Who will face changes concerning sustainability reporting?

The EU Sustainability Reporting Directive[1] came into force on 5 January 2023. The changes introduced by the so-called CSRD Directive (Corporate Sustainability Reporting Directive) aim to harmonise the standards for reporting information regarding sustainability and increase the comparability of reported data. The adoption of the said directive is also expected to contribute to building a more sustainable economic system in the European Union. In this article, we will outline the main principles and the personal scope of the CSRD Directive.

Genesis of the changes

As a part of the European Green Deal, the European Commission committed in 2019 to revise the provisions of Directive 2013/34/EU regarding the disclosure of non-financial information by companies. The extension and harmonisation of the scope of disclosed information is expected to increase investors’ knowledge of whether the investments, in which they are involved, are sustainable.

Currently, under the provisions of Directive 2013/34/EU (and Directive 2014/95/EU (NFRD) amending the abovementioned act), the following undertakings are required to include a statement on non-financial information in their management reports:

  • large public-interest undertakings exceeding at the balance sheet date the criterion of an average number of 500 employees during the financial year, and
  • public-interest undertakings which are parent undertakings of a large group exceeding at the balance sheet date, on a consolidated basis, the criterion of an average number of 500 employees during the financial year.

However, as a result of the adoption on 14 December 2022 of the CSRD Directive by the European Parliament and the Council of the European Union, which amends the provisions of, amongst others, the aforementioned Directive 2013/34/EU, the scope of entities obliged to indicate sustainability issues in their management reports, including environmental, social and labour aspects, as well as aspects concerning respect for human rights and relating to anti-corruption and anti-bribery, will be, primarily, expanded. In the near future, the European Commission will adopt detailed standards for reporting in the aforementioned areas, making the scope of reporting consistent and uniform across the European Union.

The CSRD Directive entered into force on 5 January 2023 and should now be implemented by the EU Member States, including Poland, within 18 months into national legal orders.

Entities covered by the sustainability reporting

Sustainability reporting obligations will come into force gradually. Their application will be spread in time depending on the category (size) of entities. This means that some entities will have considerably more time to prepare to comply with the new regulations. Ultimately, sustainability reporting will be conducted by:

  • all large undertakings and parent undertakings of large groups, i.e. meeting at least two of the following three criteria at the balance sheet date:
    • balance sheet total exceeding EUR 20 million,
    • net turnover exceeding EUR 40 million,
    • an average number of employees during the financial year of more than 250,
  • small and medium-sized undertakings that are public-interest entities (which at the same time are not micro-undertakings),
  • small and non-complex institutions as defined in Regulation (EU) no 575/2013,
  • subsidiaries and branches of third-country entities meeting the relevant conditions, generating a net turnover of more than EUR 150 million within the EU.

For information purposes we would like to point out that Directive 2013/34/EU recognises as public-interest entities companies whose transferable securities are admitted to trading on a regulated market of any Member State, credit institutions and insurance undertakings, as well as other entities designated by Member States.

...

Below is a list of entities that will have to carry out sustainability reporting, together with an indication of the financial years in which the aforementioned reporting obligation will commence.

SUSTAINABILITY REPORTING OBLIGATION

DATE

(in respect of financial years beginning...)

 THE OBLIGED ENTITIES

on 1 January 2024

or after that date

(first reporting in 2025)

 (i) large undertakings, which are public interest entities, exceeding at the balance sheet date an average number of 500 employees during the financial year;

 

(ii) public-interest entities. which are the parent undertakings of a large group and which exceed at the balance sheet date, on a consolidated basis, the average number of 500 employees during the financial year.

on 1 January 2025

or after that date

(first reporting in 2026)

 (i) remaining large undertakings;

 

(ii) remaining parent undertakings of a large group.

on 1 January 2026

or after that date

(first reporting in 2027)

 (i) small and medium-sized undertakings that are public interest entities and are not micro-undertakings;

 

(ii) small and non-complex institutions as defined in Regulation (EU) no 575/2013, provided that they are large undertakings or are small and medium-sized undertakings that are public-interest entities and are not micro-undertakings;

 

(iii) captive insurance and captive reinsurance undertakings as defined in EU directives provided that they are large undertakings or are small and medium-sized undertakings which are public interest entities and are not micro-undertakings.

Importantly, small and medium-sized public interest undertakings will be allowed to omit the sustainability information in their management reports for the first two years (i.e. in relation to financial years starting before 1 January 2028), but will have to explain in the report why the information has been omitted.

In addition, subsidiaries within groups of undertakings will be exempted from sustainability reporting if such undertaking and its subsidiaries are included in the parent undertaking’s consolidated management report, which implements the requirements for consolidated sustainability reporting. However, this exemption is subject to certain additional conditions, e.g. the exempted subsidiary’s management report should include links to the parent undertaking’s consolidated sustainability report.

Summary

The adoption of the CSRD Directive is one of the further steps being taken within the European Union to create a more sustainable, climate-neutral economy. It is estimated that it will require a total of 50,000 companies across the European Union to report on sustainability matters, almost 10 times the current number.

Entities that already report non-financial information will have little time to prepare for wider sustainability reporting obligations. In addition, at this point there is still no information as to in what form the CSRD Directive will be implemented into Polish law.

For other entities, the time to prepare the relevant procedures in relation to sustainability reporting is longer. Nevertheless, such companies should commence now verifying whether the given company will be covered by the reporting obligation and take the first steps to adapt its procedures and business model to the requirements under the CSRD Directive.

In the next articles we will verify and present further issues related to the entry into force of the CSRD Directive, including the subject of sustainability reporting, the individual reporting standards and the issue of verification of reports by appropriately qualified auditors.

[1] Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) no 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting.