Directive of the European Parliament and of the Council (EU) 2022/2464 (CSRD) Corporate Sustainability Reporting Directive of December 14, 2022, amending Regulation (EU) No. 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU 

This directive extends the obligation to report sustainability information to a wider range of companies, including:

● All large businesses:

This point applies to all undertakings that meet the definition of ‘large undertaking’ under Directive 2013/34/EU. This definition takes into account factors such as balance sheet total, net turnover and average number of employees during the accounting year. The inclusion of all large undertakings in the reporting obligation is justified by their potential impact on sustainability aspects, including through their value chain.

● All companies (except micro-enterprises) whose securities are traded on a regulated market in the EU:

This category includes all companies whose shares or other securities are listed on a stock exchange in the EU. The exception is micro-enterprises, which are exempt from this obligation. The reason for including these companies is the growing demand from investors for sustainability information. This information allows them to better assess the risks and impacts of their investments and to meet their own sustainability disclosure requirements.

● Credit institutions and insurance companies meeting certain size criteria:

This category includes financial institutions that play a key role in the transition to a sustainable economy. The Directive specifies size criteria for these institutions in order to ensure proportionality of the reporting obligation. The purpose is to enable users of the information to assess the impact of these institutions on society and the environment, as well as the risks they face in relation to sustainability aspects.

● Third-country undertakings whose securities are traded on a regulated EU market or which achieve significant turnover in the EU:

This category targets companies based outside the EU but with significant economic activity within the Union. This includes companies with securities listed on an EU stock exchange and companies with subsidiaries or branches in the EU that achieve a certain turnover. Including these companies in the reporting obligation ensures a level playing field for companies operating in the internal market and supports the responsibility of companies from third countries for their impact on people and the environment in the EU.

The reasons for expanding the reporting obligation are:

1. Growing demand for sustainability information from investors, civil society and other stakeholders:

This growing demand is driving changes in sustainability reporting. Sources cite several factors contributing to this trend:

• Investors are increasingly aware of the financial impacts of ESG factors on their investments. Risks associated with climate change, biodiversity loss, environmental degradation and social issues are becoming significant factors in investment decisions. Investors need quality sustainability information to assess the risks and opportunities associated with their investments.
• A growing number of investment products focused on sustainability is putting pressure on companies to disclose more information about their ESG profile. Investors are looking for investments that align with their values and sustainability goals.
• Civil society, including NGOs, social partners and consumers, is demanding greater responsibility from businesses for their impact on people and the environment. Transparency and accountability are key to building trust between businesses and their stakeholders.

Sources highlight that the current state of sustainability reporting is not sufficient to meet the growing demand. There is the disparity between the information users need and the information businesses provide. This leads to an information gap that prevents investors and other stakeholders from making informed decisions.

2. Improving the comparability and reliability of sustainability information:

Sources emphasize the need introducing common sustainability reporting standardsto ensure their comparability and reliability.

• Lack of common standards leads to businesses using different frameworks and standards, making it difficult to compare their ESG performance.
• Voluntary nature of existing guidelines does not ensure sufficient quality and consistency of reported information.
• The directive introduces mandatory standards a independent verificationto strengthen the credibility and comparability of sustainability information.

Improving the comparability and reliability of sustainability information will enable investors and other stakeholders to better assess ESG risks and opportunities, thereby contributing to more efficient capital allocation.

3. Avoiding inconsistent national rules and strengthening the internal market:

Sources indicate that fragmentation of the sustainability information market could lead to confusion and increased costs for businesses.

• Without harmonised rules at EU level, there could be different national rules for reporting sustainability information.
• That could disadvantage businessesoperating in several Member States and create obstacles to cross-border investment.
• The directive introduces common standards at EU level, thereby strengthening the internal market and reducing the administrative burden for businesses.

Harmonised rules for reporting sustainability information will contribute to creating a level playing field for all businesses in the internal market.

4. Ensuring that businesses are accountable for their impact on people and the environment:

Sources emphasize that better sustainability reporting will strengthen companies' accountability for their ESG impacts.

