Green is the New Black: How the Corporate Sustainability Reporting Directive is Making Boardrooms Eco-Chic

The phrase “corporate sustainability” is now ubiquitous across business plans, vision statements and in corporate speak generally. The accusation could historically have been levelled that this amounts to nothing more than greenwashing, with businesses, and whole industries, keen to demonstrate their environmental credentials to an ever-more concerned customer base. However, as the environmental, economic and social consequences of climate change become, ever more apparent, and supra-national efforts to reduce carbon emissions and achieve agreed targets for limiting average temperature increases, show limited effectiveness, more concrete legal obligations on organisations are now starting to come into effect. Taken as a whole, these will add significantly to the already heavy burden on many businesses from a regulatory and compliance perspective; with a more positive frame, they will facilitate a greater focus on tangible, measurable sustainability goals, targets and progress.

With that in mind, we will be producing a series of Insights on the key legislative initiatives that will impact on Irish businesses: what they provide for; when, and to whom they apply; and what in-scope businesses will need to do, both in preparation and as ongoing compliance obligations.

Introduction

On 5 January 2023, the European Parliament and Council adopted the Corporate Sustainability Reporting Directive (“CSRD” or the “Directive”). The Directive aims to reframe company reporting across EU Member States to include environmental, social and governance (“ESG”) matters, which arise from the European Green Deal and the EU Action Plan for Financing Sustainable Growth. It enhances the Non-Financial Reporting Directive (“NFRD”), which was adopted in 2014, with a harmonized EU-wide framework for the reporting of sustainability by a much broader range of companies, who are subject to European Sustainability Reporting Standards (“ESRS”). The CSRD revises the sustainability reporting requirements set out in the NFRD and requires that all large and listed companies, except micro-companies, disclose their ESG impact. Some non-EU companies will also be obliged to report should they generate over 150 million euro on the EU market. The NFRD is applicable to 11,600 companies, and it is estimated that the implementation of the CSRD will put on obligation on approximately 49,000 companies to report such information annually.

What is this initiative expected to achieve?

This aim of CSRD is to ensure that companies report relevant, comparable, reliable, information that is easy to access and use. This will reduce the risks of investing in the financial system in what could be regarded as an environmentally damaging manner, increase financial flows to companies with positive social and environmental impacts, and make companies more accountable. Furthermore, by enabling investors to better evaluate sustainability risks and investments, it will mobilise private finance in support of the European Green Deal and direct capital flow into more sustainable businesses. Moreover, the social contract between companies and society will be reinforced by making companies more accountable and strengthen relations between business, society and the environment.

Challenges Posed by The CSRD to Businesses

CSRD implementation can be a significant endeavour. The first challenge posed is the scale of data collection. To ensure compliance, businesses must appoint a project owner, identify stakeholders and obtain their buy-in, analyze existing sustainability reporting processes, and engage with key internal stakeholders to understand existing data management processes. Secondly, in-scope companies will need a robust internal framework for sustainability reporting, capable of adapting to changing requirements and withstanding rigorous external scrutiny. An additional challenge posed by the CSRD is embedding sustainability knowledge within organizational structures. To achieve this, companies must invest in training and development for their people, management and board, and stay up to date on evolving sustainability practices and standards.

Time Periods

The first companies will have to apply the new rules for the first time in the 2024 financial year, for reports published in 2025. Staggered commencement dates apply for the reporting obligations of each category. The following categories’ commencement date is the financial year starting on or after:

1 January 2024:

• Large “public interest” undertakings: These are large undertakings which have securities listed on an EU-regulated market and which have an average number of employees exceeding 500.
• “Public interest” parents of large groups: These are undertakings which have securities listed on an EU-regulated market and which are parents of a large group which, on a consolidated basis, have an average number of employees exceeding 500.

