EU Corporate Sustainability Reporting Directive (CSRD) – A New Era of Transparency)

Introduction:

The Corporate Sustainability Reporting Directive (CSRD) represents a significant step forward in the European Union’s (EU) commitment to sustainable development. Adopted in December 2022, the CSRD amends and significantly expands upon the previous Non-Financial Reporting Directive (NFRD), ushering in a new era of corporate sustainability reporting for a much broader range of companies operating within the EU.

What is the CSRD?

The CSRD mandates that companies disclose comprehensive and comparable information about their environmental, social, and governance (ESG) performance. This includes:

• Environmental Matters: Climate change mitigation and adaptation, pollution, water and marine resources, biodiversity, and circular economy.
• Social Matters: Equal treatment and opportunities, working conditions, and respect for human rights.
• Governance Matters: Business ethics, corporate culture, political engagement, internal controls, and risk management systems, including related to anti-corruption and anti-bribery measures.

Key Objectives of the CSRD:

• Enhanced Transparency: To provide stakeholders, including investors, consumers, and civil society, with a clearer and more detailed understanding of a company’s sustainability performance and its impact on society and the environment.
• Improved Comparability: To establish a standardized reporting framework, making it easier to compare the sustainability performance of different companies.
• Increased Accountability: To hold companies accountable for their sustainability commitments and their progress towards achieving them.
• Driving Sustainable Investment: To provide investors with the information they need to make informed decisions and channel capital towards sustainable activities.
• Supporting the European Green Deal: To align corporate reporting with the EU’s broader sustainability goals, including the transition to a climate-neutral economy.

Who is Affected by the CSRD?

The CSRD will apply to a significantly larger number of companies than the NFRD, encompassing:

• All large companies meeting at least two of the following criteria:
  • Balance sheet total: €25 million
  • Net turnover: €50 million
  • Average number of employees during the financial year: 250
• All listed companies on EU regulated markets (except listed micro-enterprises).
• Large non-EU companies with significant activity in the EU (net turnover of €150 million in the EU and at least one subsidiary or branch in the EU meeting certain thresholds).
• SMEs (small and medium enterprises) listed on the stock market. They will have separate, lighter requirements.

Timeline:

• January 2024: For companies already subject to the NFRD (reporting in 2025 on 2024 data).
• January 2025: For large companies not currently subject to the NFRD (reporting in 2026 on 2025 data).
• January 2026: For listed SMEs, with the possibility to opt-out until 2028 (reporting in 2027 on 2026 data).
• January 2028: For non-EU companies meeting the specified thresholds (reporting in 2029 on 2028 data).

CSRD – Key Features, Reporting Standards, and Implications

Key Features of the CSRD Reporting Requirements:

• Double Materiality: Companies must report not only on how sustainability issues affect their financial performance (financial materiality) but also on their impact on people and the environment (impact materiality). This approach captures the full picture of a company’s sustainability footprint.
• Forward-Looking Information: Companies are required to disclose their sustainability targets, strategies, and progress towards achieving them, providing a forward-looking perspective on their sustainability performance.
• Digital Tagging: Reported information will need to be digitally tagged according to a specific taxonomy, making it machine-readable and facilitating data analysis.
• Auditing of reported information: mandatory assurance of reported information. Starting with “limited” assurance and the possibility for moving to “reasonable” assurance at a later stage.
• Inclusion in the Management Report: Sustainability information must be included in the company’s annual management report, integrating it with financial reporting.

European Sustainability Reporting Standards (ESRS):

The European Financial Reporting Advisory Group (EFRAG) is developing the European Sustainability Reporting Standards (ESRS), which provide the detailed framework for CSRD reporting. These standards cover:

• Cross-cutting standards: General principles and disclosure requirements applicable to all sustainability matters.
• Topical standards: Specific standards for environmental, social, and governance matters.
• Sector-specific standards: Standards tailored to specific industries, recognizing their unique sustainability challenges and impacts.

Implications for Companies:

• Data Collection and Management: Companies will need to establish robust systems and processes for collecting, managing, and verifying sustainability data.
• Internal Expertise: Building internal expertise on sustainability reporting and engaging with relevant stakeholders will be crucial.
• Strategic Integration: Sustainability considerations will need to be integrated into core business strategy, risk management, and decision-making processes.
• Increased Scrutiny: Companies will face increased scrutiny from stakeholders regarding their sustainability performance.
• Opportunities for Innovation: The CSRD can also drive innovation and create new business opportunities related to sustainable products, services, and technologies.

Conclusion:

The CSRD is a game-changer for corporate sustainability reporting. It will significantly enhance transparency and accountability, driving companies to embed sustainability into their core business operations and contribute to a more sustainable future. While preparing for the CSRD will require significant effort, it also presents an opportunity for companies to demonstrate their commitment to sustainability, build trust with stakeholders, and position themselves for long-term success in a rapidly changing world. It is a central part of the European Green Deal and it is also expected that the directive will have international ramifications

• CSRD
• EU Corporate Sustainability Reporting Directive
• European Sustainability Reporting Standards