Recently, the European Parliament adopted the Corporate Sustainability Reporting Directive (CSRD), which will be published in the Official Journal of the European Union following its adoption and signature by the Council of the European Union. Once it officially takes effect, CSRD will replace the Non-Financial Reporting Directive (NFRD) issued by the EU in 2014, becoming the latest EU ESG disclosure regulation.

Mentioning CSRD and NFRD, we need to first talk about the concept of ESG.ESG includes environmental, social, and governance dimensions and is a crucial basis for evaluating a company’s non-financial performance and risks.

Europe, being the first to enter the industrial age, became aware of the importance of corporate social responsibility earlier. Therefore, as early as 2011, the EU formulated the "2011-2014 EU CSR Renewed Strategy,"first proposing the requirement to mandate companies to disclose non-financial information on environmental and social aspects through legislation.

After discussions and research, the EU formally issued the NFRD in 2014, providing a legal basis for requiring relevant entities in member states to disclose non-financial information.

However, with the rapid development of the global ESG field, the NFRD issued in 2014 is no longer suitable for the current market environment. Therefore, the EU promoted the creation of CSRD, making ESG disclosures by companies more standardized.

01

Differences Between the EU CSRD and NFRD

Compared to NFRD, CSRD mainly has three changes:

Firstly, the scope of companies required to disclose ESG reports has expanded.Under the NFRD, approximately 11,700 large companies were required to disclose ESG reports, while CSRD increases this number to 50,000, about 4.27 times the previous amount, basically including all large EU companies under this directive.

Secondly, the requirement for ESG report assurance has been added.The NFRD did not require verification of the content of ESG reports, often leading to ESG reports that were merely stylistically embellished, making the disclosure of ESG information superficial. In contrast, CSRD introduces an independent assurance mechanism, requiring companies to engage auditors or other independent entities to verify their ESG reports, ensuring the authenticity and validity of the reports.

Lastly, the EU has provided sustainable reporting standards—companies are required to disclose according to the EU Sustainable Reporting Standards (ESRS), making the information in the reports more detailed, comprehensive, and multi-dimensional.

02

Why Do Companies Need to Disclose ESG Information?

Why do companies need to disclose ESG information and regularly publish ESG reports? We can look at this from several perspectives.

Firstly, regulatory requirements, where relevant policies and regulations mandate companies to regularly disclose ESG information.Whether in the European and American markets, the Hong Kong market, or the A-share market, ESG information disclosure has become a “new threshold” for listed companies, requiring them to issue specific ESG, CSR, or sustainability reports.

Especially in the Hong Kong Stock Exchange, ESG information disclosure has been escalated to mandatory disclosure. The HKEX's Environmental, Social and Governance Report Guide provides very clear and specific requirements. For example, in the environmental dimension, listed companies need to focus on issues such as climate change, water resource management, and air pollution, detailing what qualitative and quantitative information needs to be disclosed, which companies must follow.

Secondly, ESG rating agencies.ESG rating agencies are generally third-party organizations independent of regulatory bodies and companies, analyzing, scoring, and rating a company’s ESG information and performance. ESG ratings are one of the recognized ways to reflect a company’s level of ESG development and serve as an effective tool for measuring ESG performance.

Compared to reading long and complex ESG reports, rating results can intuitively reflect a company’s actual performance in the ESG field, thus being highly favored by investors. At the same time, more and more stakeholders rely on ESG rating results when assessing a company’s non-financial information.

Therefore, companies that actively practice ESG, make excellent ESG disclosures, regularly publish high-quality ESG reports, and improve their ESG ratings will inevitably gain a competitive advantage in the investment market.

Lastly, the need for companies to maintain their brand image.In the new stage of development, public criteria for judging a “good” company have changed significantly; they no longer use a single dimension to judge, assuming that any company that makes money is a good company.

Now, people pay more attention to a company’s social and environmental responsibilities, considering whether the company contributes to sustainable development, whether it has a positive impact on society, whether it actively responds to climate change, and whether it actively protects consumer rights and worker rights, etc.

In summary, for companies to gain market recognition and establish a good brand image in the future, publishing ESG reports to promote communication with stakeholders is an indispensable step.

03

The Impact of the EU CSRD on Domestic Enterprises

Firstly, the implementation of the EU CSRD will inevitably affect Chinese enterprises operating in Europe.Under the CSRD, any company that meets the following conditions is considered a reporting entity:

• All listed companies;
• All large companies (meeting any two out of three criteria): more than 250 employees, turnover exceeding 40 million euros, and total assets exceeding 20 million euros;
• All companies within the EU, including subsidiaries of non-EU groups.
• Secondly, the EU has always been at the forefront of ESG regulation, and the implementation of CSRD will usher in a new era for ESG information disclosure both in the EU and globally.Especially in the context of China’s dual-carbon goals, the implementation of CSRD will undoubtedly bring many lessons for us. Being proactive, companies practicing ESG principles and preparing for ESG information disclosure will never be wrong.