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Freshfields Sustainability

| 7 minutes read

ESG disclosure requirements - are you ready for the EU corporate sustainability reporting directive?

Sustainability reporting is the phrase on everyone’s lips at the moment, and with good reason. The climate crisis is the global crisis of our time. The need to transition to net zero and the resulting shift towards sustainable finance means that investors need good-quality, reliable and comparable sustainability-related information to make their investment decisions. Regulators across the globe are demanding transparent disclosures to combat “greenwashing” claims, and forthcoming international and regional sustainability reporting standards will require corporates to evaluate ESG factors across their entire value chain (see our blogs on the SEC’s new climate disclosure proposal and Hope for a new paradigm? Progress towards a global baseline of sustainability disclosure standards).

The European Union (the EU) has required large public interest companies to report on non-financial matters for some time, since the adoption of the EU Non-Financial Reporting Directive (Directive 2014/95/EU) (the NFRD), albeit on a very general level only and with no actual sanctions in case of non-compliance. The NFRD established periodic reporting requirements for, amongst other things, environmental and social matters and treatment of employees, respect for human rights, anti-corruption and bribery, and diversity on company boards. However, investors and other users of the NFRD have complained for a long time about the lack of qualitative and comparable information. That’s why changes are coming soon in the EU, and the new rules will be more expansive in scope, reach and enforcement. Corporates, both EU and non-EU, will need to be ready for sustainability-related reporting under the new EU rules. Here is what you need to know:

A snapshot of the CSRD

In June 2022 the European Parliament and the Council reached a final political agreement on the draft text of the EU Corporate Sustainability Reporting Directive (the CSRD), which will replace the NFRD and extend its scope. We expect the EU to formally adopt the CSRD by the end of this year, with the first fiscal year requiring CSRD compliant reporting being 2024.

The proposed CSRD aims to improve the flow of sustainability information through the financial value chain. It revises and strengthens the rules introduced by the NFRD, to ensure that companies report reliable and comparable sustainability information that investors and other stakeholders need to make their investment decisions and to fulfil their own reporting obligations.

Complex requirements and potential penalties for non-compliance means that corporates (both EU and non-EU) should start preparing for CSRD reporting now even though the final regulations are not yet in place.

So what’s new? 

The CSRD extends and strengthens the NFRD though a range of parameters:  


: Reporting obligations under the CSRD will apply to:

All “large” undertakings in the EU exceeding at least two of the following three criteria: more than 250 employees, a turnover of more than €40m and/or total assets of €20m.

Non-EU companies with securities listed on EU regulated markets (other than listed micro-undertakings).

Large unlisted non-EU companies generating a net turnover of €150m in the EU with at least one subsidiary or branch in the EU.

Small and medium-sized undertakings with securities listed on EU regulated markets that are not micro-undertakings (i.e. EU companies with less than 10 employees, a turnover of less than €0.7m and/or total assets of less than €0.35m).

Double materiality perspective: 

The NFRD introduced a requirement to report about how sustainability issues affect companies’ business and financial position (outside-in perspective) and about their own impact on people and the environment (inside-out perspective). In the CSRD this requirement is further developed through its incorporation into binding reporting standards.

Binding reporting standards:ESRS). Reporting will cover a range of indicators including greenhouse gas emissions (with mandatory disclosure of Scope 1, 2 and 3 emissions), water use, biodiversity and environmental impact (in line with the EU taxonomy objectives); social-related matters such as workers in the value chain and affected communities; and governance-related matters such as business ethics, conduct and board diversity. Reporting will also be expanded to focus on sustainable practices including reporting on sustainability risks and opportunities, business model and strategy, targets, role of the board and management and the value chain. The ESRS are currently being developed by the European Financial Reporting Advisory Group and will eventually be adopted by the European Commission by way of delegated acts. A first set of 13 sector agnostic ESRS covering general disclosure requirements across the ESG landscape are now open for public consultation until 8 August 2022. More than 40 other sector specific ESRS are expected to be published in the course of 2022/early 2023.

