What is the Corporate Sustainability Reporting Directive (CSRD)?

CSRD (Corporate Sustainability Reporting Directive) Directive (EU) 2022/2464 of the European Parliament and of the Council is a legal regulation of the European Union that entered into force on January 5, 2023. This regulation requires that companies operating in the EU - including qualified subsidiaries companies from third countries - disclosed information about their environmental, social and governance (ESG) impacts and how these aspects affect their business.

The goal of CSRD is to provide greater transparency that enables investors, analysts, consumers and other stakeholders to better assess business sustainability performance and related business impacts and risks. The introduction of the CSRD was part of the European Commission's Sustainable Finance Package and expands the scope, sustainability disclosure and reporting requirements compared to its predecessor, the Non-Financial Disclosure Directive (NFRD).

CSRD reporting is based on the concept of double materiality. Organizations must disclose information about how their business activities affect the environment and society, as well as how their sustainability goals, measures and risks affect the financial health of the business. For example, instead of organizations only disclosing information about their energy consumption and costs, the CSRD requires the disclosure of emissions metrics that detail how this consumption affects the environment and information about targets to reduce this impact and their impact on the organization's finances.

All CSRD disclosures must be publicly available and their accuracy and completeness must be verified by an external audit.

Why was CSRD introduced?

The European Parliament identified several shortcomings in the Non-Financial Disclosure Directive (NFRD) in 2021, including a lack of consistent and comparable data, which could negatively impact sustainability investments and increase data acquisition costs for stakeholders.

CSRD aims to improve the disclosure process so that investors and consumers have an easier and more consistent approach to understanding and comparing the ESG impact of organizations. The long-term objective is to reduce climate risk and improve the EU's overall sustainability, supporting a globally competitive and resilient industry, renovated energy-efficient buildings, cleaner energy and advanced clean technology innovation.

Which companies must comply with CSRD?

Until 2028, the following organizations must comply with CSRD:

– Listed companies: All companies listed on an EU-regulated stock exchange, with the exception of listed "micro-enterprises", which do not meet two of the three criteria: total assets of at least EUR 450,000, net turnover of at least EUR 900,000, or have at least 10 employees.

– Large companies based in the EU, listed and unlisted: Companies that meet two of the three criteria: total assets of at least EUR 25 million, net turnover of at least EUR 50 million, or have at least 250 employees.

– Third-country companies: Non-EU parent companies with EU annual revenues of at least €150 million in the last two years that own a major EU-based business, an EU-based subsidiary listed on an EU-regulated stock exchange, or an EU branch with net turnover at least EUR 40 million.

When must companies comply with CSRD?

CSRD compliance is phased in from 2024 to 2029:

– Financial year 2024 (publication in 2025): For organizations already committed to complying with the NFRD, including all organizations listed on an EU-regulated exchange with more than 500 employees.
– Financial year 2025 (publication in 2026): For large businesses not yet covered by the NFRD.
– Financial year 2026 (publication in 2027): For small and medium-sized enterprises (SMEs) listed on an EU-regulated stock exchange.
– Financial year 2028 (publication in 2029): For certain businesses from third countries.

CSRD Disclosure Standards and Requirements

In 2022, the European Financial Reporting Advisory Group (EFRAG) published the first set of European Sustainability Reporting Standards (ESRS). These standards detail the metrics that companies must disclose and how to disclose them to meet CSRD requirements. There are 12 ESRS covering:

– Cross: General principles and general disclosures.
– Environmental: Climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy.
– Social: Own workforce, workers in the value chain, affected communities, consumers and users.
– Governing: Business conduct.

All CSRD disclosures must be publicly available and their accuracy and completeness must be verified by an external audit.

Comparison of CSRD and NFRD

– Scope: CSRD covers more companies than NFRD, including large unlisted companies.
– External audit: CSRD requires external audit while NFRD allows voluntary audit.
– Breadth of reporting: CSRD reports on risks and opportunities, with a focus on future planning, while NFRD allows for greater flexibility.
– Specific electronic format: CSRD requires reports to be submitted in ESEF/XHTML format.

Penalties for non-compliance

EU Member States must establish investigative and sanctioning bodies to impose appropriate and dissuasive sanctions based on the seriousness and duration of the infringement. Penalties vary from state to state and each company should be aware of any legal changes and ensure compliance.

Directive (EU) 2022/2464 (" CSRD ")