Commission’s proposal before a final text of the regulation is agreed, subjected to a legal-linguistic review and published in the Official Journal. The length of time for this legislative phase will depend on how far the co-legislators wish to depart from the proposal, but the Commission has signalled an ambitious timetable. If the Commission gets its wish, we could see the first EU-wide sustainability reporting framework in place by next year. 

Author: Kelly Sporn


1Directive 2014/95/EU
2Directive 2013/34/EU
3Undertakings which as at their balance sheet dates exceed two out of three of (a) EUR 20m balance sheet total, (b) EUR 40m net turnover and (c) 250 average employees during the previous financial year.
4Small undertakings are undertakings which do not exceed two out of three of (a) EUR 4m balance sheet total, (b) EUR 8m net turnover and (c) 50 average employees during the previous financial year. Medium-sized undertakings are not small undertakings, or a smaller category of “micro undertakings” and which do not exceed two out of three of (a) EUR 20m balance sheet total, (b) EUR 40m net turnover and (c) 250 average employees during the previous financial year. These must also be governed by the law of an EU member state and have transferable securities admitted to trading on an EU regulated market.
5Art. 2 (24) Regulation 2019/2088.
6“Marking up” in this context means annotating a document using XBRL (eXtensible Business Reporting Language).
7The Commission will also request the opinion of ESMA on EFRAG’s technical advice, as well as consulting with the other ESAs, the ECB and other organisations.

By integrating sustainability disclosures with financial data, we would create a 'one-stop shop' for all critical information about a company, including its green credentials, which would be immensely useful for investors.

Christine Lagarde

President of the ECB

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