Ireland's approaching transposition of the Corporate Sustainability Reporting Directive

On 5 January 2023, the Corporate Sustainability Reporting Directive (the 'CSRD') entered into force. Large companies, as well as listed SMEs, will now be required to report on sustainability, which includes environmental, social and governance ('ESG') factors. Non-EU companies that generate over €150 million in the EU will also fall within its scope.

Ireland and other Member States have until 6 July 2024 to transpose the Directive, ahead of the publication of mandatory reports commencing on the following dates: 

• 1 January 2025: 2024 financial year for public interest entities within the scope of EU non-financial reporting rules (greater than 500 employees).
• 1 January 2026: 2025 financial year for other larger companies and public interest entities. These include companies which satisfy 2 of the 3 following criteria:

• A net turnover of more than €50 million;
• Balance sheet total assets greater than €25 million; and/or
• More than 250 employees.

• 1 January 2027: 2026 financial year for listed SMEs, with an ‘opt out’ possible until 2028, i.e., the option to explain why certain information is not available to be reported on.
• 1 January 2029: 2028 financial year for certain non-EU entities.

The Department of Enterprise, Trade and Employment has indicated that work is underway to incorporate the necessary provisions of CSRD into national law by way of Ministerial Regulations before the deadline for transposition this July. Mandatory reporting will follow in 2025.  

European Sustainability Reporting Standards

Companies subject to the CSRD will have to report on material impacts by using detailed framework of two general and ten specific ESG topics, called the European Sustainability Reporting Standards (the 'ESRS'). These standards apply to companies within the scope of the CSRD regardless of the sector in which they operate and the objective is to make sustainability information more comparable and auditable. ESRS specify the information that an undertaking shall disclose about its material impacts, risks and opportunities in relation to ESG matters, summarised as follows.

Although the content above seems simple, they are further divided into 'sub-topics' and 'sub-sub-topics'. For more information, see the Commission Delegated Regulation 2023/2772/EU as regards sustainability reporting standards.

Double Materiality

All sustainability topics must undergo a 'Double Materiality Assessment' to see what issues should be reported on. This assessment has two broad components:

• Outward impact: The company's actual or potential, positive or negative impacts on people or the environment over the short, medium or long term.
• Inward impact: The financial effects of a sustainability matter on the company over the short, medium or long term.

Penalties

Member States are responsible for the provision and enforcement of penalties. Therefore, we will have to wait for the incoming Ministerial Regulation before knowing the extent of penalties in Ireland for failure to comply with the CSRD. Currently, in Ireland, breaches of the Non-Financial Reporting Directive (the forebearer to the CSRD) carry the risk of 6-month imprisonment of company directors and/or a €5,000 fine. It is entirely possible that these will be increased as it is significantly lower than the penalties in several other Member States.

For comparison, France has already transposed the CSRD into its law by Ordonnance n° 2023-1142 du 6 décembre 2023. The penalties are as follows:

• Failure to have a CSRD report audited by an accredited body could lead to a two-year jail term and fines of up to €30,000 for directors, and up to €150,000 for companies.
• Directors face fines of up to €75,000 and imprisonment for up to five years if they fail to provide essential information for external auditors to validate their CSRD reports. If the fault is attributable to the company, the fine can be up to €375,000.
• Exclusion from public procurement in the event of non-compliance with obligations to publish sustainability information.

However, of possibly greater concern to companies is the threat from the "court of public opinion": companies can expect to have their reports publicly scrutinised, which brings with it a heightened risk of litigation and reputational damage for any non-compliances or inaccuracies.  

How to prepare

• Determine whether you are within the CSRD's scope, either directly or as part of a value chain.
• Establish your reporting processes, internal controls and governance to implement the requirement to begin (or increase) sustainability reporting.
• Obtain professional advice already if you are required to report on the 2024 financial year. Obtaining professional advice from a law firm has the added benefit of rendering the information you provide subject to legal professional privilege, meaning that a professionally qualified lawyer is exempted from disclosure of communications which may otherwise be required to be revealed. This is especially beneficial in the context of sensitive information that may arise from carrying out reporting obligations under the CSRD.
• For smaller companies that are not required, or not yet required, to report, they should still determine whether they form part of the value chain of a large company that falls within the CSRD's scope. It is advisable to be informed of which information you may be asked to supply.

Written by: Jonathan Moore and Adam Winston