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November 2022 / 5 Min Read

Preparing for CSRD – The European Union’s Corporate Sustainability Reporting Directive

 

The European Union adopted CSRD, which requires companies to disclose their corporate activities impacting the environment and societal standards of living. Companies face audits and more if they fail to properly disclose.

This article:

  • Provides readers with key takeaways from the EU’s adoption of CSRD
  • Alerts readers to how CSRD will impact EU and non-EU companies differently
  • Highlights regulatory disclosure changes impacting different countries and regions

On November 28, the European Union (EU) Council adopted the Corporate Sustainability Reporting Directive (CSRD), which becomes effective 20 days after its publication in the Official Journal of the European Union. The CSRD requires companies to report on the impact of corporate activities on the environment and society and requires the audit (assurance) of reported information.

On November 15, the European Financial Reporting Advisory Group (EFRAG), a body designated by the EU to define the European reporting standard, voted for the European Sustainability Reporting Standard (ESRS) to implement the Corporate Sustainability Reporting Directive (CSRD).

Proposed to the European Parliament in April 2021, the CSRD will replace the current Non-Financial Reporting Directive (NFRD), which has been in effect since 2018 and will extend its scope significantly. Today, only 12,000 companies are subject to the NFRD. This new rule will impact an additional 38,000 companies and changes will apply starting in 2024.

Who Will be Impacted?

CSRD will apply to:

  • All EU companies meeting two of the three following criteria:
    1. Employee count is greater than 250
    2. Total revenue is greater than 40 M€
    3. Total asset value is greater than 20 M€
  • Non-EU companies with revenues greater than 150 M€ in the EU
  • EU-listed and private companies with more than 250 employees
  • All EU-listed small medium enterprises (SMEs) (defined as all the listed companies that have not been part of first round of CSRD regulation in 2025 as not meeting the criteria described above)

As was the case for NFRD, EU countries choose to extend CSRD’s scope within their jurisdiction to a broader range of companies than required by the EU.

When Will the Regulation be Implemented?

CSRD’s regulation is applicable as early as:

  • 2024 for listed companies with more than 500 employees (2024 activities reported in 2025)
  • 2025 for non-EU companies and for listed and private companies between 250 and 500 employees (2025 activities reported in 2026)
  • 2026 for all listed subject medium enterprises regardless of the number of employees (2026 activities reported in 2027).

The table below sets forth indicative timing and most important criteria:

 

Next Steps

EU companies and some Non-EU companies with operations in the EU will need to start or accelerate their ESG tracking and disclosure, which might increase the burden of strategic and operational complexities. Depending on how companies implement the new regulation, Aon might expect a decrease or an increase of corporate ESG risks and liabilities depending on how CSRD is applied by companies.

For companies already regulated by the NFRD since 2018. ESG processes and culture might already be in their corporate DNA. However, CSRD will require more robust and standardized disclosures with several nuances, namely on the social front such as equal opportunities, working conditions, respect for human rights which will require a double materiality analysis.

Attention newly regulated companies. It’s important to formalize and strengthen ESG strategy and identify relevant ESG KPIs as well as create an ESG roadmap with short, medium and long term goals against which they will measure their performance. Most importantly, companies need to manage all stakeholders’ expectations, (investors, employees, and customers), with a consistent and well documented message as stakeholders and regulators across the globe will increasingly scrutinize these statements. Greenwashing will be at the top of regulators’ mind as well as the one of Non-Governmental Organizations (NGOs) and activist investors.

The EU has set the tone for an environmental, social and governance revolution. Aon believes that these new regulations will:

  • Provide comparable data to key stakeholders such as investors
  • Connect financial and sustainability in corporate reporting
  • Bring transparency and accountability to ESG

Aon can help companies prepare to comply with CSRD as well as other EU taxonomy and the directive on the Corporate Sustainability Due Diligence (CSDD). This last directive aims at fostering sustainable and responsible corporate behavior throughout global value chains.

If you’d like to speak with one of our European ESG experts about these developments and how we can help, please write to [email protected]. Our Global Governance & ESG practice has more than 50 colleagues across the globe who can assist you in the ESG journey, partnering with you to manage and implement ESG solutions.

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The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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