The CSRD or Corporate Sustainability Reporting Directive is one of the cornerstones of the European Green Deal and represents a significant step forward compared to the current limited sustainability reporting requirements.
This new EU law regulates sustainability reporting requirements and, although it is specific to the EU, it is expected to have wide implications worldwide, with direct and indirect repercussions for many organisations.
In this article we share the main issues set out in the Corporate Sustainability Reporting Directive (CSRD).
If you would like to know how it affects you and how you should report, please keep on reading.
What is the CSRD?
The Corporate Sustainability Reporting Directive (CSRD) is a new EU law that aims to establish more stringent requirements for sustainability reporting by companies.
This directive amends the NFRD directive on disclosure of non-financial information and aims to increase the transparency and comparability of information on the environmental, social and governance (ESG) performance of companies.
This is intended to help investors and other stakeholders make more informed and sustainable decisions.
Is it already in force?
The CSRD entered into force on 5 January 2023 and the first disclosures are expected to be published in 2024, following these phases:
- 1 January 2024 for companies with over 500 employees already subject to the non-financial reporting directive (NFRD), which will be required to submit their reports in 2025.
- 1 January 2025 for large companies not currently subject to the NFRD with over 250 employees and/or €40 million turnover and/or €20 million total assets, which will be required to report in 2026.
- 1 January 2026 for small and non-complex credit institutions, captive insurer companies and listed SMEs. For the latter there is an “opt-out” clause until 2028.
Who is affected?
Many companies are wondering whether it is mandatory for them to report under the CSRD. The directive affects more than 49,000 European companies, which are as follows:
- All companies listed on EU regulated markets (except micro companies).
- Large European companies or subsidiaries of non-EU companies operating in the EU. To be considered a large company, the regulation establishes that it must meet at least two of the following requirements: having a turnover of more than 40 million euros, a balance sheet total of 20 million euros or employing over 250 people during the financial year.
- It will also apply to insurance companies and credit institutions, regardless of their legal form.
Not all companies will be subject to compliance. Subsidiaries could be exempt if the parent company includes them in its report.
In addition, listed micro-enterprises and unlisted SMEs do not fall within the scope of the Directive, but may choose to comply with its provisions on a voluntary basis.
Why is the CSRD important for companies?
This directive is of great importance for companies, as it sets more stringent requirements for sustainability reporting.
This provides greater transparency and comparability of information on environmental, social and governance (ESG) performance, enabling investors and other stakeholders to make more informed and sustainable decisions.
In addition, CSRD brings an opportunity for companies to improve their ESG performance, stakeholder engagement and create long-term value. It is not only a legal obligation, but also an opportunity for companies to lead the transition to a more sustainable, environmentally and socially responsible economy.
Some of the benefits for companies of implementing the directive include:
- Access to new investment opportunities by attracting investors interested in sustainability.
- Better identification of activities and projects that contribute to the transition towards sustainability.
- Cost reduction and efficiency gains.
- Improved reputation and brand image of the company by demonstrating its commitment to sustainability and social responsibility.
- It helps to identify and manage ESG risks, which can reduce the costs associated with these risks.
These are some of the opportunities that companies can take advantage of to put themselves at a competitive advantage.
Disclosure requirements of the CSRD Directive: What information must companies provide?
The CSRD Directive not only establishes mandatory requirements for companies, but also brings with it a number of new developments that promote greater transparency and consistency in sustainability disclosures. Some of these developments include:
- Common reporting standards to ensure consistency of reporting content in the European Union, which are developed by the European Financial Reporting Advisory Group (EFRAG).
- Digital taxonomy of sustainability reporting standards so that information can be labelled consistently.
- Third-party verification of information to increase the reliability and credibility of sustainability reporting.
In terms of content, companies should provide information related to sustainability, including:
- Description of the organisation’s business model and strategy.
- Sustainability-related objectives set by the company with a time horizon.
- Role of the administrative, management and supervisory bodies related to sustainability.
- Sustainability policies of the company.
- Incentive schemes offered to members of the administrative, management and supervisory bodies that are linked to sustainability issues.
- Sustainability due diligence procedures.
- List of the main sustainability-related risks.
Reports must be certified by an accredited independent auditor or certifier in order to comply with CSRD requirements. In addition, the information must be published in a specific section of the company’s management reports.
Finally, the European Financial Reporting Advisory Group (EFRAG) will be responsible for establishing European reporting standards to complement the directive through the European Sustainability Reporting Standards (ESRS). The Commission is expected to adopt the first set of standards by June 2023.
CSRD and European Taxonomy
The relationship between the CSRD and the EU taxonomy is key to sustainable disclosure.
Companies reporting under the CSRD will be obliged to report on their alignment with the EU taxonomy, ensuring greater consistency and comparability of reporting.
In addition, the indicators in the SFDR standards will be aligned with CSRD reporting, providing financial market stakeholders with robust and reliable information on the sustainability of the companies in which they invest.
The SFDR already regulates how financial market participants must disclose sustainability information, and the CSRD ensures that companies report the information necessary to comply with SFDR reporting requirements.
Differences between CSRD and ESRS
The CSRD (Corporate Sustainability Reporting Directive) and the ESRS (European Sustainability Reporting Standards) are related but different, which can be confusing.
The ESRS is an outreach component or tool within the CSRD. The latter obliges companies to issue sustainability reports and the ESRS describes all the information that these reports must contain.
While the CSRD is fully finalised, the ESRS is still under development, and is likely to continue to evolve and change based on the EFRAG’s ongoing work, as well as feedback from companies, regulators and associations.
In these times of regulatory tsunamis, the use of tools that can automate the ESG data collection process can be very useful.
At APlanet we develop software to collect, manage and report data for companies, always supporting them on their sustainability journey. You can request a demo here.
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