The European Commission has taken a significant step by sending letters to 17 EU member states, initiating infringement procedures due to their failure to fully transpose the new Corporate Sustainability Reporting Directive (CSRD) into national laws. The CSRD represents a critical update to the previous EU Non-Financial Reporting Directive (NFRD), vastly expanding the scope of companies required to provide sustainability disclosures from approximately 12,000 to over 50,000.
This directive is pivotal for enhancing transparency regarding companies' impacts on the environment, human rights, and social standards, as well as their sustainability-related risks. By establishing the European Sustainability Reporting Standards (ESRS), the CSRD introduces comprehensive reporting requirements aimed at standardizing sustainability disclosures across the EU.
The CSRD took effect at the beginning of 2024, initially applying to large public-interest companies with more than 500 employees. These firms are anticipated to release their inaugural sustainability reports by 2025. Subsequently, in 2026, the requirements will extend to companies with more than 250 employees or €50 million in revenue, followed by listed small and medium-sized enterprises (SMEs) a year later.
The Commission's latest communication reveals that 17 member states have not yet complied with the obligation to integrate the CSRD into their national regulations by July 6, 2024. This requirement is essential for ensuring consistent sustainability reporting throughout the EU.
The states receiving warnings include:
The Commission emphasized that without the transposition of these new rules, achieving a necessary level of harmonization in sustainability reporting is unlikely. This lack of compliance will hinder investors from accurately assessing the sustainability performance of companies when making investment decisions.
Under the EU's infringement procedures, the Commission may escalate its actions against member states that fail to implement EU laws. The process begins with a formal notice letter, which may progress to a detailed opinion requiring compliance and could eventually result in a referral to the Court of Justice, potentially leading to penalties for failure to comply.
Following the issuance of these letters, the 17 member states are granted a two-month period to respond and complete the transposition process. If they fail to do so, the Commission may issue a reasoned opinion.
In addition to the CSRD concerns, the Commission has also opened infringement procedures against 26 member states regarding the Renewable Energy Directive. By 2030, this guideline necessitates that renewable energy represents 42.5% of the EU's total energy consumption, in addition to establishing a challenging goal of 45% for renewable sources. As of now, only Denmark has met the July 2024 deadline for fully transposing the directive's provisions, highlighting a broader issue of compliance within the EU.
The new CSRD regulations for sustainability reporting revise the existing standards outlined by the NFRD. This directive significantly expands the range and detail of ESG information that must be disclosed, mandating thorough reporting on ESG impacts, risks, and opportunities. Notably, the CSRD will have a far-reaching global effect, affecting not only EU firms but also numerous corporate groups with non-EU parent companies.
The ESRS, adopted in July 2023, sets out the specific requirements for sustainability disclosures under the CSRD. As the first set of companies is required to report in 2025, the urgency for member states to comply with transposition is underscored.
Member states have until November 26, 2024, to respond and complete their transposition into national law. In the event of non-compliance, the Commission might take additional actions in the infringement procedure to ensure that the CSRD is implemented.
Although the Commission's actions do not directly impact companies, they could potentially accelerate the implementation process of the CSRD within these member states. Companies should monitor these developments closely, as member states might "gold-plate" the CSRD in their domestic laws, potentially extending the scope of companies required to report or imposing additional ESG reporting requirements.
The European Commission's actions underscore the urgency and importance of effective sustainability reporting and compliance across member states. The CSRD aims to foster greater transparency and accountability in corporate sustainability practices, and the failure of these 17 countries to implement the directive threatens to undermine these goals. As the EU moves toward a more sustainable future, adherence to these regulations will be crucial for ensuring that investors can make informed decisions based on accurate sustainability disclosures.