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The EU’s New Corporate Sustainability Reporting Directive

In November 2022, the European Parliament and the Council of the EU are adopting the EU’s new Corporate Sustainability Reporting Directive (CSRD), which will significantly enhance and expand sustainability reporting obligations for a broader range of companies.

In 2021, the European Commission published its Proposal for the CSRD with the objective of revising and strengthening the rules of the EU’s current Non-Financial Reporting Directive (NFRD). Currently,

the NFRD provides rules on the disclosure of non-financial and diversity information that must be complied with by large companies listed in the NFRD, banks, and insurance companies with more than 500 employees. The covered companies are required to include in their management reports a non-financial statement containing information on the policies they implement concerning “environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters”.

The new CSRD will apply to all large EU companies, including EU subsidiaries of non-EU parent companies, and, as a novelty, to small and medium enterprises (SMEs) listed on regulated markets. Importantly, the CSRD will also have an impact on non-EU undertakings with annual EU-generated revenues in excess of EUR 150 million and that have either a large or listed EU subsidiary or a significant EU branch generating a net turnover of more than EUR 40 million in the EU.

Companies covered by the CSRD will have to comply with the forthcoming European Sustainability Reporting Standards (ESRS), which are still being developed by the European Financial Reporting Advisory Group (EFRAG). The CSRD will require covered companies to report on corporate sustainability in a dedicated section of the company’s management report, which must be made publicly available. Concerning non-EU undertakings, the CSRD will require the publication of a sustainability report in accordance with specific disclosure standards, which are set to be developed in an Implementing Act. Sustainability reports issued by non-EU undertakings have to include information on their impact “regarding social and environmental matters”.

Following the entry into force of the new CSRD, the new rules will only start applying in stages: In 2024 for companies already subject to the current reporting obligations, in 2025 for large companies currently not subject to the reporting obligations, and, in 2026, for SMEs.

Possible action

As under RED II, the key elements of the CSRD, namely the European Sustainability Reporting Standards, are still under development and the specific disclosure standards for non-EU undertakings will only be set in a future Implementing Act. Therefore, the CPOPC and individual member countries, such as Malaysia, should engage with the EU regarding the CSRD and the future implementing rules, which will have a significant impact on a broad range of companies operating in the EU. In the meantime, companies should prepare to ensure compliance with the new reporting obligations.

Prepared by MPOC Europe

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