The Corporate Sustainability Reporting Directive (CSRD) is the new EU legislation requiring all large companies 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.
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
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 will require all large companies - meaning companies with more than 250 employees and more than €40M turnover and/or more than €20 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: Sustainability risk (including climate change) affecting the company + companies’ impact on society and environment
- Process to select material topics for stakeholders
- More forward looking information, including targets and progress
- Disclose information relating to intangibles (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?
As of this state, the CSRD is still a proposal by the European Commission. The European Parliament and the European Council still have to agree on it. This is expected to be happening within Q1 2022. Once that happened, these are the following milestones:
- 2025: Businesses already subject to the NFRD will have to start reporting on the financial year 2024
- 2026: Large undertakings not currently subject to the NFRD will have to start reporting on the financial year 2025
- 2027: Small and medium enterprises and small and non-complex credit institutions and captive insurance undertakings will have to start reporting for the financial year 2026 - with a further possibility of voluntary opt-out until 2028
- 2029: Non-European companies that have branches or subsidiaries 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: €10 million 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?
If your company must comply with the CSRD, you must act now. 2023 is closer than it seems. To be fully prepared, businesses should start collecting data now.
It is not easy to stay on top of the requirements and understand which data must be collected and when to disclose it. We at Plan A have the solution for you. Get in touch with us.