Comment: Doubts Rise Over EU CSRD Preparedness Amid Pressure to Review Rules

It is fair to say that there are growing concerns whether the new EU corporate sustainability reporting requirements are going to have their intended effect of creating greater transparency and accountability of their reporting, or even that they will remain in their current form.

There has been growing push-back from European corporations against the new more detailed reporting requirements under the Corporate Sustainability Reporting Directive (CSRD), the first corporate disclosures for which are due to be published in 2025.

The CSRD requires listed companies to disclose information about the risks and opportunities arising from social and environmental issues against the new European Sustainability Reporting Standards. The new requirements under the CSRD replace those of the Non-Financial Reporting Directive (NFRD), introduced in 2014, which was the first EU directive requiring large companies to report on non-financial information and create uniform standards for the disclosure of environmental, social and governance aspects.

Germany’s Justice Minister Marco Buschmann told a conference organised by the German Chamber for Industry and Commerce (DIHK) this month that he wanted to reopen negotiations on the CSRD.

That statement followed an announcement from the European Commission that it was starting infringement procedures against 17 member states (Belgium, Czechia, Germany, Estonia, Greece, Spain, Cyprus, Latvia, Luxembourg, Malta, the Netherlands, Austria, Poland, Portugal, Romania, Slovenia and Finland) for failing to transpose the provisions of the CSRD (Directive (EU) 2022/2464) into law.

The CSRD amends several laws, the Accounting Directive (Directive 2013/34/EU), the Transparency Directive (Directive 2004/109/EC) and the Audit Directive (Directive 2014/56/EU), but none of these states had done so by 6 July 2024, the transposition deadline. It’s not uncommon for member states to drag their feet in transposing EU directives into their national law, but the scope of the failure in this case is significant.

Germany’s call to review the CSRD was echoed by former investment banker and European Central Bank President Mario Draghi who in a report he presented to the European Commission in September said the EU’s sustainability reporting and due diligence framework, which encompasses several pieces of legislation, was “a major source of regulatory burden, magnified by a lack of guidance to facilitate the application of complex rules and to clarify the interaction between various pieces of legislation”. Calling for a simplification of the rules he pointed to compliance costs, and risks of over-compliance (e.g. over-reporting) across the value chain.

That framework also includes the EU Taxonomy Regulation, with its “do no significant harm” (DNSH) assessment process; the Sustainable Finance Disclosure Regulation; Corporate Sustainability Due Diligence Directive, which came into effect in July, the Eco-design for Sustainable Products Regulation (ESPR), the Industrial Emissions Directive (IED, the Emissions Trading System (ETS) and REACH.

Whether the CSRD framework will be renegotiated remains to be seen, but several studies have found that reporting companies are unprepared for the requirements. One online survey of companies by ESG consulting firm Tennaxia, presented at the ProDurable trade fair, found nearly a quarter of the companies surveyed would need to report in 2025 and yet 46% of respondents said they had doubts about the content and form of their CSRD reports and more than a third of respondents did not know where the data they had to publish could be found.

A total of 42% of respondents say they have between 500 and 700 data points to publish in their management report, according to a report in France’s Open Lefebvre Dalloz.

According to a PwC survey in July of more than 500 senior executives and business professionals, including finance, sustainability and risk leaders, respondents cited data availability and quality (59%), value chain complexity (57%) and staff capacity (50%) as obstacles to implementation to a large or very large extent. Fewer than half of these companies had completed key activities, such as confirmation of reporting options (39%), double materiality assessment (38%), and validation of availability of data (20%). Even so, PwC found almost two-thirds of companies (63%) surveyed were very or extremely confident that they would be ready to report under the CSRD.

It is likely that the Commission in light of Draghi’s report and pressure from key member states such as Germany will at the very least consider reviewing the rules. The Commission already, as late as August when companies were preparing their reports, published a Draft Commission Notice clarifying the interpretation of provisions set out in the CSRD.

It is also likely that the European Securities and Markets Authority (ESMA) which is tasked with overseeing compliance, will not take a heavy-handed approach to enforcement, at least initially. In a statement in July, ESMA pointed to a number of aspects of reporting which it considered to be important. It itself noted that “most of the issuers who will publish a sustainability statement under ESRS in 2025 already have experience with the Non-Financial Reporting Directive (NFRD), the novelty and depth of the exercise when applying the CSRD and ESRS create challenges.”

It nevertheless said in its annual Enforcement Priorities statement this month that in respect to corporate reporting material assessment would be one of the focus areas for enforcement.

Useful questions and Answers on the Adoption of European Sustainability Reporting Standards can be found here.