An Overview of the Corporate Sustainability Reporting Directive

Gizem Bozkurt

Şişecam, Lawyer - Non-EU Operations & Global Investments

1. Introduction to Corporate Sustainability Reporting Directive 

The European Union, which has made pioneering moves in the field of sustainability, has implemented the Corporate Sustainability Reporting Directive (“CSRD”) regulation in line with the goal of becoming the world's first economic power to achieve net zero greenhouse gas emissions by 2025.

Although the Non-Financial Reporting Directive (“NFRD”) has a pioneering quality as it is the first regulation in the European Union that obliges companies to make corporate sustainability reporting for the first time, the CSRD has had a significant impact on the corporate world as it requires companies to periodically disclose their environmental, social and governance (“ESG”) impacts to the public in certain standards based on the NFRD.

Therefore, certain reporting standards are developed by the European Financial Reporting Advisory Group (“EFRAG”) in order to ensure that organizations within the scope of the CRSD conduct their corporate sustainability reporting in accordance with certain standards. The European Sustainability Reporting Standards (“ESRS”) standards published in sets by EFRAG provide guidance for the periodic reporting of companies within the scope of the CRSD and also standardize the reports to be disclosed to the public.

In summary, CSRD is a European Union regulation that aims to integrate sustainability into corporate activities by making sustainability reporting mandatory, leaving reporting and public disclosure in the field of sustainability out of the companies' own initiative.

2. Scope of the CSRD

As indicated, the ESG reporting obligation of companies in the European Union is based on the NFRD. Although the NFRD has a pioneering quality as it is the first regulation that imposes the obligation of sustainability reporting on companies, the directive has been highly criticized due to its very narrow scope and the fact that it addresses a very small number of companies even in the European Union. As a matter of fact, the NFRD only covers approximately 11,000 companies working in public interest and employing more than 500 employees.

Therefore, the narrow scope of the NFRD has been considerably expanded with the CSRD and the corporate sustainability approach has moved beyond the borders of the European Union to an international scale. According to the CSRD, there are two main groups of companies that are obliged to report on sustainability: European Union companies and Non-European Union companies.  These company groups are as follows[1]:

2.1. EU Companies

2.1.1. Companies Already Subject to the NFRD

The first group of companies covered by the CSRD are those that are already required to report according to the NFRD. These companies are listed companies with more than 500 employees, banks, insurance companies and organizations recognized by national authorities as public benefit organizations.

2.1.2. All Large Companies

EU companies and EU consolidated groups that meet two of the following criteria are covered by the CSRD.[2]

- 250 employees and/or

- 40 million Euro Turonover and/or

- 20 million Total Assets

2.1.3 Listed Small and Medium Enterprises (“SMEs”)

Companies listed in European regulated markets and small and non-complex- credit insurances and captive insurance entities are in scope of the Directive, whereas micro-undertakings are excluded. micro-undertakings meet two of the following criteria.[3]

- Less than 10 employees.

- Less than 350,000 million Euro Turnover

- Less than 700,000 million Euro Total Assets

2.2. Non-EU Companies

The CSRD not only increased the number of companies covered but also included non-EU companies in the scope of the directive if they meet certain criteria. Companies that meet the following criteria are included in the scope of reporting obligation under the CSRD:

2.2.1. Companies whose securities are traded on an EU regulated market

Any non-EU undertaking whose securities are admitted to trading on an EU regulated market is obliged to report under the directive, unless it is a “micro-enterprise” (refer to section 2.1.3).

2.2.2. Companies that do not have any securities traded on an EU regulated market

Any non-EU undertaking that does not have any securities admitted to trading on an EU regulated market but meets the criteria listed below is covered by the directive.

- has an annual net turnover in the EU at consolidated or individual level exceeding €150 million for each of the last two consecutive financial years; and

- a large EU subsidiary subject to CSRD requirements (refer to section 2.2.2) or

- Non-Eu companies with an EU branch in the EU with a net turnover of over €40 million are included in the scope of the directive.

