Explained: The new CSRD Directive
#news and trends • 15/06/2023 • Ana Katarina Avila De Langhe & Katelijne NorgaEarlier this year, the Corporate Sustainability Reporting Directive (CSRD), the new European directive on sustainability reporting, came into force. 50,000 companies in Europa will have to provide insight into their activities’ impacts on people and on the environment. What companies are we talking about? What and when do you need to report? And how do you leverage the CSRD for your business? You can read it here.
This is the first of a series of insights that help you to navigate through the changes and complexities related to the CSRD and the accompanying ESRS (European Sustainability Reporting Standards).
With the Green Deal, Europe wants to transform its economy to become a climate neutral continent by 2050. To turn this ambition into reality, it launched the Sustainable Finance Action Plan, among other things, including legislation for both financial and non-financial companies. A part of that plan is the Corporate Sustainability Reporting Directive or CSRD. This directive sets the standard by which numerous large European companies will have to report. The CSRD replaces the Non-Financial Reporting Directive (NFRD), that already required reporting for listed companies, banks and insurance companies. The CSRD does not only broaden the directive’s scope, it also expands its reporting requirements.
What does the EU want to achieve with the CSRD?
- The EU’s main objective is to direct companies towards sustainable activities and investments. As a result, the need for transparency about which economic activities are truly sustainable increases. Investors and banks, which must also meet climate and environmental targets under the Sustainable Finance Disclosure Regulation (SFDR) for financial market participants, need ESG information from non-financial companies. What impact do they have on people and the environment? How do they plan to manage that impact? What transition plan do they have ready to take their place in the climate-neutral economy of the future? By reporting on this annually, it becomes possible for financial players and other stakeholders to compare the ESG performance of companies.
- The new set of rules should help to put a stop to greenwashing. The Green Claims Directive will also influence this - more on this in our May newsletter.
- Aligning the CSRD with other international reporting frameworks such as the Global Reporting Initiative (GRI) and the Task Force on Climate-related Financial Disclosures (TCFD) can harmonize and simplify global reporting.
Who does the CSRD apply to?
The CSRD significantly increases the number of companies subject to sustainability reporting. While approximately 11,700 companies were covered by the NFRD, up to 50,000 European companies are affected by the CSRD – five times more.
Those companies are:
- All listed companies, including SMEs
- Companies of public interest
- All large companies that meet two of the following three criteria:
- A net turnover of more than 40 million euros
- A balance sheet total of more than 20 million euros
- 250 or more employees
Although the CSRD does not put non-listed SMEs under an obligation, smaller companies will be faced with expectations from their clients and other stakeholders. The whole market mechanism will be affected by the Green Deal and the CSRD, so SMEs must also get on board.
When do you have to start reporting in accordance with the CSRD?
The reporting requirements will be implemented in four successive stages:
- January 2025 (fiscal year 2024): Both listed companies and companies of public interest will report on fiscal year 2024 for the first time in 2025.
- January 2026 (fiscal year 2025): All other large companies will be required to report on fiscal year 2025 for the first time in 2026.
- January 2027 (fiscal year 2026): Listed SMEs have an additional year to prepare for the reporting requirements on fiscal year 2026.
- January 2029 (fiscal year 2028): Non-EU companies with subsidiaries in Europe are required to report on fiscal year 2028 for the first time in 2029.
The European Parliament officially adopted the CSRD in November 2022. Member states now have two years to incorporate the directive into national legislation. That transposition will not affect the timing. However, member states may decide to set the bar higher than Europe, to award fines for non-compliance with the new law, or to tighten the criteria for mandatory reporting.
What should you report?
Companies have to publish general information on the strategy, business models, organization and governance they implement towards a climate-neutral economy. The way they involve various stakeholders, ranging from financial players, to employees, customers, NGOs, local residents ... in the creation of their sustainable strategy should also be described in detail.
The heart of the report is the sustainability information, that should be structured around three themes: Environment, Social and Governance (ESG).
