Sustainability reporting under the CSRD: Changes to the size criteria for companies and European Sustainability Reporting Standards (ESRS)

Starting from the 2024 financial year, companies will have to submit a sustainability declaration each year in accordance with the Corporate Sustainability Reporting Directive (“CSRD”, Directive (EU) 2022/2464). This article explains how the European Commission has adjusted the thresholds for companies required to report and explains the European reporting standards that the companies concerned can already use now to prepare their sustainability reporting.

Based on the first CSR directive (Non-Financial Reporting Directive or “NFRD”, Directive 2014/95/EU), certain companies have been required to report on their contribution to environmental, social and employee matters since 2017. To this end, they must add a non-financial statement to their management report (see section 289b of the German Commercial Code (Handelsgesetzbuch – HGB)). This generally affects large listed corporations with an average of at least 500 employees. The purpose of the directive is to place greater emphasis on corporate social responsibility (CSR).

Due to the new CSRD, which came into force on 5 January 2023, Member States must now introduce a comprehensive sustainability reporting obligation for companies (see Article 19a of the “Accounting Directive” amended by the CSRD (Directive 2013/34/EU)). Unlike previously, the reporting obligation applies to large companies regardless of whether they are listed or not. The reporting obligation also includes small and medium-sized enterprises (“SMEs”) for the first time, provided that they are companies whose securities are admitted to trading on a regulated market within the European Union. The Member States of the European Union must transpose the CSRD into national law by 6 July 2024. Companies that have already been obliged to submit a non-financial declaration must submit a sustainability declaration for the first time for the 2024 financial year. Large companies are obliged to do so from the 2025 financial year. SMEs will start reporting in the following financial year.

Almost ten years after the first CSR directive and one year after the CSRD, there are regular new developments in relation to the upcoming sustainability reporting. In this article, we look at the inflation-linked change to the personal scope of the sustainability reporting obligation (“who”) and the new compulsory harmonised European Sustainability Reporting Standards, or ESRS for short (“how”).

New size criteria for companies required to submit reports

The European Commission has changed the size categories that determine whether a company must submit a sustainability declaration in accordance with the CSRD. In response to the higher inflation rates of recent years, the European Commission adopted a Delegated Directive (EU) 2023/2775 on 17 October 2023, which was published in the Official Journal of the European Union on 21 December 2023.

According to the Accounting Directive as amended by the CSRD, all “large” companies are to be covered by the reporting obligation, regardless of whether they are listed. The reason for this is that large companies shall in general become aware of their social responsibility. This is also set to apply to listed SMEs, which are required to report under the CSRD.

The Accounting Directive defines the threshold at which companies are categorised as large companies or SMEs. Due to higher inflation, the European Commission deemed it necessary to increase the accounting criteria for categorisation in the size categories. Accordingly, a company will in future be categorised as “large” (and therefore subject to reporting under the CSRD) if it exceeds two of the following three criteria:

• Balance sheet total over EUR 25,000,000 (previously EUR 20,000,000),
• Net turnover above EUR 50,000,000 (previously: EUR 40,000,000),
• Over 250 employees on average.

The European Commission also increased the size criteria for SMEs accordingly, provided they are listed companies.

The new criteria will apply to sustainability reporting from the 2024 financial year.

Harmonised European standards for CSRD reporting

On 31 July 2023, the European Commission presented the first set of European Sustainability Reporting Standards (“ESRS”). The Delegated Regulation (EU) 2023/2772 was published in the Official Journal of the European Union on 22 December 2023.

Under the CSRD, the European Commission is authorised to harmonise sustainability reporting through compulsory standards (see Article 29b of the Accounting Directive as amended by the CSRD). The aim is to enable companies to report reliably and comparably on their material sustainability aspects. The first set of ESRS is binding for financial years beginning on or after 1 January 2024. There is no need for transposition into national law as the delegated regulation applies directly.

This set contains generally applicable standards for all business sectors (see Annex I of Delegated Regulation (EU) 2023/2772). It distinguishes between cross-sector standards (ESRS 1 and 2) and supplementary topic-specific standards relating to environment (ESRS E), social (ESRS S) and governance (ESRS G) matters. The topic-specific standards are subdivided into topics and (sub-)subtopics that deal with various aspects of sustainability.

 

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The standards in ESRS 2 govern which information companies are required to include in their sustainability statement at a higher level. This concerns the following reporting areas:

• Governance: In this section, companies must explain the role of their administrative, management and supervisory bodies with regard to sustainability aspects, i.e. how responsibilities are allocated, what reporting lines exist and how monitoring is carried out. This also includes information on how diverse the bodies are, what expertise and competencies in relation to sustainability exist or are available to the bodies (both ESRS 2 GOV-1) and to what extent sustainability-related objectives exist in the incentive and remuneration systems of administrative, management and supervisory bodies (ESRS 2 GOV-3).
• Strategy: In this section, companies describe the sustainability aspects of their strategy and explain the interactions with their business model and value chain. They also explain to what extent they take stakeholders’ interests into account.
• Management of impacts, risks and opportunities: In this additional section, companies explain the procedures they use to carry out their materiality analysis, which determines which topic-specific standards they report on and in what depth.
• Parameters and targets: In the final section of the General Disclosures, companies explain what parameters they use to assess how effective their strategic measures are and what measurable targets they set themselves.

There is a reporting obligation with regard to the topic-specific standards with respect to environment, social and governance (ESG) if a sustainability aspect is categorised as material according to the materiality analysis to be carried out:

The aim of the materiality analysis is to determine the main sustainability-related impacts of the company’s activities as well as the impacts, risks and opportunities for the company (IRO). Companies must consider the individual sustainability topics in the ESG areas and, if applicable, other company-specific sustainability aspects from two perspectives when analysing them (known as the principle of dual materiality). If a sustainability aspect is categorised as material according to one of the two perspectives, it must be reported on. A sustainability aspect is “material” if:

• Inside-out perspective: the company’s business activities, including its value chain, have or could potentially have a positive or negative impact on people and the environment with regard to the respective sustainability aspect (impact materiality);

• Outside-in perspective: the sustainability aspect in question has or can reasonably be expected to have a financial impact on the company (financial materiality).

Example: A company in the manufacturing industry which is required to report (e.g. a manufacturer of vehicle parts) may be obliged, following its materiality analysis, to include detailed information in its sustainability statement on its use of water resources in accordance with ESRS E3 and the associated individual sub-topics and sub-sub-topics, such as its water consumption, water extraction and water discharge.

In the first few reporting years, companies can waive some of the general disclosures under ESRS 2 and certain topic-specific disclosures (see ESRS 1, Appendix C).

On 17 October 2023, the European Commission submitted a proposal for a decision to the European Parliament and the Council of the European Union to extend the deadline for adopting the second set of ESRS to June 2026 (COM(2023) 596 final). The second set of ESRS is to contain sector-specific standards and define appropriate lower reporting requirements for SMEs subject to reporting obligations under the CSRD starting from the 2026 financial year.

Conclusion and outlook

Companies subject to reporting requirements face the challenge of keeping up with current developments and taking them into account when preparing their sustainability statement. EFRAG, which is supporting the European Commission in developing the ESRS, intends to publish further technical recommendations for sustainability reporting.

 

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