Effect of EU sustainability rules on UK companies- be prepared

Sustainability reporting is a challenging and potentially exciting and lucrative opportunity which will affect accountancy firms and their clients the next few years. The UK Sustainability Technical Advisory committee recently appointed Sally Duckworth as Chair, which means that work can now begin on reviewing and ultimately endorsing the IFRS Sustainability Reporting Standards in the UK.

By contrast, things are much more advanced in the European Union and there is already a suite of sustainability reporting standards in force and mandated by the Corporate Sustainability Reporting Directive (CSRD).

Despite the UK’s exit from the European Union, some UK companies may be required to comply with the CSRD for accounting periods beginning on or after 1 January 2024. In this article, Ross Haydock explores which companies may be caught by this legislation and how this will affect their reporting requirements.

What is the CSRD?

The Corporate Sustainability Reporting Directive is EU legislation, requiring all large and listed companies in the EU to:

1. report their risks and opportunities on social and economic subjects and
2. report the impacts they have on the environment.

These will be included in a clearly identifiable Sustainability Statement, alongside the financial statements. Limited assurance reporting is required covering:

• compliance with European Sustainability Reporting Standards (ESRS);
• the underlying materiality assessment process;
• EU Taxonomy Regulation; and
• the digital tagging of sustainability information.

It is planned that reasonable assurance reporting will be required once feasible, although the European Commission has until 1 October 2028 to adopt reasonable assurance standards.

To ensure the consistency and comparability of reporting, the European Commission has adopted the European Sustainability Reporting Standards (ESRS). The suite is made up of twelve standards in total - two cross-cutting standards, ESRS 1 and ESRS 2 and ten topical standards. The topical standards cover Environment (ESRS E1 – E5), Social (ESRS S1 – S4) and Governance (ESRS G1). There are also six appendices to the standards.

The cross-cutting standards apply to all sustainability matters, regardless of topic. The topical standards include both sector agnostic and sector-specific disclosure requirements for information that has been assessed to be material for all entities or all entities in a specific sector.

Which companies are in scope of the CSRD?

In summary, the following are in scope of CSRD:

• all companies that have securities listed on an EU regulated market (including listed small and medium companies);
• all EU companies or EU companies that are a parent of a large group ('EU subgroup') that exceed two of the three following criteria (as per the Accounting Directive 2013/34/EU as amended in 2023 to increase the thresholds) on two consecutive annual balance sheet dates:
  • more than 250 employees during the financial year
  • balance sheet total of more than €25 million
  • net turnover of more than €50 million;
• non-EU companies generating a net turnover of more than €150 million in the EU and:
  • having a subsidiary in the EU that meets the criteria applicable to EU companies (ie, being listed on an EU regulated market except micro, or being a large EU company or subgroup as per the Accounting Directive thresholds); or
  • a branch in the EU generating more than €40 million net turnover in the preceding year;
• some small and non-complex credit institutions and some captive insurance and reinsurance undertakings.

There are some exemptions available for EU subsidiaries and subgroups and some groups are being brought into scope in a phased timeframe.

When and how might a UK company be in scope?

The table below outlines when and how UK companies may fall into scope of reporting for CSRD. There are some exceptions for debt-only issuers listed on EU-regulated markets and for micro-undertakings, defined as companies that do not exceed two of the following three criteria in each of the last two consecutive years – 10 employees, €700,000 net turnover, €350,000 total assets.

UK companies should be prepared to provide support to any in-scope EU subsidiaries to enable them to capture relevant data for reporting purposes. Those owned or controlled by EU parents may need to report sustainability information for group reporting purposes.

What should we do?

All companies, whether affected by the legislation above or not, should keep abreast of the new sustainability legislation and the potential reporting requirements. Of particular importance is understanding whether a company’s internal systems can allow them to generate the required and verifiable information for sustainability disclosure.

Although most UK companies will not be affected at this stage, it is useful to keep aware of how the rapidly changing legislation can impact firms and their clients.

How can Mercia help?

Visit Mercia’s ESG hub to keep up to date with ESG developments and latest products to help you navigate this rapidly evolving area, Our technical queries service can also support you if you have questions about new regulations.