The Corporate Sustainability Reporting Directive (CSRD)
Preparing for compliance with the EU directive
Sustainability reporting has gained significant importance over the years as companies and investors recognize the value of understanding a business’s impact on the environment and society. In 2014, the European Union (EU) introduced the Non-Financial Reporting Directive (NFRD) to encourage companies to disclose non-financial information related to environmental, social, and governance (ESG) matters. However, with the aim of strengthening sustainability reporting and ensuring it carries the same weight as financial reporting, the EU has decided to replace the NFRD with the Corporate Sustainability Reporting Directive (CSRD). In this article, we will explore the key aspects of the CSRD and how companies can prepare for compliance with this new directive.
Why was the CSRD put into place?
The NFRD was a significant step forward in encouraging companies to report on ESG matters. However, the EU recognized the need for further improvements and enhancements to close gaps in sustainability reporting. The CSRD was introduced as an expansion of the NFRD, designed to elevate the importance of sustainability reporting within the EU. By mandating the disclosure of crucial sustainability information, the CSRD ensures that investors and stakeholders can access the data they need to assess investment risks arising from climate change and other sustainability issues.
What is the CSRD?
Under the NFRD, companies were required to report on various ESG matters, including environmental impact, social policies, human rights, anti-corruption efforts, and board diversity. The CSRD expands on these reporting obligations and introduces new aspects to strengthen sustainability disclosure. Companies now must report on future-oriented sustainability goals, the role of the board of directors and the supervisory board, the main adverse effects of the company, and intangible resources not yet accounted for. Moreover, the CSRD introduces the concept of “double materiality,” requiring companies to consider both their impact on the environment and the potential environmental impacts on the company’s future.
External verification is another crucial element of the CSRD. The sustainability report must be independently verified according to standards set by the EU. Unlike the NFRD, which allowed separate reporting, the CSRD requires companies to include sustainability reporting as an integral part of their management report alongside financial reporting. Furthermore, companies must use the European Single Electronic Format (ESEF) Regulation and report their sustainability information in XHTML format for machine readability in the European Single Access Point (ESAP).
To ensure consistency and transparency in reporting, the European Financial Reporting Advisory Group (EFRAG) is developing reporting standards for the CSRD. The first part of these standards is expected to be published by November 2023, with the second part following in June 2024.
Which companies must comply with the CSRD?
While approximately 11,900 companies had to report under the NFRD, the CSRD significantly expands the scope, with approximately 49,000 companies falling under its requirements. Companies that previously reported under the NFRD will naturally have to comply with the CSRD.
Additionally, the CSRD brings more enterprises within its ambit based on certain criteria. Companies with a workforce of at least 250 employees, net sales of at least €40 million, or a balance sheet total of at least €20 million must comply. All companies listed on stock exchanges, except micro-enterprises meeting specific size criteria (e.g., fewer than 10 employees, net sales below €700,000, and a balance sheet total below €350,000), will also be subject to the CSRD. Moreover, non-EU companies with total group sales of over €150 million in the EU for two consecutive years will need to comply with the CSRD.
CSRD status and timeline
The NFRD’s rules remain in force until the implementation of the CSRD. Starting from January 2024, companies of public interest with more than 500 employees will have to comply with the CSRD. From January 2025, all other companies meeting the size and criteria requirements mentioned earlier will also have to adhere to the CSRD. By January 2026, all SMEs listed on the stock exchange, not using their right to postpone the reporting obligation, will also have to comply.
However, in October 2023 the European Commission announced plans to delay key aspects of CSRD, specifically the adoption of requirements for companies to provide sector-specific sustainability disclosures and for sustainability reporting from companies outside of the EU.
Announced alongside the Commission’s release of its 2024 Commission Work Programme – designed to set out a list of actions it will take over the upcoming year – the statement outlines the EU Commission’s intention to postpone the adoption date for the sector-specific European Sustainability Reporting Standards (ESRS) by two years. Additionally, it recommended delaying the adoption of rules for large non-EU companies that operate in the EU to provide sustainability reporting by 2 years.
As the Commission notes in its proposal, the postponement of these two key rules has arisen in order to allow “companies to focus on the implementation of the first set of ESRS,” “ensure that EFRAG has time to develop sectoral ESRS that are efficient,” and “limit the reporting requirements to the minimum necessary.”
More detail on the 2024 Commission Work Programme can be found here.
Difference between an EU regulation and an EU directive
It is essential to understand the difference between an EU regulation and an EU directive. An EU regulation is directly applicable and binding in its entirety across all member states, leaving no room for variations in implementation. On the other hand, an EU directive sets the result to be achieved but allows member states to determine the best means of transposing it into their national laws. The CSRD falls under the category of an EU directive.
How to prepare for the CSRD
As the CSRD will bring significant changes to sustainability reporting, companies must prepare adequately to meet the new requirements. Here are essential steps to take:
- Get familiar with the reporting standards by EFRAG: Stay updated on the reporting standards developed by EFRAG to align your sustainability reporting with the CSRD requirements. (August 2023)
- Determine your reporting timeline: Identify when your company needs to start collecting data and prepare for reporting. Be proactive in ensuring data accuracy and transparency.
- Collect data from various sources: Gather data from your operations, suppliers, and business partners to have trustworthy evidence for your sustainability reports.
- Ensure data trustworthiness: Since the CSRD mandates external verification, make sure your data is reliable and exact to pass the verification process.
- Find an external verifier: Engage with an external verifier to ensure your reporting method is verified and can be used for future reports as well.
The CSRD marks a significant step in enhancing sustainability reporting within the EU, bringing it on par with financial reporting in terms of importance. By expanding reporting obligations, introducing double materiality, and mandating external verification, the CSRD aims to provide investors and stakeholders with comprehensive and reliable sustainability information. Companies must prepare for compliance with the CSRD by understanding its requirements, collecting trustworthy data, and engaging with external verifiers to ensure seamless reporting and adherence to the new directive. With effective preparation, companies can embrace the CSRD as an opportunity to demonstrate their commitment to sustainability and responsible business practices.