The EU’s new Corporate Sustainability Reporting Directive (CSRD) came into effect on 5 January 2023, modernising regulations for social and environmental company reporting. But how will it affect UK businesses?
The new legislation aims to increase transparency for investors and stakeholders to assess investment risks associated with sustainability within a company. The CSRD is seen as a crucial step towards a sustainable and responsible business environment, focused on society and the planet.
Who is in scope for CSRD?
CSRD will apply to all large EU companies (including EU subsidiaries of non-EU parent companies) exceeding at least two of the following criteria:
- More than 250 employees
- A turnover of more than €40 million
- Total assets of €20 million
CSRD will also apply to companies with securities listed on an EU-regulated market, regardless of whether the issuer is established in the EU or in a non-EU country. This means that even small and medium-sized enterprises (SMEs) that are listed will be affected, although they have the option to opt out until 2028 during a transitional period.
Significant EU undertakings
In addition, CSRD will affect non-EU companies that have an annual revenue of over €150 million generated from EU operations, and either:
- Have a large or listed subsidiary in the EU
- A significant branch in the EU generating at least €40 million in revenue
What does CSRD mean for UK companies?
First and foremost, if your company was already obligated to report under the Non-Financial Reporting Directive (NFRD), then it will also be required to report under the CSRD.
On the other hand, if your company wasn’t previously subject to NFRD reporting requirements, then there are two potential scenarios in which the disclosure responsibilities outlined in the CSRD could impact your business.
If your UK company has securities listed on an EU-regulated market.
If your UK company has a net turnover in the EU of over €150 million for each of the last two consecutive financial years and has either:
- An EU subsidiary which has securities listed on an EU regulated market; or is classed as a large undertaking and meets two of the following criteria:
- Total assets of €20 million
- Net turnover of €40 million
- An average of 250 employees over the financial year
- An EU branch which has generated a net turnover of more than €40 million in the previous financial year.
Who is expected to report if eligible?
Starting in 2028, the subsidiary or branch in question will have the responsibility of producing consolidated sustainability reports, modelled after the CSRD requirements, for non-EU undertakings.
Being forward thinking
For UK businesses that are not subject to the CSRD, it’s important to recognise how this regulation will serve as a model for sustainability initiatives worldwide, with the likelihood of further expansion or localised regulations.
In response to the need for a sustainable finance leadership, UK MPs have urged the development of a comprehensive ESG strategy. Moreover, the Financial Conduct Authority (FCA) is looking to introduce the Sustainability Disclosure Requirements (SDR), which could be an indication of the future.
Regulations are likely to become more comprehensive, with reporting requirements and sustainability metrics monitoring and tracking initiatives increasing over time. The sooner your company can adopt and adjust, the better.
The good news? Beyond the obligatory mandates, sustainability reporting can provide wider advantages too, such as increased transparency with stakeholders who are eager to partner with environmentally responsible companies. Furthermore, it can help in identifying areas of improvement and growth opportunities within your organisation.
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