EU Parliament expands ESG requirements for SMEs and large companies

On 10th November 2022, the EU Parliament formally adopted The Corporate Sustainability Reporting Directive (CSRD) in a move to make businesses within the EU and those that operate within the EU disclose information on their ESG credentials.

This goes further than the previous piece of legislation known as the Disclosure of Non-financial Information (NFRD) which was largely deemed insufficient and did not go far enough to meet global impacts of climate and social change.

The new piece of legislation (CSRD) will use independent auditing to ensure companies are complying with EU Law. In an effort to develop a comprehensive strategy in line with the European Green Deal, it is a move by the EU to implement more detailed reporting requirements on businesses’ impact on the environment, human rights, and social norms. Below will provide a summary of applicability of the CRSD:

Extending the scope for large companies

The new CSRD will extend a reporting requirement to all large companies, whether listed on the stock markets or not; a shift from the NFRD which only required large listed companies, banks and insurance companies with 500 employees or more to publish an ESG report.

For large listed companies that are already subject to the NFRD, the new rules will come into force from 1st January 2024 with reports due in 2025.

Rules will begin on January 1st, 2025, with reports due in 2026 for businesses that are not currently subject to the NFRD but have more than 250 employees, €40 million in annual revenue, or €20 million in total assets.

Extending the scope to SMEs

Listed SMEs will also now be covered by the legislation however due to previous legislation only applying to large companies, SMEs will have to start complying to the rules from 1st January 2026 with reports due in 2027. SMEs do have the ability to opt-out until 2028.

Applicability to non-EU companies

Non-EU companies with a turnover of €150 million or more will also have to comply which furthers ESG requirements for companies that may have no legal ESG requirements in their jurisdiction. Reporting obligations for non-EU companies will start from 1st January 2028.

How should companies respond?

The EU has made sure that the timescale for the CRSD is reasonable and companies that were not previously subject to the NFRD have sufficient time to implement new ESG requirements. Large companies should start preparing and determine whether they are subject to the new requirements of the CSRD and what the reporting requirements involve in more detail.

Article by George Martin

George is currently undertaking a masters degree in Public International Law at the University of Nottingham. He provides paralegal and research assistance to the legal team at Prospect Law.

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