Similar to the NFRD, under the proposed CSRD affected companies will have to report information on a full range of environmental, social and governance issues relevant to their business. Under the NFRD companies are free to choose their reporting standards. The CSRD, however, will require companies to report according to mandatory European Sustainability Reporting Standards (

Publication formats and place: 

While under the NFRD companies have been free to choose where and how to publish non-financial information, the CSRD requires disclosure to be made in the management report as a single separately identifiable section, in a digital and machine-readable format. The information will also need to be digitally tagged so that it can feed into the European Single Access Point. 


Unlike the NFRD, the CSRD requires mandatory audit and assurance of the sustainability report by qualified third parties.

Impact on non-EU corporates

EU subsidiaries of a non-EU parent undertaking may be exempt from certain reporting obligations under CSRD where those EU subsidiaries are included in the consolidated management report of the parent undertaking, and that management report is drawn up in accordance with CSRD requirements or in a manner considered equivalent to EU sustainability reporting standards.

Alternatively, an in-scope subsidiary or branch of a large non-EU company generating a net turnover of at least €150m in the EU may be exempt from reporting sustainability information in the consolidated management report may instead publish a separate consolidated sustainability report that meets the requirements of CSRD or equivalent requirements. This might be a preferable option, where the exemption is available, for non-EU parent undertakings that are not used to including such information in their management reports. To benefit from this exemption, the relevant subsidiary or branch will be obliged to publish free of charge to the public the consolidated sustainability report and a related assurance opinion, on a “comply or explain” basis.

What if an in-scope company does not comply with the CSRD? 

The EU Commission’s draft of the CSRD foresaw the implementation of a set of penalties for non-compliance with the CSRD requirements. Penalties included fines, cease and desist orders and “naming and shaming” by the respective regulator (see our previous blog here). However, the final draft of the CSRD dropped all binding penalties, aligning with the current status under the NFRD. EU member states will therefore continue to have discretion to set forth the desired types and amounts of sanctions (if at all). Germany, for example, decided on including criminal sanctions with respect to non-compliance with the previous regulations under the NFRD.

What are the next steps?

It is expected that the CSRD will be formally adopted in 2022 and transposed into national laws of EU member states by early 2024. Local implementation may vary between EU member states to the extent allowed by discretionary provisions of the CSRD. The ESRS reporting standards are due to be finalized and adopted by the European Commission by June 2023 although this is a very ambitious deadline which will be difficult to meet.

Accordingly, CSRD requirements will apply to large companies that are already subject to NFRD from financial years starting 1 January 2024, with first corporate reports expected in 2025. For newly in-scope companies, it will apply from financial years starting on or after 1 January 2025 (save for listed SMEs, small and non-complex credit institutions and captive insurance undertakings, which will be required to report as of 2026 but may opt-out until 2028).

How to prepare for the new paradigm?  


In addition to these EU requirements, businesses will need to bear in mind other international sustainability-related reporting proposals which are being developed in parallel. Global businesses may find themselves having to navigate different standards and requirements across regions, with differing disclosure requirements, terminology, definitions and concepts. Although EU regulators are pledging to develop standards that would be “interoperable” and claiming a close cooperation with international standard-setters, it remains to be seen how these multiple standards and approaches (the EU being the only proponent of double materiality disclosure) will work in practice. You can find more information about the recent sustainability-related proposals from the US Securities and Exchange Commission and the International Sustainability Standards Board in our blog Hope for a new paradigm? Progress towards a global baseline of sustainability disclosure standards.

After the CSRD and related ESRS come into effect, sustainability-related disclosures will require each company to develop a deep understanding of sustainability-related risks and opportunities. Preparation for, and compliance with, these requirements will need to be prioritized on the board agenda and linked further from the boardroom down to internal responsibility clusters. It may then be necessary to adjust internal reporting and responsibility lines to set up cross-functional teams in charge of integrating sustainability reporting with financial reporting and tracking connectivity between them.

For companies with complex background on both sides of the double materiality lens it may be sensible to conduct a dry run in CSRD compliant reporting even before actual reporting obligations kick in. Within this exercise the most important topics for the business will be crystallized in advance of mandatory reporting in 2025. Moreover, this may help to identify any internal information flow bottlenecks and data gaps that will need to be addressed prior to mandatory reporting.

Meanwhile, it may be useful to share your views on the ESRS and their expected impact through the ongoing public consultation.

Feel free to reach out to your usual Freshfields contact if you would like to discuss this development, or the implications of preparing to report under the CSRD, in more detail.


sustainable finance