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Freshfields Risk & Compliance

| 4 minutes read
Reposted from Freshfields Sustainability

Expanding ESG reporting: European Commission publishes draft for new Corporate Sustainability Reporting Directive

In 2020 the European Commission conducted a comprehensive review of the Non-Financial Reporting Directive (NFRD). Then in April this year, the Commission published its draft for a Corporate Sustainability Reporting Directive (CSRD), which will replace the current NFRD. The CSRD imposes new duties on many corporates across the EU and is proposed to be effective for financial years beginning as of 1 January 2023.

Context and scope – more companies obliged to report

The planned CSRD forms part of the EU’s efforts to integrate sustainability and COVID-19 recovery (‘Building back better’) within EU law. It is smartly intertwined with many other recent EU legislative frameworks, such as the EU’s Taxonomy Regulation and the Sustainable Finance Disclosure Regulation.

While at present the NFRD only applies to large public-interest entities with more than 500 employees, the Commission proposes to extend the scope of the CSRD to:

  • all large companies, whether listed or not; and
  • all companies listed on EU regulated markets, with the sole exception of listed micro-companies. 

'Large companies' are those that exceed at least two of the following three criteria:

  • a balance sheet total of €20m;
  • a net turnover of €40m; and
  • an average number of employees during the financial year of more than 250.

According to the proposal, 'listed companies' would include companies not established in the EU that are listed on EU regulated markets. Although listed small and medium-sized enterprises (SMEs) would fall within the scope of the Directive as of 1 January 2026, the Commission clarifies that separate, proportionate standards will be developed and tailored to the capacities and resources of such companies. 

Large banks and insurance corporations remain subject to the reporting duties under the CSRD. According to the Commission, the proposed broadened scope of the Directive would require that nearly 49,000 companies would have to comply with the EU sustainability reporting standards, as opposed to approximately 11,000 companies that are currently subject to these obligations.

Expanded sustainability topics to report on

The CSRD also specifies the topics that corporates will have to report on:

  • Leaving aside the four broad areas addressed by the NFRD – namely environmental, social and employee-related matters, respect for human rights, anti-corruption and bribery matters – the Commission further specifies the content of sustainability-related information, referring to the EU-coined term ESG: 
    • Environmental matters shall comprise, among other things, climate change mitigation, water and marine resources, and biodiversity. 
    • Social information shall comprise, among other things, gender equality, working conditions and respect for human rights as laid down in international human rights treaties. 
    • Reporting on governance criteria shall address, among other things, anti-bribery and corruption, lobbying activities, payment practices with business partners, internal risk and control management as well as the role of a corporation’s bodies regarding sustainability issues and their composition.
  • In addition, sustainability reporting is intended to include information on intangible assets, such as intellectual, human, social and relationship capital. 'Intangibles' shall cover non-physical resources that contribute to the undertaking’s value creation.
  • The CSRD requires companies to also report on: 
    • the principal actual or potential adverse impacts connected with the undertaking’s value chain, including its own operations, its products and services, its business relationships and its supply chains; and 
    • any actions taken, and the result of such actions, to prevent, mitigate or remediate actual or potential adverse impacts. Thus, the draft CSRD foresees similar reporting duties as suggested by the European Parliament’s draft for a Supply Chain Due Diligence Directive. It currently seems unclear whether there will be a consolidation of reporting duties under the different EU frameworks, which would significantly facilitate companies’ reporting processes.
  • For listed companies, the CSRD explicitly requires the reference to gender in the description of the diversity policy applied by the undertaking in relation to its administrative, management and supervisory bodies, whereas the NFRD left flexibility on which diversity topic to report on. This clarification ties in with the proposed 'EU Directive on improving the gender balance among non-executive directors of companies listed on stock exchanges and related measures' from 2012. Hence, the topic might not be entirely off the table.

All sustainability information is to be published as part of the management report in a digital and machine-readable format.

Unified EU-wide reporting standard and audit requirement

The directive aims at introducing a unified EU-wide reporting standard and therefore would put an end to the current ‘alphabet soup’ of various standards (GRI, SASB, IIRC, etc). The Commission will adopt delegated acts to provide for such reporting standards based on the technical advice provided by the European Financial Reporting Advisory Group (EFRAG). The first delegate acts are expected in October 2022.

The CSRD proposal would also, for the first time, implement a general EU-wide audit and assurance requirement for sustainability reporting. While the objective is that a similar level of assurance for financial and sustainability reporting will be achieved in the long run, the proposal starts with a 'limited' assurance requirement.


The proposed CSRD also requires member states to provide for penalties for infringements of the reporting duties when implementing the directive into domestic law. Generally, this is not different from the current NFRD, and countries like Germany, for example, already criminalised false non-financial reporting. Yet the CSRD goes further and requires that member states also impose the following (administrative) sanctions: 

  • a public statement outlining the nature of the violation and indicating the responsible person/entity;
  • a cease-and-desist order against the responsible person/entity; and
  • administrative pecuniary sanctions.


As apparent from many previous blogs on the topic, the EU is currently the global trendsetter and driver with respect to the sustainability transformation. The pace and sheer amount of regulatory action has no precedent. So it would not come as a big surprise if the CSRD also impacts other non-financial reporting regimes elsewhere in the world, fostering global convergence and comparability of sustainability reporting. This is an explicitly communicated goal by the EU itself. 

What becomes evident too is that our clients – including many non-EU based multinationals – are increasingly interested in the EU’s answers to the critical sustainability questions and willing to adapt to 'EU-guided best practices'. Without doubt, the EU’s actions are being tracked across the globe.


human rights, europe, corporate governance, environment, society, sustainability, esg disclosures, reporting obligations