In the interest of helping companies under the CSRD to report on a standardized basis, the European Financial Reporting Advisory Group (EFRAG) drafted 12 technical standards: the European Sustainability Reporting Standards (ESRS). These standards help to interpret and implement the CSRD and ensure that the data is auditable and comparable. In subsequent blog articles, we will zoom in on the ESRS.
What is new?
The CSRD introduces a number of new concepts:
- Looking back and ahead. Companies should not limited themselves to reporting on the previous year's impacts and performance. They are also required to disclose their transition plans and roadmaps. This will show which companies are positioning themselves as problem solvers in the future climate-neutral economy.
- Double materiality. This concept forces companies to assess their impact on people and planet on the one hand (inside-out approach), and on the other to examine how external trends such as climate change affect their financial value (outside-in approach). This combination of impact materiality (impacts) and financial materiality (risks and opportunities) should form the basis of the sustainable business strategy.
- Upstream and downstream value chain. Reporting is not limited to information about the company's own business activities. Impacts throughout the value chain (upstream - at subcontractors and suppliers - and downstream - at consumers and after end-of-life) must also be included in the sustainability report.
- All ESG information should have a place in the company's annual management report, creating a single, integrated report that includes both financial and non-financial information.
- Sustainability reports must be audited by an independent auditor. This is done in two steps: first a limited audit and then a reasonable audit.
- Digital Report. Reports prepared in accordance with the CSRD must be digital and machine-readable. They must be submitted in a central access point, yet to be established, in accordance with the ESEF Regulation.
Finally, it is important to note that the CSRD is inextricably linked to the EU Taxonomy and its Delegated Acts. The EU taxonomy is the European ‘sustainability catalogue’, which unambiguously defines the technical requirements for sustainable economic activities and investments by sector and activity.
What can a sustainability report do for my business?
Sustainability reporting is becoming an obligation, but you would do well to look beyond it. Here are 5 reasons why a sustainability report will benefit your business more than mere compliance:
Employees and job applicants prefer credible employers
Millennials and the up-and-coming generation care about working for a sustainable employer, studies show. So in the war for talent, being a sustainable company gives you a big edge. With a sustainability report prepared according to the rules and the CSRD, you show the labour market that you take your social responsibility seriously.
Reporting helps you manage risk
Boards of directors are faced with the task of making their business strategy sustainable. They want a clear view of their company's environmental and social risks - think: loss of permits, unforeseen expenses, a bad reputation ... - in order to manage them in an informed way. And they want to have a plan ready to seize new business opportunities with both hands. A sustainability report provides executives with the necessary data to make informed decisions and anticipate new developments.
- You demonstrate creditworthiness
The biggest risks of financial institutions are the (indirect) risks of their customers. Indeed, banks are under great pressure to stop financing companies with a poor environmental or social image. If a company does not control its negative environmental or social impacts, it will appear negatively on the financial radar. With a sustainability report, you show your CSR performance in black and white and are therefore stronger in financial negotiations.
A sustainability report helps improve your strategy
Have you been planning to work on your ESG trajectory for a long time? Then now is the right time, because all studies show that companies that are resilient and sustainable survive economic crises better. Even if you are still in the process of shaping your sustainability strategy, a sustainability report is a useful tool. Think of it as a kind of baseline measurement: where do I stand as a company with my ESG policy? By recording your starting position today, you can shape your strategy in a more focused way in the coming years.
- Your customers demand sustainable suppliers
Sustainability has gradually become mainstream and, as a result, consumers are increasingly critical of brands' green claims. They see through it when companies profile themselves with things that are already standard in the market or with promises they cannot keep. Clear commitments; transparent, honest communication about your sustainability approach; facts & figures are crucial to avoid this. So, in times of greenwashing and disinformation, a sustainability report is a must-have to maintain and strengthen your market position as a company.
The CSRD implies extensive changes for companies. It is best to take steps now in order to be well prepared for 2025. Our consultants are happy to guide you every step of the way, from strategy to reporting. Contact us at mail@pantarein.be.
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