On January 5, 2023, the European Union’s (EU) Corporate Sustainability Reporting Directive went into effect. It focused on three key areas:
(a) Improving reporting on environmental, social, and governance.
(b) Promoting sustainability practices and investments by ensuring that businesses report reliable and comparable sustainability information and help investors re-orient towards more sustainable technologies and industries.
(c) Driving transparency and accountability.
For organizations doing business in the EU, this legislative update outlines the reporting directive and the penalties associated with not following them.
A Background of the Corporate Sustainability Reporting Directive
Scoping Considerations
Double Materiality Assessment
Next Steps After Completing the Double Materiality Assessment
Assurance Requirements
Penalties
Frequently Asked Questions
The Background of the Corporate Sustainability Reporting Directive
The Corporate Sustainability Reporting Directive lays the groundwork for reporting on environmental, social, and governance. Companies will be required to follow the European Sustainability Reporting Standards in terms of disclosures to be provided. The European Sustainability Reporting Standards are primarily made up of two cross-cutting standards. They are the European Sustainability Reporting Standards 1, General Requirements and European Sustainability Reporting Standards 2, General Disclosures. In addition, there are 10 topical standards covering environmental, social, and governance issues (including climate). These standards are sector-agnostic and apply to all eligible companies regardless of their industry.
The European Sustainability Reporting Standards are comprehensive and require consultation and buy-in from the entire company, including subsidiaries and entities based inside and outside the EU. Understanding the European Sustainability Reporting Standards requires a significant investment of time and effort. So too does effectively preparing the required sustainability report. Companies should have confidence that their data and information is reliable, and that any data or internal control gaps are addressed before the sustainability report is completed and reported to the relevant EU member states.
Scoping Considerations
In 2025, large public interest entities and companies with securities listed on EU-regulated markets that have over 500 employes will publish their first sustainability statement for the years beginning on or after January 1, 2024. These entities are currently subject to reporting requirements under the EU’s Non-Financial Reporting Directive.
The next wave of public interest entities and companies being required to report under the Corporate Sustainability Reporting Directive are large companies that meet at least two of the following criteria on their balance sheet date:
- Net revenue of over €50 million
- Total assets of over €25 million
- Over 250 employees
Given the criteria, many companies in the United States that have operations in Europe are surprised to find out they are in scope. Companies should perform a scope analysis to determine if any of their subsidiaries operating in Europe will fall under the Corporate Sustainability Reporting Directive requirements, and what specific EU member state reporting is needed. Companies in scope are required to report in 2026 on fiscal year 2025. If these companies have not performed this analysis yet, management should prioritize It as reporting requirements are approaching.
Additionally, ultimate non-EU parent companies with a combined group level turnover in the EU of over €150 million in each of the last two consecutive financial years, are required to report in fiscal year 2029 on fiscal year data from 2028. Separate standards for non-EU parent companies are currently being developed and are expected to be issued mid-year in 2026.
Double Materiality Assessment
After completing scoping, the company should focus on performing its double materiality assessment. This crucial element of the Corporate Sustainability Reporting Directive helps companies ensure compliance, allows them to integrate sustainability into their core business strategies, and helps identify which environmental, social, and governance topics are material—a and which ones should be reflected in its sustainability report.
The double materiality assessment identifies material sustainability impacts, risks, and opportunities from a short, medium, and long-term perspective. Double materiality assessments broaden the concept of materiality from solely focusing on financial materiality, to one that provides a view of a company’s impact on society and its stakeholders within its value chain. Impact and financial materiality are not mutually exclusive and are defined in the following ways:
Impact materiality considers how the company affects the environment and society, including impacts directly caused by the company and those linked to its value chain.
Financial materiality considers how sustainability risks and opportunities affect the company financially.
The double materiality assessment is a new concept, and many companies are performing the analysis for the first time. Value chain engagement is especially important as companies need to evaluate their upstream suppliers and the downstream customer impact on its business model. It’s also important that all steps are aligned with the guidelines of the European Sustainability Reporting Standards, since both the process and results are subject to external assurance.
Next Steps After Completing the Double Materiality Assessment
Once companies have completed their double materiality assessment, they should take the following actions: communicate the results to relevant stakeholders, integrate material issues into business strategies, set specific targets and key performance indicators related to the identified material impacts, prepare for sustainability reporting by identifying the relevant data and information to include, and ensure the relevant internal controls are in place. You are required to remediate any gaps identified in data, information, or internal controls. Lastly, companies will need to prepare the sustainability report and have external assurance on its sustainability report prior to submitting to the relevant EU member state.
Assurance Requirements
The Corporate Sustainability Reporting Directive requires companies to obtain independent assurance for their sustainability reports, initially requiring limited assurance. At a to-be-determined date, after the European Commission conducts a feasibility analysis, they will require reasonable assurance.
Penalties
Penalties for not complying with the Corporate Sustainability Reporting Directive include financial fines, public denouncements, orders to change conduct, and in some countries, jail time for company directors. Specific penalties are dependent on the EU member state where the company is operating. Each EU member state has the authority to set their own enforcement actions for non-compliance.
Contact Us Today
For more information on the EU’s Corporate Sustainability Reporting Directive or to learn more about MorganFranklin Consulting’s Environmental, Social, and Governance team, contact us today.
Frequently Asked Questions
Q: What is the purpose of the Corporate Sustainability Reporting Directive?
A: The EU’s Corporate Sustainability Reporting Directive is focused on improving reporting for environmental, social, and governance impacts. It’s also focused on promoting sustainability practices and investments by ensuring that businesses report reliable and comparable sustainability information. The goal: To help investors re-orient towards more sustainable technologies and industries and drive greater transparency and accountability.
Q: What are the scoping considerations for the Corporate Sustainability Reporting Directive?
A: Public interest entities and large companies with listed securities on EU-regulated markets that have over 500 employees are required to publish their first sustainability statement for the years beginning on or after January 1, 2024, and are currently subject to reporting requirements under the EU’s Non-financial Reporting Directive. The second wave of companies in scope are required to report in 2026 on fiscal year 2025. This includes large companies that meet at least two of the following criteria: net revenue of over €50 million, total assets of over €25 million, or they have over 250 employees.
Q: What penalties apply for non-compliance with the Corporate Sustainability Reporting Directive?
A: Penalties for non-compliance include financial fines, public denouncements, orders to change conduct, and even jail time for company directors. Specific penalties are dependent on the country where the company is operating, with each EU member state setting their own penalties for non-compliance.
