Understanding the Corporate Sustainability Reporting Directive (CSRD): A New Era for Corporate Accountability

The Corporate Sustainability Reporting Directive, known as Directive (EU) 2022/2464 (CSRD), represents a significant leap forward in the European Union’s commitment to enhancing corporate transparency and accountability regarding sustainability practices. As part of the EU’s Green Deal and sustainable finance agenda, the CSRD aims to ensure that companies not only disclose their financial performance but also their impact on the environment and society. This article delves into the key aspects of the CSRD, its implications for businesses, and the broader context of sustainability reporting in Europe.

What is the CSRD?

The CSRD is a legislative measure introduced by the European Union to improve the quality, consistency, and comparability of sustainability information provided by companies. It broadens the scope of businesses required to disclose sustainability information, encompassing their impact on people and the environment, as well as their business operations. The directive is a crucial component of the EU’s overarching strategy to channel capital towards sustainable investments, thereby fostering a greener economy.

The CSRD officially entered into force on January 5, 2023, and EU member states are required to transpose it into their national laws by July 6, 2024. As of now, several countries, including Bulgaria, Czechia, Denmark, Ireland, France, Croatia, Italy, Lithuania, Hungary, Romania, Slovakia, and Sweden, have already implemented the directive.

Who is Affected by the CSRD?

One of the most significant changes introduced by the CSRD is the expansion of the number of companies subject to sustainability reporting requirements. The directive now covers all large companies and all companies listed on regulated markets, excluding micro-enterprises. This change affects approximately 50,000 companies, a substantial increase from the 11,000 companies previously covered under the Non-Financial Reporting Directive (NFRD).

Key Categories of Companies Required to Report:

1. Listed Companies: All listed companies in the EU, including non-EU companies listed on European stock exchanges, are required to comply, with the exception of micro companies (those with fewer than 10 employees and an annual turnover or balance sheet below €2 million).

2. Large Companies: Companies that meet at least two of the following criteria for two consecutive financial years:

   • €25 million balance sheet total
   • €50 million net turnover
   • An average of 250 employees
3. Non-EU Companies: Non-EU companies with net sales exceeding €150 million in the EU for the last two consecutive financial years must also report if they have:
   • At least one large company in the EU
   • An EU-listed subsidiary
   • An EU branch with a net turnover exceeding €40 million in the preceding financial year

Exemptions

Certain exemptions apply under the CSRD. For instance, subsidiary undertakings may be exempt from reporting non-financial information if their immediate parent companies are included in the consolidated management report of their ultimate parent undertaking. Additionally, parent undertakings may be exempt from preparing consolidated financial statements if they are subsidiaries of another parent undertaking that complies with the reporting obligations.

Timeline for Reporting Obligations

The CSRD establishes a clear timeline for when different categories of companies must begin reporting:

• Large EU and non-EU listed companies (and financial institutions) with more than 500 employees: Reporting in 2025 for the financial year 2024.
• Large EU and non-EU non-listed companies with more than 500 employees: Reporting in 2026 for the financial year 2025.
• Listed EU SMEs: Reporting in 2027 for the 2026 financial year.
• Subsidiaries or EU branches of non-listed non-EU companies: Reporting in 2029 for the financial year 2028.

Reporting Standards Under the CSRD

Under the CSRD, companies are required to provide a comprehensive account of their sustainability practices. This includes detailing how their business model impacts climate change, environmental resources, social rights, and human rights. The reporting must adhere to strict standards to ensure consistency and comparability, primarily through the use of the European Sustainability Reporting Standards (ESRS), which are currently being developed.

Key Reporting Requirements:

1. Business Strategy and Sustainability: Companies must disclose their business strategy, emphasizing resilience against sustainability-related risks and alignment with sustainable, climate-neutral economic transitions, as outlined in the 2015 Paris Agreement. This includes detailing stakeholder interests, sustainability opportunities, and the role of management in sustainability issues.

2. Intangibles and Sustainability Information: Companies should report on intangible assets, including intellectual and human capital, R&D, and social and relationship capital. This involves identifying processes for such information and relevant KPIs, offering both forward-looking and retrospective perspectives.

3. Compliance with Sustainability Reporting Standards: Companies must provide an integrated report on their environmental impact and performance, covering a wide range of factors, including climate dependencies, risks from environmental changes, greenhouse gas emissions, energy use, social considerations, governance structures, and business ethics.

The Role of Auditors

A notable feature of the CSRD is the introduction of mandatory assurance for sustainability information. This requirement marks a significant shift towards higher accountability and reliability in reporting. Companies must have their reported sustainability information audited by independent auditors or assurance service providers, ensuring the accuracy and completeness of the data disclosed.

Penalties for Non-Compliance

Non-compliance with the CSRD can result in penalties, which will be defined by the national laws of EU member states implementing the directive. This underscores the importance of adherence to the new regulations. Companies are encouraged to develop robust ESG data management practices to facilitate compliance and mitigate risks associated with sustainability reporting.

Integration with Other Regulations

The CSRD is designed to align with other EU initiatives, such as the EU Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (SFDR). This alignment aims to create a cohesive framework for sustainability reporting across the EU, essential for informed investment decisions and fostering a sustainable economy.

Conclusion

The Corporate Sustainability Reporting Directive represents a transformative step towards greater corporate accountability in sustainability practices. By expanding the scope of reporting requirements and introducing stringent standards, the CSRD aims to enhance transparency and drive companies towards more sustainable operations. As businesses prepare for the upcoming reporting obligations, the emphasis on sustainability will not only shape corporate strategies but also influence investment decisions, ultimately contributing to a more sustainable future for all.