• Transparent sustainability information will enable stakeholders to better assess the impact of businesses on society and the environment.
• That will increase pressure on businessesto take measures to improve their environmental and social performance.
• Increased transparency will help build trust between businesses and citizens and strengthen their mutual relations.

Responsible corporate behavior is key to achieving the Sustainable Development Goals and transitioning to a more sustainable future.

The directive introduces new sustainability reporting standards, to be developed by the European Financial Reporting Advisory Group (EFRAG). These standards will include information on:

1. Environmental, social, human rights and governance factors:

These factors, abbreviated as ESG (Environmental, Social, Governance), form the core of the concept of sustainability. Sources define them as “sustainability aspects” that include:

• Environmental factors: The business's environmental impacts, such as greenhouse gas emissions, water and energy consumption, pollution and impact on biodiversity.
• Social factors: The business's impacts on people, such as working conditions, respect for human rights, employee health and safety, diversity and inclusion, and relations with communities.
• Human rights factors: Respect and observance of human rights throughout the company's value chain. This includes the prohibition of forced and child labor, respect for freedom of association and collective bargaining, and protection against discrimination.
• Correct factors: The way the business is managed and controlled, including the structure and functioning of the board of directors, risk management, ethics and transparency.

Sources emphasize that information about ESG factors is key to understanding a company's impact on society and the environment.

2. Double materiality:

The concept of dual materiality is one of the fundamental pillars of the Sustainability Reporting Directive. Sources explain it as taking into account two aspects:

• The impact of the company on sustainability aspects: Sources define this aspect as “the impact of a business’s activities on people and the environment.” Businesses must identify and disclose information about their significant negative impacts on environmental and social aspects.
• Impact of sustainability aspects on the business: The sources emphasize that companies must also consider how ESG factors affect their own performance and position. This involves identifying and disclosing information about the risks and opportunities that arise for the company from ESG factors.

Sources emphasize that both aspects of materiality are equally important and businesses must disclose information that is material from both perspectives.

3. Due diligence procedure:

Due diligence is a systematic process that businesses use to identify, prevent, mitigate and remediate their negative impacts on ESG factors.

Sources indicate that this procedure includes:

• Identification and assessment of ESG risks and impacts throughout the company's value chain.
• Adoption of prevention and mitigation measures identified risks and impacts.
• Monitoring and evaluating effectiveness measures taken.
• Disclosure of information about the due diligence process and its results.

Due diligence is key to responsible business behavior and minimizing their negative impacts on society and the environment.

4. Risks and opportunities related to sustainability aspects:

Sources emphasize that ESG factors pose not only risks but also opportunities for businesses.

• Risks: ESG risks are factors that could negatively impact a company's performance, financial stability or reputation. Examples of ESG risks include: physical risks of climate change, changes in legislation and regulation, biodiversity loss and social unrest.
• Opportunities: ESG opportunities are factors that could positively impact a company's performance, competitiveness and sustainability in the long term. Examples of ESG opportunities include: the development and adoption of new technologies, growing demand for sustainable products and services, and improving relations with investors and stakeholders.

Sources say that businesses must identify and disclose information about the significant ESG risks and opportunities they face.

5. Results of sustainability policies:

Sources emphasize that companies must disclose information about the results of their sustainability policies. This includes information about:

• Company-wide sustainability goals and strategies.
• Specific objectives and measures to address individual ESG factors.
• Progress in achieving set goals.
• Challenges and obstaclesthat businesses face when implementing their sustainability policies.

Information on the results of sustainability policies is key to understanding how companies address ESG factors and the impact their activities have on society and the environment.

The directive further provides:

• Verification obligation sustainability information reported by an independent assurance provider,
• Shareholders' rights require a sustainability reporting report from an accredited third party,
• Obligation to publish sustainability information in a clearly identifiable part of the management report.

The directive also highlights the importance of employee involvement into the sustainability reporting process.

The directive aims to improve transparency and accountability of businesses in the area of sustainability and support the transition to a more sustainable economy. Spring