Large companies and companies listed on stock markets across the EU who do not currently fall within the Non-Financial Reporting Directive (Directive 2014/95) face new reporting obligations under EU regulations that came into effect last month.

Firms affected by the new rules will have to disclose detailed information on the risks and opportunities they see from climate change, as well as the impact their activities are having on the environment and people.

The Law Society’s Business Law Committee notes that many companies covered under the regulations will have to report on how their value chains operate – information that may be difficult to obtain.

The European Union Corporate Sustainability Reporting Regulations 2024 came into effect on 6 July, transposing the EU’s Corporate Sustainability Reporting Directive (CSRD).

The regulations make a number of amendments to the Companies Act 2014, in particular on the additional information that must be included in the directors’ report, and filings that are included with the financial statements filed by companies that are covered.

The act has also been amended to deal with the approval and registration of auditors who can carry out the assurance of sustainability reporting. The Irish Auditing and Accounting Supervisory Authority has been given additional powers and responsibilities in this regard through the regulations.

The regulations are also intended to provide investors with more information and access to companies’ sustainability efforts and impacts, allowing investors to focus capital on sustainable investment and long-term financial, social, and economic stability.

A survey carried out by law firm Mason Hayes & Curran earlier this year found that less than half (42%) of companies felt that they were well-prepared for the regulations.

Scope of the regulations

The CSRD and the regulations place reporting obligations on all companies that are subject to the existing Non-Financial Reporting Directive and, in addition, to large companies and listed companies – excluding listed micro-enterprises that are defined as meeting two of the following three criteria:

• Not exceeding a balance sheet total of €450,000,
• Not exceeding a net turnover of €900,000, and
• Not exceeding an average number of ten employees.

There is a phased-in implementation of the rules, based on specific company characteristics.

Large public-interest entities and public-interest parents of large groups

For companies governed by the law of an EU member state or non-EU companies but, in both cases, with securities listed on an EU-regulated market, or that are otherwise EU public-interest entities (which include banks and insurance companies) and have an average number of employees exceeding 500, the reporting requirements start for the financial year starting on or after 1 January 2024.

EU-based large undertakings and parent undertakings of large groups

For EU-based larger undertakings, or non-EU companies with securities listed on an EU regulated market that are large undertakings, and parent undertakings of large groups, the reporting rules apply for the financial year starting on or after 1 January 2025.

EU legislation defines large undertakings as those that meet at least two of the following criteria:

• Balance sheet exceeding €25 million,
• Net turnover exceeding €50 million, and
• Average number of employees exceeding 250.

Listed small and medium-sized entities

For small and medium-sized EU public-interest entities (small and non-complex institutions and captive insurance undertakings, or those with securities listed on an EU-regulated market), reporting requirements begin in the financial year starting on or after 1 January 2026 (with an opt-out right for an additional two years).

Non-EU undertakings

The regulations also cover third-country (i.e. non-EU) undertakings that:

• Are the ultimate parent of at least one EU subsidiary subject to CSRD that generates a net turnover of more than €150 million in the EU in the last two consecutive financial years, and
• Where there are no subsidiaries, have a branch in the EU with net turnover more than €40 million

For these organisations, the reporting requirements apply in the financial year starting on or after 1 January 2028.

Reporting requirements

Companies affected by the new rules will have to report specific information set out by the European Sustainability Reporting Standards (ESRSs), a new set of mandatory reporting standards adopted by the European Commission.

There are 12 standards in total – including general disclosure requirements and requirements specific to environment, social, and governance (ESG) matters.

Value chain

In a novel and far-reaching requirement, ESRSs will also require many companies to report on material issues in the operations of their supply or value chains.

As this information may be challenging to obtain, however, there is currently a three-year transitional period during which more limited reporting may apply in this area.

‘Double materiality’

‘Double materiality’ is another novel and far-reaching requirement that is central to the CSRD, with relevant companies now required to consider two dimensions when reporting on sustainability:

• Financial materiality – how climate change and social issues affect the company’s financial performance, and
• Environmental and social materiality, focusing on how the operations of a company affect the environment and society.

Under the regulations, companies must report the required sustainability information annually in a dedicated section within the company’s annual directors’ report.

These reports are required to be published digitally using the European Single Electronic Format to ensure that the reports are machine-readable, searchable, and comparable.

Audit requirements

In addition to this, in addition to the normal audit of financial statements, an audit of the sustainability report and statements by statutory auditors or accredited assurance third-party providers is a legally binding requirement.

Failure to comply will result in a breach of Irish company law akin to failing to prepare and file annual financial statements to the extent required.

As yet unexplored is the extent to which there may be a potential civil liability for presenting misleading sustainability statements, and the extent to which case law dealing with audited financial statements will be applied an analagous way, if any.

The Annual Business Law Conference, which takes place on 13 November (2pm to 5.30pm), will delve deeper into the theme of ESG and reporting obligations.