Corporate Sustainability Reporting Directive (CSRD): scope and timing
The CSRD sets out rules regarding social and environmental information to be reported by large companies and certain listed SMEs. The CSRD came into force on 5 January 2023 and will apply in phases from 2024, however, thus far it has only been transposed into national law in a few jurisdictions.
The following companies are in-scope of the CSRD: (a) companies that meet two out of the following three criteria and have: (i) more than 250 employees on average during the financial year, (ii) net turnover/sales over €50 million, and/or (iii) a balance sheet of at least €25 million, (b) EU-listed enterprises (other than micro-enterprises), (c) small and non-complex credit institutions, (d) group-owned insurance companies, and (e) non-EU companies that have a net turnover within the EU of €150 million in the last two years and at least one large subsidiary, an SME undertaking listed on an EU-regulated market or branch located in the EU with a net turnover of at least €40 million. The CSRD also looks at the corporate group, and therefore companies must analyse their wider group to assess whether they fall within the scope of CSRD.
The first phase of the CSRD’s implementation applies from 2024 to companies that are in-scope of the Non-Financial Reporting Directive. The adoption of sector-specific standards (Sectorial European Sustainability Reporting Standards), which was due to occur in mid-2024, has been delayed until 2026 to allow companies more time to get up to speed with the non-sector specific reporting requirements before addressing the sector-specific requirements.
There needs to be a full, cross-border analysis across corporate groups, to identify whether and, if so, which companies are caught by CSRD.
Corporate Sustainability Due Diligence Directive (CS3D): application and ongoing discussions
CS3D aims to ensure that businesses address the adverse impacts of their actions and value chains within and outside the EU. While the EU Commission first published their proposal with regard to CS3D in February 2022, the future of CS3D is currently unclear. As of today, an agreement has not yet been reached with regard to it and, in the event that one is not reached by 15 March, potentially either CS3D could be the subject of renegotiation following the upcoming June 2024 EU elections or it may be dead all together.
If approved in its current form, the CS3D will apply in phases from 2027. Based on the latest, publicly available draft, CS3D would likely apply, in particular, to large European limited liability companies with (a) more than 500 employees and net worldwide turnover of at least €150 million, or (b) more than 250 employees, net worldwide turnover of at least €40 million, and operations in certain “high impact sectors”. Non-EU companies active in the EU and which meet the above criteria for revenue generated in the EU may also be caught by the CS3D.
CS3D takes a risk-based approach to the due diligence process. It aims to identify risks, consider their severity and likelihood of occurrence, and prioritise mitigation actions.
Sustainable Finance Disclosure Regulation (SFDR): sustainability-related disclosures in the funds industry
The SFDR applies sustainability-related disclosure and reporting requirements to in-scope financial advisors, financial market participants and financial products. The SFDR came into force in phases from March 2021, and has been in full force since January 2023.
Certain disclosure and reporting requirements apply at entity-level to financial market participants regarding their sustainability-related policies. Other disclosure and reporting requirements apply at product-level, depending on a financial product’s sustainability-related ambition and commitments. At product level, the scope of the SFDR is particularly broad, and catches both investment funds that are established in the EU, and third-country investment funds that are marketed in the EU.
There remains uncertainty regarding the interpretation and development of the SFDR. During the last 18 months, there have been three consultations on the SFDR, including on the regulatory framework, the form and substance of the detailed disclosures and corresponding fund name guidelines. The consultations have exposed a wide range of opinions amongst industry stakeholders and a consensus on the shape of SFDR 2.0 has not yet emerged.
“In the next two years, we will likely see substantial change to the SFDR regime,” declares Maren Stadler-Tjan. “Hopefully, this will result in greater clarity for fund managers and investors alike. However, disparate sustainability-related disclosure regimes are being developed globally and, as a result, market participants are also increasingly looking for global solutions and global alignment.”
Interaction between the CSRD and the SFDR
Depending on their circumstances, financial market participants may find themselves in scope of both the CSRD requirements and the entity-level disclosures under the SFDR. The 2023 consultation on the SFDR framework included questions on the utility of the entity-level disclosures, and we may therefore see this overlap streamlined in SFDR 2.0.
At the product-level, as well as complying with the SFDR disclosure requirements, financial market participants must assess the extent to which investee companies in their portfolios are caught by the CSRD. The expectation is that, as the CSRD comes online, this will in turn provide richer data to support financial products with their reporting under SFDR.