1 January 2025:

• Large Undertakings: These are EU undertakings which exceed the limits of at least two of the following criteria: More than 250 employees; more than €40 million in net turnover; and more than €20 million in total assets.
• Parent undertakings of large group: These are Parents of a large group, that prepare consolidated financial statements and meet the large undertaking criteria on a consolidated basis.

1 January 2026:

• Listed small and medium-sized enterprises (“SMEs”): These are all small and medium-sized companies with securities listed on an EU-regulated market, excluding “micro-undertakings” (undertakings which do not exceed the limits of at least two of the following criteria: balance sheet total €450k; net turnover €900k; average number of employees 10). SMEs listed on regulated markets are required to report, although they will have extended deadlines and simplified reporting requirements compared to larger companies (they have an opt-out right for an additional 2 years).

1 January 2028:

• Non-EU undertakings: These are third country undertakings generating an annual net turnover of €150 million in the EU at a consolidated level and with (i) a branch in the EU with a net turnover exceeding €40m; and/or (ii) a subsidiary that is a large undertaking or a listed small or medium enterprise.

A company set up in multiple member states will report to the member state where its parent undertaking is registered. The parent undertaking is typically the main entity or holding company that consolidates the financial statements of the group. This simplifies the reporting process and ensures that there is a central point of accountability and compliance within the EU framework.

European Union (Corporate Sustainability Reporting) Regulations 2024

The European Union (Corporate Sustainability Reporting) Regulations 2024, which transpose the CSRD, was signed into law by Minister Peter Burke on 5 July 2024. The Regulations were published on 9 July, with effect from 6 July. The Regulations amend various Irish provisions to reflect the requirements of the CSRD. Notably, Sections 1585 and 1648 have been introduced into the Companies Act 2014, which address sustainability reporting directly. The Regulations also increase the balance sheet turnover thresholds for micro, small, medium and large companies and groups under the Companies Act 2014 by 25% to account for inflation. Furthermore, the Irish government is currently seeking the views of stakeholders and interested parties on the Member State option to introduce independent assurance providers in relation to the CSRD and introduced a consultation period, which closed on 19 July last.

As per the Minister for Enterprise, Trade and Employment, the signing of these Regulations: “marks a significant step the government is taking in the context of the European Green Deal and the EU’s Action Plan for Financing Sustainable Growth. These Regulations provide a helpful structure to companies for preparing sustainability reporting in a clear and consistent way, that gives the relevant information to investors, consumers, and other stakeholders, whilst minimizing unnecessary burdens on companies”.

Sustainability Information: Of Growing Importance?

There has been a notable increase in recent years in legislative developments with respect to corporate sustainability reporting, aimed at requiring companies to report not only on financial information, but also on ESG aspects of their business operations. Outside the European Union, in 2021, the IFRS Foundation announced the establishment of the International Sustainability Standards Board (“ISSB”). Furthermore, in 2022, in the United States, the US Securities and Exchange Commission (“SEC”) proposed rules to enhance and standardize climate-related disclosures for investors. Based on the CSRD, the European Commission adopted the first set of European Sustainability Reporting Standards in July 2023. In 2023, the ISSB also issued two standards on sustainability-related and climate-related disclosures. As a result, the requirements on corporate sustainability reporting both in the EU and globally are emerging rapidly.

Conclusion

In conclusion, the CSRD harmonizes the EU rules for sustainability reporting by companies and puts it on the same footing as financial reporting, thus ensuring that investors and other stakeholders have access to information and investment risks arising from sustainability issues. The Directive also expands the scope of the existing EU rules to include large corporations, listed SMEs, and subsidiaries and large branches of non-EU companies with a significant presence in the EU. Companies in scope will be required to report annually on ESG and human rights matters according to ESRS. This report must be produced in a single electronic format by digitally tagging information, making it more amenable to digital analysis. Staggered commencement dates apply for the reporting obligations of each category from 2024 to 2028.

Look out for the next Insight in the Corporate Sustainability series, on the Corporate Sustainability Due Diligence Directive, which entered into force on Thursday last, 25 July 2024.