CSRD implementation removes GP hurdle

The European Council’s approval of the Corporate Sustainability Reporting Directive (CSRD) on 28 November has reduced the burden upon GPs to solicit sustainability data from portfolio companies.

Other advantages of streamlining the reporting standards include more transparency and more assistance for financial market participants who are in scope of the EU’s SFDR and taxonomy legislation.

A broader horizon

The CSRD is an updated version of the Non-Financial Reporting Directive (NFRD) and applies to a broader scope of undertakings. These will now include:

• Entities with securities listed on EU regulated markets;
• Listed or unlisted undertakings meeting at least two of the following (this applies to EU undertakings and EU subsidiaries of a non-EU entity):
  • >250 employees
  • > €40m turnover
  • > €20m total assets

• SMEs with transferable securities on an EU-regulated market from 1 January 2026. Entities may opt out until 2028.
  

It is worth noting that UK entities are not automatically included in the scope of the legislation post-Brexit. However, it is predicted that similar legislation will be implemented in the UK in due course, with a commitment to mirror the EU’s taxonomy.

There is also an equivalence regime in place whereby certain non-EU disclosure requirements can be recognised as complying with CSRD. While this equivalence is not yet measurable and there is no guarantee that the equivalence will be granted to non-EU companies, it does incentivize an alignment between regulations which are developed elsewhere.

The ins and outs

Additional requirements to the former NFRD include the “double materiality” concept, which measures both incoming and outgoing sustainability impacts. Incoming factors should be measured using the environmental and social determiners that can affect the entity itself, while outgoing factors are measurable using the activities which have the potential to affect the environment and wider society.

Another addition, which was optional in the NFRD, is the obligation of audit assurance requirements. This means that reported sustainability information provided by companies will be audited accordingly to prevent greenwashing. This can be performed by assurance service providers. For now, this requirement will be limited until 2026 when the EU will tighten its surveillance prerequisites.

More information on ESG regulation and its history in the UK and EU can be found here.