Corporate Sustainability Reporting Directive (CSRD)

The Corporate Sustainability Reporting Directive (“CSRD”) is the EU directive that aims to improve the quality and comparability of sustainability reporting by companies. It will amend and expand the existing Non-Financial Reporting Directive (“NFRD”).

The CSRD requires companies to disclose sustainability performances in their management report, as a part of their annual report. This sustainability report must be provided in a standard format, which should make it easier for investors and other stakeholders to assess the sustainability performances of companies and compare them with other companies. The CSRD further requires companies to have their sustainability disclosure audited, and the disclosures must be digitally “tagged” so that they can be collected in an upcoming EU database.

The Dutch government submitted the “Sustainability Reporting Directive Implementation Act” (Wet implementatie richtlijn duurzaamheidsrapportering) for consultation on 17 July 2023. This legislative proposal will transpose the CSRD into national legislation by amending (amongst others) the Accounting Organizations Supervision Act (Wet toezicht accountantsorganisaties), the Financial Supervision Act (Wet financieel toezicht) and the Dutch Civil Code (Burgerlijk Wetboek).

Scope of CSRD

The CSRD will - through transposition by the Implementation Act – come into force in phases in the next few years. The NFRD already requires Public-Interest Entities (“PIEs”) with more than 500 employees to disclose their sustainability performance. These PIEs remain subject to the disclosure requirements under the upcoming CSRD. In addition, the CSRD will expand the scope of sustainability reporting meaning that starting in 2025, large enterprises will be required to disclose their sustainability performance. As of 2026, Small and Medium-sized Enterprises (so-called “SME’s”) will also be required to report under the CSRD. Please refer to the chart below for the criteria that a large, medium and small enterprise must meet, as well as the dates on which these reporting requirements will take effect.

This white paper does not address the reporting requirements for group companies and non-EU enterprises. We remind readers that these enterprises will eventually also be required to report under the CSRD.

For enterprises in the Real Estate and Construction sector, the CSRD applies when they meet all criteria set for a type of enterprise. The common theme of the reporting requirements under the CSRD is that over time the scope will be extended to smaller enterprises.

Reporting requirements CSRD

Enterprises that fall within the scope of the CSRD are required to prepare a sustainability report and add this report as a clearly identifiable section in their management report. Article 19a and Article 29a of the CSRD specify the topics on which they must report for various types of enterprises.

The reporting requirements are detailed in standards, called the “European Sustainability Reporting Standards”(“ESRS”). The European Commission has appointed the EFRAG (European Financial Reporting Advisory Group) to provide first drafts of the ESRS. The first set of ESRS are included in a delegated regulation that was adopted by the European Commission on 31 July 2023.

Based on these ESRS, all enterprises are required to report using at least two general standards: General Requirements (ESRS 1) and General Disclosures (ESRS 2). These general ESRS address the “double materiality assessment.” In other words, this principle means that enterprises must, on the one hand, report on the impact of the enterprise on society and the environment (external impact), and, on the other hand, report on the impact of sustainability issues in the (financial) operation of the enterprise (internal impact).

We point out that reporting standards have been established for each ESG topic. These ESRS include four sets for Environmental, four sets for Social and one set for Governance. The type of activity of an enterprise determine which set of ESRS apply.

The aforementioned ESRS are sector-independent. The EFRAG will establish sector-specific ESRS in the future. One of the sectors identified by the European Commission in this regard is the Real Estate sector. ESRS for the Real Estate sector are not yet in preparation. At the time of writing, it is not yet known when preparation of these ESRS will commence. It is expected that enterprises in other sectors than real estate, enterprises that either use real estate (e.g. under a lease) or own real estate for the operation of their business, will also be required to disclose on the real estate they use or own in their sustainability reporting based on the ESRS that are already adopted.

Finally, specific ESRS for small and mediumsized enterprises, and specific ESRS for non-EU enterprises will be adopted in the future.

Criticism on reporting standards

In a news article of the Financieel Dagblad dated 19 July 2023, major Dutch pension funds expressed their dissatisfaction with a new proposal by the European Commission to amend the ESRS, as initially drafted by EFRAG. The European Commission’s amendments stem from concerns that were raised by enterprises regarding the expected heavy reporting burden. Almost all ESRS are subject to a materiality assessment, which effectively means that ESRS may not apply if an enterprise deems the reporting standards not applicable to its activities.

The Dutch pension funds expressed concerns that they need information to report under the SFDR (chapter 2 of this whitepaper), but the information that enterprises provide under the CSRD is often insufficient to complete their reporting. The addition of a materiality assessment to the CSRD would therefore be incompatible with the reporting requirements under the SFDR. The European Commission eventually adopted the ESRS, including the materiality assessment. We are curious to see how the materiality assessment under the ESRS will develop in the future. In our opinion, this shows that these directives and regulations are still in a state of flux. In our opinion, the harmonized sustainability reporting framework envisioned by the European Commission is still work in progress.