The Corporate Sustainability Reporting Directive

The CSRD is one of the cornerstones of the European Green Deal and the Agenda for Sustainable Development. The Directive is part of a broader EU policy that commits undertakings to respect human rights more consistently and to reduce the impact of businesses on the environment. The existing rules on disclosure of non-financial information, especially the Non-Financial Reporting Directive (“NFRD”), which only applies to around 11,700 undertakings, have proven flawed and not fit for purpose. In addition, consumers’ needs and preferences for sustainability information have soared in recent years as they want more and more information to make (sustainable) choices that align with their values. Investors are also increasingly aware of the importance of sustainability for the financial performance of undertakings, making information about the environmental and human impact of an undertaking increasingly important to them. This has led to the adoption of the CSRD, which aims to increase the accessibility/availability of sustainability information and to ensure that sustainability reporting is based on comparable, trustworthy and reliable information. This is not only to build confidence in the green investment market but also to create greater public accountability.

The CSRD introduces several new arrangemets, including:

1) Extending the scope of undertakings required to report to almost 50,000 companies at EU level, covering:

• large undertakings, whether listed or not, considering that a large undertaking is an undertaking that meets at least two of the following criteria: a balance sheet total of  EUR 20 million, a net turnover of  EUR 40 million, 250 employees on average over a business year; 
• small and medium-sized undertakings (“SME”) with securities admitted to trading on an EU-regulated market, but not SMEs with securities listed on SME growth market or multilateral trading facilities; 
• non-EU undertakings with a significant activity in the EU market (i.e. with a net turnover in the EU of more than EUR 150 million in each of the last two consecutive business years and with at least one subsidiary or branch in the EU. The subsidiary must also meet the criteria applicable to large, small and medium-sized undertakings, while the branch must have a net turnover of more than EUR 40 million).

However, “micro” enterprises, i.e. undertakings that do not meet the above criteria for (at least) small undertakings, are excluded from complying with the Directive’s requirements.

2) Requiring undertakings to prepare their financial statements and management report in XHMLT format in accordance with the European Single Electronic Format (ESEF) and to “tag” reported sustainability information according to a digital categorisation system as set out in the ESEF.

3) The CSRD extends the reporting period from one to two years. Undertakings will be required to provide sustainability information for both the current business year as well as the previous year.

4) The CSRD – similarly to the previous rules – incorporates a so-called “double materiality” or “double-materiality perspective”, which means that undertakings must disclose not only the risks they face from climate change but also the impacts they may cause to the climate and society.

5) Requiring that sustainability information must be included in the undertaking’s management report (clearly identifiable in a separate section of the management report), whereas the previous rules allowed for disclosure in a separate document. 

6) Requiring a broader and more detailed scope of reporting, as the sustainability report must cover: (i) a description of the undertaking’s business model and strategy; (ii) a description of time-bound targets related to sustainability matters; (iii) a description of the role of management and oversight bodies with regard to sustainability matters; (iv) a description of the undertaking’s policies in relation to sustainability matters; (v) a description of the undertaking’s principal actual or potential adverse impacts; (vi) a description of any measures taken by the undertaking to prevent, mitigate, remediate or eliminate actual or potential adverse impacts; and certain other requirements.

7) Introducing assurance requirements as reporting must be certified by an accredited independent auditor or certifier (with the conditions for such auditors yet to be determined by countries). The auditor will have to provide assurance that the information reported is accurate and reliable.

8) Requires undertakings to report in accordance with mandatory European Sustainability Reporting Standards to be developed by the European Financial Reporting Advisory Group (“EFRAG”). These standards will focus on three areas: environment, society and governance.

The CSRD’s reporting requirements will start applying on a phased basis, as follows:

• from 1 January 2024 for large undertakings that are public-interest entities and whose average number of employees exceeds 500 (i.e. undertakings already subject to the NFRD). Reports must be submitted in 2025;
• from 1 January 2025 for large undertakings (with more than 250 employees and/or a turnover of EUR 40 million and/or total assets of EUR 20 million) not already subject to the NFRD. Reports must be submitted in 2026; 
• from 1 January 2026 for SMEs and other listed undertakings. For business years starting before 1 January 2028, listed SMEs may decide to opt-out; however, in such cases, they must nevertheless briefly state in their management report why sustainability reporting was not provided; 
• from 1 January 2028, the reporting obligation will apply to third-country undertakings (with a net turnover of more than EUR 150 million in the EU, if they have at least one subsidiary or branch in the EU). The reports must be submitted in 2029.

Given that the NFRD has been transposed into the Slovenian legal system by an amendment to the Companies Act (namely amendment ZGD-1J), the same approach can be expected with the CSRD. This means that we can expect an amendment to the Companies Act, in particular provisions around the submission of annual reports, report content, the submission of audited and consolidated annual statements, and management board liability.

Although the transposition of the new obligations under the CSRD seems a long way off, given the complexity and critical nature of these new disclosures, it is prudent for undertakings having to report under CSRD to start taking action now. Management and senior executives must acquaint themselves with the standards and what the requirements mean for their business at an operational level. This will enable the appropriate systems and processes to be rolled out in time to identify and produce sustainability-related information.

Authors: Jernej Jeraj, Partner and Živa Korenjak, Legal Assistant