As part of the wider efforts towards a European Green Deal, the European Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD) on 21 April. The proposal will revise the Non-Financial Reporting Directive’s (NFRD) sustainability reporting requirements, to increase consistency with the broader sustainable finance legal framework, including the Sustainable Finance Disclosure Regulations (SFDR) and EU Taxonomy Regulation. A key potential benefit of the CSRD is that it could help standardise sustainability reporting and so reduce costs whilst increasing transparency.

Unlike the predecessor NFRD, the CSRD will not form part of the UK’s International Financial Reporting Standards (UK-IFRS) post-Brexit. It remains to be seen whether through momentum and timing the CSRD sets a benchmark for market practice such that UK-IFRS will have broadly align with it, or whether this will be an instance where the UK diverges. In any event, the CSRD will have a significant impact on the standards expected in ESG reporting in the EU if not beyond. This post explores in more detail UK corporate reporting post-Brexit.

Currently, the NFRD requires large companies to publish information related to environmental matters; social matters and treatment of employees; respect for human rights; anti-corruption and bribery; and diversity on company boards (in terms of age, gender, educational and professional background).

Over and above the NFRD’s requirements, the CSRD will:

  • extend the scope of the reporting requirements to catch:
    • all large companies, meaning those that meet at least two of following criteria:
      • 250 employees;
      • a balance sheet of €20 million; and/or
      • €40 million in turnover;
    • all listed companies (except listed micro-companies); and
    • non-listed SMEs on a voluntary basis;
  • require third party assurance of sustainability information;
  • require those in scope to provide more detail in line with mandatory EU sustainability reporting standards; abd
  • require that all information is published as part of companies’ management reports and disclosed in a digital, machine-readable format.

In practice, this means nearly 50,000 companies in the EU will need to follow more detailed EU sustainability reporting standards, up from the 11,000 companies that are subject to the existing requirements. Listed companies that are SMEs will be subject to “separate, proportionate” standards, and will have an extra three years to comply.

The EU’s theory is that by making companies more accountable and transparent when it comes to their impact on people and the environment, the proposal can help strengthen relations between business and society. If the CSRD does pick up the necessary momentum, it may well set the standard for sustainability reporting far beyond the EU.