The transformative power of the CSRD - Part 3: Pulling thousands of companies into its orbit

The scope of the Corporate Sustainability Reporting Directive is broad, because one of its remits is to make sustainability information widely available. Based on its stated applicability criteria, the regulation is expected to apply to more than 45,000 companies both public and private, large and small, including roughly 10,000 non-EU companies that have operations or revenues in the European Union. But as we’ll see below, the reach of the CSRD may extend well beyond this “tier one” of regulated companies.

The CSRD applies to:

• All companies listed on an EU exchange (all except microcaps¹)
• European private companies meeting two out of three criteria: (i) revenues > €50M; (ii) assets > €25M; and (iii) average employees during the reporting period > 250
• Non-European companies (whether public or private) with revenues > €150M in European markets, with either a subsidiary (listed or large as per above criteria) or a branch (with net revenues > €50M) in Europe

Public and private

For publicly listed companies, mandatory annual and quarterly disclosures are par for the course, because information is considered the lifeblood of capital markets and it is believed that the better the information, the more efficient the markets. Unlike many jurisdictions where private companies have no such disclosure obligations, in the European Union many private companies already had the obligation to file annual financial statements with the relevant national business registers. So it would make sense that the obligation to produce sustainability reporting should extend to them as well.  

Since the determination of which set of standards to apply is based on a company’s size, rather than its ownership structure, EU based publicly listed and private companies will be submitting the same disclosures produced using the European Sustainability Reporting Standards (ESRS).

Large and small

Recognizing the different realities of smaller companies, the CSRD has prescribed a lighter set of standards for small- and medium-sized enterprises (SMEs).

Publicly-listed companies that do not meet the above criteria will have the option to meet their disclosure obligations by applying a lighter set of the ESRS standards created for SMEs. Furthermore, private companies that do not meet the above criteria  are encouraged to voluntarily produce sustainability statements using an even lighter set of standards.

In early February, the European Financial Reporting Advisory Group (EFRAG) launched a public consultation on both its draft mandatory European Sustainability Reporting Standards for listed small- and medium-sized enterprises (ESRS LSME) and its draft voluntary reporting standards for non-listed small- and medium-sized enterprises (VSME). The ESRS LSME will be issued as a delegated act and will be effective on 1 January 2026 with an additional two-year opt out.

“The purpose of the ESRS LSME exposure draft is to set reporting requirements that are proportionate and relevant to the scale and complexity of the activities and to the capacities and characteristics of [listed small- and medium-sized enterprises]. This is expected to support [them] getting better access to finance and avoid discrimination against them on the part of financial market participants, as it will enable availability of standardised sustainability information.” — EFRAG

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EFRAG will also be conducting a field test for both standards, which will focus on feasibility, costs, challenges, benefits, and usefulness of the individual disclosures and suggested improvements to the exposure drafts. The importance of this test cannot be underestimated because implementing these standards — or rather the changes to business practices and information collection they bring about — will represent a step change that requires resources in time, people, and money. The reality today is that most small- and medium-sized enterprises do not have those resources readily available. (One might argue that larger companies don’t either!)

One cannot help but think that there is a grand plan in motion when it comes to sustainability reporting regulation in the EU, the pieces of which are coming together. A case in point is that the rationale for creating the voluntary standards for small- and medium-sized enterprises (VSME) is to enable them to respond to information requests from their business counterparts (read: investors, creditors, insurers, and large customers), which often come in the form of supplier and third-party questionnaires. This makes sense, since larger entities subject to the CSRD must identify and report on their material impacts, risks, and opportunities across their value chain, which includes their upstream suppliers. In fact, one of the key questions EFRAG is seeking answers to as part of the public consultation is whether lenders/investors/corporate clients would be able and willing to replace a substantial part of their questionnaires with the content of VSME.

“[The VSME exposure draft] proposes a simple reporting tool to assist non-listed micro-, small- and medium-sized enterprises (non-listed SMEs) in responding to requests for sustainability information that they receive from business counterparts (i.e., banks, investors or larger companies for which non-listed SMEs are suppliers) in an efficient and proportionate manner as well as to facilitate their participation in the transition to a sustainable economy. Based on market acceptance, the VSME exposure draft is expected to standardise the current multiple ESG data requests (which represent a significant burden on non-listed SMEs), by reducing the number of uncoordinated requests they receive. This is expected to support them in having better access to lenders, investors and clients.” — EFRAG

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EU and non-EU domiciled

As mentioned above, if a company has revenues in European markets of more than €150M and either a subsidiary (listed or large) or a branch with revenues of more than €50M in Europe, then it, too, will be subject to the disclosure requirements of the CSRD within four years’ time, using a set of standards for non-EU parent companies that have yet to be developed and are expected in 2026. However, since their regulated subsidiary(ies) will need to produce disclosures according to the CSRD’s stated phase-in calendar (2024, 2025, or 2026 depending on company size), the more likely scenario is that companies with a global footprint will choose to comply with the ESRS at the consolidated level from the onset, rather than produce piecemeal disclosures for their European operations. The consequence of this would be a greatly expanded and accelerated uptake of the CSRD sustainability disclosure requirements.

But wait, there’s more

Consider all the companies that are located outside the EU and therefore fall outside the scope of the regulation, but that happen to be part of the supply chain of in-scope companies. It’s interesting to note that the proposed VSME aren’t exclusive to European private small- and medium-sized enterprises; so any company that is part of the supply chain of another company subject to (or choosing to comply with) the CSRD could use these standards to produce standardized and therefore comparable sustainability disclosures.

Finally, consider what might happen when companies that fall outside the scope of the regulation engage in a round of peer benchmarking. Those whose peers are subject to the CSRD and who do not want to risk falling behind the pack in terms of producing significantly more granular, comparable, forward-looking, and assured disclosures — let alone improving their risk management and reputational capital — may well choose to embrace portions or all of the regulation’s disclosure requirements. One need only think of investors conducting their comparative analysis in making their investment choices to understand that all else being equal, they are likely to choose companies with more transparency that can demonstrate having a better handle on their material impacts, dependencies, risks and opportunities.

All in all, it becomes pretty clear that the scope of the CSRD, combined with the deeply intertwined nature of global trade and value chains, may pull a great many companies into its orbit and in so doing achieve its objective of making comparable and reliable sustainability information widely available.

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This completes our series on the transformative power of the CSRD. You can find the other installments here:

The transformative power of the CSRD - Part 1: The regulation itself

The transformative power of the CSRD - Part 2: The expanded scope of disclosures

‍The contents of this article are inspired by the Seizing the Corporate Sustainability Reporting Directive (CSRD) opportunity white paper, which provides companies with practical guidance on how to identify compliance gaps and build a roadmap to fill them and take control of their CSRD journey to achieve lasting sustainability leadership.

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¹ Micro-entreprises are defined as meeting two out of the following three criteria:

• revenues < €900K
• assets < €450K
• average employees during the reporting period < 10