CSRD preparation for legal teams
November 2022
On November 28, 2022, the European Union (EU) formally adopted the Corporate Sustainability Reporting Directive which requires companies operating in the EU to publicly disclose and report on environmental, social affairs and governance issues. It will come into force 20 days later and EU member states will then have 18 months to incorporate it into their own national laws. The first set of draft European Sustainability Reporting Standards, a significant part of the compliance and reporting framework, were submitted to the European Commission on November 23, 2022. Companies will be facing new, wider and more complex sustainability reporting obligations soon. In this context, legal teams need to understand the content and work with sustainability and corporate reporting teams to ensure the approaches and methodologies undertaken are compliant. The legal, commercial and litigation risks also need to be considered should those methods be challenged.
CSRD amends a number of existing Directives and is very much a gamechanger for the world of business not least because it applies to all large companies in Europe. This is judged on two of the following three criteria: more than 250 employees, more than 40 million euros in revenue and more than 20 million euros in assets. It will also apply to SMEs whose securities are traded on a regulated market in the EU. Critically, CSRD applies even to subsidiaries of non-EU based companies. Global businesses with EU companies will need to consider corporate governance and oversight protocols for local subsidiaries - there are regulatory requirements for them to demonstrate oversight of sustainability matters.
As a result, CSRD is expected to impact nearly 50,000 companies operating in the EU and its requirements will have legal implications for organisations worldwide. In fact, it’s fair to say that CSRD has the potential to mainstream ESG reporting globally, especially when combined with other existing and proposed frameworks such as those developed by the Taskforce on Climate-related Financial Disclosures (TCFD), or the International Sustainability Standards Board (ISSB), as well as the requirements stemming from the proposed EU Corporate Sustainability Due Diligence Directive.
Already, many companies are finding it hard to keep up with the pace of this regulatory change. Yet, given that CSRD will be legally enforceable throughout the EU within 18 months – with companies facing potential penalties if they do not comply – companies must start preparing now to reform their business operating models, corporate governance and legal entity structures in order to account for and report on ESG. Those that don’t start planning now to assess the impact of the new requirements are at significant risk of not having sufficient time to comply.
What then, do general counsels and legal teams have to know right now about CSRD?
We would highlight six immediate takeaways.
- Governments and Regulators are demanding real transparency about companies’ environmental, social, and governance (ESG) risks and opportunities
- CSRD is no box ticking exercise. It has been designed to deliver real change in the way EU-based companies operate. Companies will have to report on several ESG areas in accordance with very detailed EU reporting standards.
- Determining whether a company or its subsidiary is captured by the scope of the rules is complex - it will impact both EU and non-EU entities
- For those included, the need to report at an EU and / or global consolidated level, the standards required, and the effective date when reporting obligations start can differ; this will be dependent on the organisation's business activities and the geographies where commercial operations are based
- The requirements are extensive and will require companies to: report details of their operating model; engage with stakeholders and collect data across their value chain (suppliers, customers etc); as well as undertake double materiality assessments
Mandated assurance requirements will heighten the level of scrutiny. Never before have organisations had to disclose so much about their business.
- CSRD greatly increases reporting requirements. Not only will it bring five times more entities than currently affected by EU non-financial reporting requirements into scope, but what organisations are required to report on is also much wider
What companies need to prepare for right now
CSRD is going to require organisations to expand the scope of their reporting standards. This will include examining the corporate structure to determine which legal entities are in scope and why, what information has to be reported in each case and under which standards, for inclusion in the reporting framework. By extension it will also then include a review of reporting strategy, non-financial data gathering, the drafting and implementing of governance policies and controls. It may also involve identifying and implementing operational and organisational changes and understanding potential litigation risk due to enhanced reporting.
Having reassessed and adapted their new reporting requirements, companies will have to implement them across the wider corporate structure.
Directors of local subsidiaries could face sanction for non-compliance.
How legal teams can help organisations get ready for CSRD
- Ensure they are part of the multidisciplinary approach to ensure that regulatory compliance is achieved
- Work with Sustainability and Corporate Reporting teams to ensure that the methodologies, controls and processes are based in the legal requirements and can withstand third party scrutiny
- Work with directors of local EU subsidiary boards to review corporate governance protocols and policies to demonstrate oversight responsibilities
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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Global Sustainability Tax, Legal and Workforce Leader, Partner, PwC United Kingdom
Tel: +44 20 7583 5000
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