3. Timeline of the CSRD

As mentioned, with the CSRD, the understanding of corporate sustainability has expanded to an international arena and more than 50,000 companies have been included in the scope of the directive. Accordingly, although the CSRD entered into force on January 5, 2023, the reporting obligations of the companies within the scope of the directive are spread over a certain period of time. In accordance with the CSRD, companies within the scope of the directive will report in accordance with the following timeline between 2024 and 2029.[4]

Phase One: Beginning in the 2024 financial year, followed by reporting in 2025

Companies with more than 500 employees and large companies already subject to the NFRD will submit their sustainability reports for 2024 in 2025. These companies will be the first group of companies to report according to the ESRS standards set out under the CSRD.

Phase Two: Beginning in the 2025 financial year, followed by reporting in 2026

From this phase onwards, the first group of companies that have not previously been subject to the NFDR will be required to comply with the CSRD requirements. These companies are large companies that fulfil at least two of the following criteria

- 250 employees and/or

- 40 million Euro Turnover and/or

- 20 million Euro Total Assets

Companies in the second phase will start reporting according to CSRD requirements for the financial year 2025 and publish their reports in 2026.

Phase Three: Beginning in the 2026 financial year, followed by reporting in 2027

All small and medium-sized EU companies and non-EU companies whose securities are traded on an EU regulated market will be subject to the reporting obligation under the directive from 2026. However, the directive grants these companies a two-year exemption if they can provide a reasonable explanation as to why the required sustainability information is not included in their management reports. In other words, if the necessary conditions are met, these companies will be able to report for the financial year 2028 in 2029.

Phase Four: Beginning in the 2027 financial year, followed by reporting in 2028

The last stage of reporting concerns non-EU companies. Non-EU companies that do not have any securities traded on an EU regulated market but are covered by the directive (refer to section 2.2.2) will be obliged to report on going concern by 2028. 

4. Non-Compliance with CSRD and Responsibility of Company Directors

Pursuant to the CSRD, there is no specific regulation on the sanctions to be applied in case of non-fulfilment of the reporting obligations by companies within the scope of the directive.  The supervision and enforcement of the reporting obligations imposed on companies by the CSRD is left to the domestic law and regulatory authorities of each country. In other words, the legal and criminal sanctions to be imposed on companies that are within the scope of the directive but do not report at all or report incompletely or inaccurately in accordance with the CSRD will be determined according to the domestic laws of the countries.

In this respect, the countries covered by the directive are required to prepare a domestic law regulating the implementation and supervision of the CSRD and to designate judicial or administrative bodies to fulfil the task of supervision under this directive.

In a similar approach, there is no direct criminal liability for company executives under the CSRD. However, due to their positions, company executives have primary responsibility for their companies' compliance with the CSRD.

As the current situation, France is the only country that has transposed the CSRD into its domestic law. With the amendments made in the French Commercial Code[5], the reporting obligations of companies within the scope of CSRD are discussed in detail and it is emphasised in many places that the reports of companies should be audited by external auditors. In addition, penal sanctions are regulated for company managers in case of failure to fulfil reporting obligations properly. For example, if a company fails to appoint an independent auditor or an independent third-party organisation for CSRD reporting, company directors may be imprisoned for two years and fined up to EUR 30,000. Similarly, in the event that the external auditors appointed for reporting are not provided with the necessary information and the duties of the auditors are obstructed, imprisonment for five years and a fine of up to EUR 75,000 are clearly regulated in the text of the law.

5. Conclusion

The CSRD has opened up a new perspective to the business world with the regulations it introduces and the obligations it imposes on the companies it covers. Under the CSRD, sustainability has ceased to be a mere formality for companies and has become an obligation that shapes the future of companies. As a result of the CSRD, transparency and sustainability have become the key points for companies to gain a competitive advantage.

This transformation introduced by the CSRD covers not only European Union companies but also all global companies in the global procurement supply chain. In this context, Turkish companies need to accept the requirements of this new era and take action for green transformation in order to survive on a global scale.