The EU's Corporate Sustainability Reporting Directive ("CSRD") was due to be implemented into national law by the Member States by 6 July 2024. The majority missed that deadline to finalise their laws. Travers Smith spoke to expert counsel in 23 EU Member States to find out what clients should be looking out for, when finalising their scoping analysis, considering the nuances of reporting, or assessing the risks associated with failing to report in accordance with the law.
To date, most businesses have been assessing their exposure to CSRD using the provisions of the Directive itself – a sensible approach when the lead time to prepare for the first CSRD report is long, and for some, the reporting deadline as soon as next year. It is also important to note that generally Member States do transpose the provisions of Directives quite faithfully, though differences can emerge, particularly in the case of "minimum harmonisation" directives such as CSRD which set a floor but not a ceiling for the standards to be set by national law. This was seen with CSRD's predecessor, the Non-financial Reporting Directive ("NFRD"), whereby some countries expanded the scope to cover companies not included in the original directive.
State of play
At the time of writing in early August 2024, of the surveyed jurisdictions, 10 had finalised and brought into force national laws implementing CSRD. By contrast, 4 had yet to publish any form of consultation or draft text. The remaining countries had prepared a draft law, at various stages of the law-making process.
The delays to implementation do not help businesses who are well prepared and looking to ensure that implementation in their main reporting jurisdiction does not impact their first report, albeit that this double-checking exercise is an advisable step. Generally speaking, the direction Member States appear to be taking is to follow the text of the Directive. However, there are a few both major and minor divergences in the Member State level implementing legislation that will require attention for businesses with undertakings in those locations.
Changes to the scope of national sustainability reporting laws is one of the most disruptive change that latecomer jurisdictions can make – this would require companies with potentially in-scope entities in that jurisdiction to revisit their scoping exercises and ensure that none are newly caught. Given the precedent of NFRD, where scope was expanded in some jurisdictions, it is not too surprising that this is where we already see divergence.
Scope of national laws
There are a variety of nuances around scope, mostly with the outcome that certain companies will find themselves in scope according to the national law, even though they would have been out of scope based on the Directive's own thresholds. This can occur simply because the Member State uses its own currency to determine company size thresholds, resulting in small changes. On the other hand, some Member States have used the EU's financial thresholds for a "large undertaking" as they existed before being amended to account for inflation (where the financial thresholds for "large" increased from €20mil to €25mil balance sheet and from €40mil to €50mil turnover), potentially resulting in an unwelcome yo-yo effect for companies close to the thresholds who thought that the amendment took them out of scope.
Romania is the outlier with respect to the financial thresholds, having legislated that individual medium sized undertakings (not groups) should also be subject to CSRD reporting. This represents a major departure from the Directive and any businesses with legal presence in Romania should ensure that they have assessed their exposure against these significantly lower thresholds.
The type of EU corporate undertakings that are in the scope of CSRD is another area where businesses should take care to understand local variations. Member States have, in a few cases, expanded the list of entities in scope beyond those listed in Annex I and II of the Accounting Directive (Directive 2014/34/EU). On the other hand, the Netherlands' draft implementing law suggests that some entities which are subject to financial reporting (such as foundations) will not be subject to sustainability reporting. Lithuania has reportedly included a sweeper provision mentioning the inclusion of "profit-seeking legal entities", leaving some uncertainty around precisely which Lithuanian corporate forms will be in scope.
Reporting standards
Having navigated the complexities of local implementation of CSRD's scope provisions, reporting entities may well be relieved that the manner and content of reporting under CSRD has been determined by the European Commission via a delegated regulation, which requires no transposition into local law but applies directly within all Member States. This should ensure the highest levels of consistency and comparability between reports, regardless of the home jurisdiction of the reporting entity.
One potential area for divergence, however, is in respect of the possibility for Member States, at their election, to allow reporters to omit commercially sensitive information (on impending developments or matters in the course of negotiation). Another point of discretion for Member States under the Directive is that they may require the subsidiary of a third country undertaking subject to sustainability reporting (under Article 40a) to report the parent's turnover generated in that country and in the Union. By contrast, in another area of discretion a pattern is emerging: most Member States are expected to require sustainability reports to be published on the reporting entity's website.
Timing of reports
The deadline for publication of sustainability reports under CSRD is a matter for national law, tied to the reporting entity's financial year end. While most countries require publication within 6 or 12 months of the previous accounting period, Germany requires reporters to prepare their report within 3 months. Some Member States provide longer for group reporting than individual reporting. The differences between Member States' publication deadlines may cause some data-collection headaches for those groups operating across multiple jurisdictions.
The phased introduction of CSRD reporting depending on the type of entity has been transposed faithfully by all Member States except Sweden, which commenced the first wave of reporting for entities with financial years beginning on or after 1 July 2024 instead of 1 January 2024. This means that entities meeting the relevant criteria with financial years aligning to the calendar year will not need to start collecting data until 2025, with reports in 2026.
Penalties
Member States must determine penalties for failure to comply with the Accounting Directive, including CSRD, which must be effective, proportionate and dissuasive. In most cases, existing penalty provisions can be applied to failure to prepare a compliant management report including the sustainability reporting elements. The French implementing law made headlines for its draconian penalties including prison sentences for directors, but in reality such penalties are likely to be limited to exceptionally egregious and repeat breaches of the sustainability reporting requirements. Several other Member States including Germany and the Netherlands envisage the possibility of prison sentences for directors in the most serious cases. Financial penalties on the company itself range from fines of a few hundred Euros to fines based on a percentage of the balance sheet or turnover of the reporting entity.
Next steps
Navigating CSRD is challenging in and of itself, but negotiating 27 different implementations of it would test even the most seasoned ESG professional. It will be necessary to understand how the most relevant local implementing law impacts the final report, but companies will benefit from staying focused on the EU-prescribed reporting standards and continuing to progress key steps such as the materiality assessment and value chain definition concurrently. The most critical question will be whether national laws change the scope in a way that could bring reporting obligations onto additional entities.
Post script
With the long-awaited FAQ on interpretation of the CSRD finally published by the European Commission on 7 August, it will now remain to be seen how far Member States review and adjust their own implementing legislation based on the Commissions' clarifications. While the content of the (draft) FAQ itself is not binding, it too has the potential to have a disruptive impact on businesses that have run their CSRD scoping and compliance processes based on their existing understanding of the legislation and how it is to be applied in practice.
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