The Corporate Sustainability Reporting Directive (CSRD) is the new EU legislation requiring all large companies and listed SMEs, to publish regular reports on their environmental and social impact activities. It helps investors, consumers, policymakers, and other stakeholders evaluate large companies' non-financial performance. Thus, it encourages these companies to develop more responsible approaches to business. For instance, it radically changes companies' scope and type of sustainability reporting. With the CSRD, the European Commission defines a common reporting framework for non-financial data for the first time.
Adopted as part of the comprehensive Sustainable Finance Package on 21 April 2021, the CSRD entered into force on 5 January 2023. This directive expands the scope of sustainability reporting, affecting approximately 50,000 companies across Europe, with the aim to standardise non-financial data reporting.
On 28 November 2022, the European Union Council gave its final approval to the Corporate Sustainability Reporting Directive (CSRD). Following the Council’s approval of the European Parliament's position, the CSRD legislative act was adopted.
Compliance is happening soon: companies must submit their report aligning with the CSRD on 1 January 2025, for the 2024 financial year. It will be challenging for reporting companies, as data collection and auditing is an arduous process requiring time and resources. If your company is not familiar (yet) with this regulation and you are wondering, "does my company needs to comply?" then it is time to become an expert on the topic, and on that side, we have you covered.
What is the Corporate Sustainability Reporting Directive (CSRD)?
To help improve money flow towards sustainable activities across the European Union, the European Commission adopted the ambitious and comprehensive Sustainable Finance Package on 21 April 2021. One of the proposed measures within the package is the Corporate Sustainability Reporting Directive (CSRD).
The Corporate Sustainability Reporting Directive extends the scope and reporting requirements of the already existing Non-Financial Reporting Directive - a regulatory framework that mandates sizeable public interest entities to report on their sustainability performance since 2018.
This new legislation comes into play as Environmental, Social and Governance (ESG) reporting gains momentum. There is evidence that companies' information is not sufficient in the reporting. According to the European Commission, "reports often omit information that investors and other stakeholders think is important". Reported information can be difficult to benchmark from company to company, and users are often unsure whether they can trust it. For example, investors need to assess this information to report under the SFRD and channel money to sustainable activities.
With its new requirements, the EU is tackling the problem of quality reporting by establishing a common reporting framework. Also, the CSRD aims to ensure that businesses report reliable and comparable sustainability information to re-orient investments towards more sustainable technologies and companies.
NFRD versus CSRD: differences and action points
While both directives aim to enhance transparency and contribute to a more sustainable economy, the CSRD expands the reporting requirements, company types, and provides a more harmonised framework for reporting. The CSRD also calls for an audit of the sustainability information that companies report, contributing to more reliable data and increased trust among stakeholders.
Which companies have to comply with the CSRD?
While the NFRD only requires "public interest entities" with more than 500 employees to report on their sustainability performance, the CSRD is requiring all large companies - meaning companies with more than 250 employees and more than €50 Million in turnover and/or more than €25 Million in total assets - and all listed companies (except micro-enterprises, less than 10 employees or below €20M in turnover) to report on their sustainability.
As soon as put into force, nearly 50,000 companies (15,000 in Germany alone) in the EU will need to follow detailed EU sustainability reporting standards, corresponding to 75% of all EU companies turnover.
Which information will have to be disclosed?
Additional to the NFRD Under Directive 2014/95/EU, large companies have to publish information related to:
- Environmental protection
- Social responsibility and treatment of employees
- Respect for human rights
- Anti-corruption and bribery and
- Diversity on company boards
Also, the CSRD is adding additional requirements on:
- Double materiality concept: It includes sustainability risks (like climate change) that affect the company and the company's impact on society and the environment.
- Companies will need to report on their process of selecting material topics for stakeholders.
- More forward-looking information, such as targets and progress, must be included in reports.
- Companies must disclose information relating to intangible assets, like social, human, and intellectual capital.
- Reporting in line with Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation.
- Businesses will correspondingly have to start reporting how sustainability risks might affect their performance.
While the EU provides voluntary reporting guidelines for NFRD reports, the CSRD introduces more detailed reporting requirements and requirements to report according to mandatory EU sustainability reporting standards. The CSRD reporting will align with the already existing Sustainable Finance Disclosure Regulation and the EU Taxonomy.
What are the next steps?
On 28 November 2022, the European Union Council gave its final approval to the corporate sustainability reporting directive (CSRD). Following the Council’s approval of the European Parliament's position, the CSRD legislative act is adopted.
After being signed by the President of the European Parliament and the President of the Council, it was published in the Official Journal of the European Union and has entered into force on 5 January 2023. The new rules will need to be implemented by member states 18 months later. Here are the next steps and what to expect:
- End of 2023: EU Member States will have to adopt the EU Directive into national law.
- January 1, 2024: Companies within the scope of CSRD and currently reporting under the NFRD will be obliged to report their FY 2024 data in 2025. As of the beginning of 2024, all other large EU companies within the scope of CSRD are obliged to report.
- January 1, 2025 : Businesses already subject to the NFRD will have to start reporting in the financial year 2024.
- January 1, 2026: SMEs listed on a regulated market (no micro-enterprises) obliged to report for FY 2025 (but under less stringent reporting requirements).
- January 1, 2028: Small and medium enterprises and small and non-complex credit institutions, and captive insurance undertakings will have to start reporting for the financial year 2027 - with a further possibility of voluntary opt-out until 2028. The reporting standards for SMEs will be lighter.
- January 1, 2029: Non-European companies that have branches or subsidiaries in the EU with a net turnover of €150M in the EU will have to start reporting.
Can companies get sanctioned if they are not complying?
It is unknown exactly when the EU Commission will sanction businesses failing to comply with the CSRD. According to the Commissions' requirements within the Directive, the sanctions can be expected to be significant.
The nature of the sanctions and the fines' amount will depend on the different Member States. For example, if German businesses don't report compliance to the German version of the Non-Financial Reporting Directive (the Directive being amended with the CSRD) they face fines up to the amount which is the highest of the following: €10M or 5 % of the total annual turnover of the company or twice the amount of the profits gained or losses avoided because of the breach.
On the other hand, French businesses face no fines if they don't report according to the NFRD unless an interested party asks for the disclosure of the non-financial information. If it is not available, subsequently, financial penalties can be imposed by a judge.
What does the CSRD mean for businesses?
your company must comply with the CSRD, it is crucial to take proactive steps. Preparation should begin immediately, as the timeline for compliance is fast approaching. To navigate the requirements and understand which data must be collected and when to disclose it, consider seeking expert advice.
It is not easy to stay on top of the requirements and understand which data must be collected and when to disclose it. At Plan A, we are ready to guide you through the process and ensure your company is prepared for the CSRD. Get in touch with us.