Of interest.

CSRD, NFRD and CSSD – what are the EU sustainability directives about?

Sustainability is currently a topic of intense debate within the European Union. In recent years, the EU institutions have gradually issued and, over time, continuously updated legal documents and measures covering this topic. The most important of these are the CSRD, the NFRD and the CSSD.

You can read about the legislative history and legal binding force of these directives, their relationship and, in particular, what new obligations they impose on obliged entities in this article.

These directives aim to support the implementation of the Green Deal for Europe and the UN Sustainable Finance Agenda and a set of different types of measures at EU level to combat the climate crisis.

At the same time, they aim to transform the European Union into a modern and sustainable economy with zero carbon emissions and efficient use of renewable resources. The package of measures includes, for example, the EU Taxonomy Regulation – a regulation specifying the economic activities contributing most to the Green Deal objectives.

Objective of the directives
The main objective of not only the directives, but also of all related measures and methodologies, is to progressively lead companies doing business in the European Union towards greater responsibility in relation to environmental protection, human rights and sustainable development.

Non-Financial Reporting Directive (NFRD)
The first directive dealing with sustainability was the Directive of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards the disclosure of non-financial and diversity-related information by certain large undertakings and groups, or the Non-Financial Reporting Directive (hereinafter as the “NFRD”).

The NFRD imposed obligations on large companies to disclose information about their activities in specified areas in order to provide transparency and help investors and consumers assess the impact of companies on the environment and society as a whole – the so-called non-financial reporting obligation (see below), which has become the most emphasised topic in the legislation and measures that have followed.

Corporate Sustainability Reporting Directive (CSRD)
In November 2022, the Corporate Sustainability Reporting Directive or CSRD was approved by the European Parliament and has already entered into force on 5 January 2023, replacing the NFRD.

The main objective of the CSRD is for as wide a range of companies as possible to disclose relevant information on the risks, opportunities and environmental impacts of their activities.

The CSRD has significantly expanded the number of companies that will have to provide sustainability information and introduces more detailed reporting requirements on the company’s environmental, human rights, social and sustainability-related impacts and risks – so-called ESG reporting.

ESG reporting
Companies affected by the new obligations will now have to report more in-depth and extensive non-financial, so-called ESG, reporting, i.e. publicly filed reports on the sustainability factors and impacts of a company’s activities. The CSRD provides detailed instructions on what kind of information the report will need to contain, including sustainability targets and key performance indicators for the company.

An important part of the report will also include an overview of the social responsibility of the entire supply chain. The mandatory disclosures will follow the European Sustainability Reporting Standards (ESRS) framework, which will apply to all member states regardless of national regulation, even after the implementation of the directive. Until now, obliged companies could selectively choose the type of information to be disclosed, where deliberately “inconvenient” information was simply not disclosed at all. The CSRD now introduces the concept of dual materiality, whereby these ESG reports will have to report on both the sustainability factors affecting the company (financial materiality) and how the company affects society and the environment around it (external materiality), regardless of the light in which this puts the company in question. Thus, in addition to the positive impact of sustainability, companies must also report negative impacts.

When and to whom will CSRD apply?
Member states are obliged to implement the CSRD in their legislation within 18 months of its entry into force, but the effectiveness will not be uniform for all companies:

Companies with more than 250 employees, a net turnover of more than CZK 1 billion or balance sheet assets of more than CZK 500 million per fiscal year, which are already covered by the previous NFRD, will have to comply with the amended rules from 1 January 2024;

Other companies that will be covered up to the CSRD, which are all large companies and all small, medium and large companies trading their securities on the stock exchange, except micro companies, will have to comply with the new rules from 1 January 2025 at the earliest – however, even for these companies, applicability will be further phased in.

Benefits of the CSRD
However, the new expanded content and standards of ESG reporting, as well as other new rules to which affected companies will have to comply and adapt, bring a number of benefits. What are they?

  • Easier access to capital – ESG criteria are already part of the criteria generally followed when applying for credit by some banking institutions, which require a guarantee that the capital provided by them will be used in accordance with the principles of sustainable development.
  • Faster company growth – companies with a sustainable operating model that have easier access to bank financing are more attractive to potential investors and partners. ESG reporting thus opens the door to new business opportunities, reduces costs and increases competitiveness.
  • European Union financial support – sustainability projects are one of the areas where the European Union has already allocated a large amount of funding and expects to continue to support them in the future, be it soft loans or, for example, grants through the Operational Programme on Technologies and Applications for Competitiveness.

Directive on Corporate Sustainability Due Diligence (CSDD) – proposal for a new ESG directive
In addition to the already adopted directives dealing with the ESG reporting agenda, another major ESG legal document is undergoing the legislative process – the Corporate Sustainability Due Diligence Directive, or CSDD.

The draft directive was presented by the European Commission in February 2022 and is currently being discussed by the European Parliament. The European Parliament’s opinion on the proposal is expected in May this year, with adoption expected to take place at the end of 2023 or early 2024 at the earliest.

Main objectives of the CSDD
The main objective of the CSDD is to require companies to identify and seek to prevent serious human rights and environmental impacts throughout their supply chains.

Once implemented, the CSDD should prevent, for example, forced labour, child labour in agriculture, deforestation of the Amazon and Indonesian rainforests, forced displacement of people in mining projects and other negative environmental and socio-economic impacts such as discrimination in the work environment, respect for health and safety in the workplace, the right to fair remuneration and the right to unionise.

Another key benefit of the CSDD is to level the playing field between domestic producers and responsible companies with global supply chains. Under current conditions, domestic producers are at a disadvantage, especially in terms of costs, which are incomparably higher than those of competitors using foreign producers who do not comply with labour and environmental conditions.

The instrument that the directive introduces for companies, which is intended to mitigate these inequalities in the short term and to prevent them altogether in the future, is the obligation of due diligence, i.e. in this context the obligation to carry out a non-financial audit of all the activities of the companies concerned. The draft directive comes with a detailed process for companies to identify, assess and then address the problems.

Who will be affected by the CSDD obligations?
The due diligence obligation will apply to large companies, including their subsidiaries.

Specifically, this will include:

  • companies with at least 500 employees and a net global turnover exceeding EUR 150 million (approximately CZK 3.5 billion); and
  • companies with at least 250 employees and a net global turnover of at least EUR 40 million, provided that at least 50 per cent of the turnover comes from natural resource-intensive sectors, mainly agriculture or textiles.

Although this is European Union legislation, the CSDD will have an indirect impact on a large number of companies outside the EU. This is because companies affected by the new obligations will also have to require their suppliers outside the EU to comply with the CSDD standards.

The NFRD, the CSRD and the CSSD are a step towards sustainable development that puts social and environmental responsibility at the forefront by introducing common rules for disclosing information on the impact of the activities of all larger companies in turn, thereby contributing to the transition towards a sustainable economy and development.

In view of progressive legislation and general trends in sustainable development at EU-wide and national level, this is an area that is undoubtedly set for dynamic and intensive development towards a green and sustainable future.

Already today, proposals for new rules, or proposals updating existing rules, and new methodologies appear more or less every day, both from the EU institutions and from national authorities implementing the new rules in their control procedures. Given the large reach of the CSRD and CSSD, the new obligations will affect a large number of companies in the Czech Republic as well.

We are fully at your disposal for non-financial reporting.


Mgr. Kateřina Roučková, advokátní koncipientka – rouckova@plegal.cz

Ráchel Kouklíková, právní asistentka – kouklikova@plegal.cz

Mgr. Jakub Málek, managing partner – malek@plegal.cz




25. 04. 2023