The Corporate Sustainability Reporting Directive (CSRD), a new piece of legislation from the European Union (EU), aims to ensure that all large companies in the EU will need to disclose data on the impact of their activities in a management report. In this explainer, we analyse what this will mean for eligible businesses.
CSRD was adopted in November 2022 as part of the European Green Deal and updates the provisions of the existing Non-Financial Reporting Directive (NFRD) which applied to large EU-listed companies, banks, and insurance companies.
The regulation allows investors, consumers, policymakers, and other stakeholders to evaluate large companies’ non-financial performance and looks to drive a more sustainable agenda.
Here are the top five things you need to know about CSRD for your business.
1. Which companies will be affected by CSRD?
CSRD applies to all companies established in the European Union, Iceland, Liechtenstein, Switzerland, and Norway exceeding at least two of the following criteria:
- A net turnover of €40 million;
- A balance sheet total of €20 million;
- 250 employees on average over the financial year.
Additionally, non-EU companies generating a net turnover of more than €150 million of EU-generated profits and companies that have a subsidiary or a branch in the EU generating more than €40 million net turnover, also fall within the scope.
The new sustainability reporting rules will also apply to all large companies and to all companies listed on regulated markets, except those listed with micro trades. These companies are also responsible for assessing the information applicable to their subsidiaries.
2. What information must be reported under CSRD?
CSRD requires reporting of forward-looking, retrospective, qualitative and quantitative information necessary to understand the companies impacts on sustainability matters.
The information is essential to interpreting how these matters influence a company’s development, performance, and position. But it also sheds light on the adverse impacts that the company may have on the climate – or any other dimension of sustainability. This is called “double materiality”.
The information must contain a description of the company’s:
- Business model & strategy, as well as opportunities and resilience to sustainability risks and transition plans;
- Sustainability targets and their progress;
- Sustainability governance (administrative, management and supervisory bodies and their expertise and skills to fulfil their role);
- Sustainability policies;
- Incentives schemes linked to sustainability matters;
- Due diligence of sustainability matters and the process to conduct it;
- Principal adverse impacts, and those of its value chain, including its products and services, its business relationships and its supply chain; principal sustainability risks and their management.
3. When will CSRD start applying?
The application of CSRD will take place in four stages:
- Stage 1: Reporting in 2025 for the financial year 2024 for companies already subject to the NFRD;
- Stage 2: Reporting in 2026 on the financial year 2025 for other large companies;
- Stage 3: Reporting in 2027 on the financial year 2026 for listed SMEs (except micro undertakings), small and non-complex credit institutions and captive insurance undertakings;
- Stage 4: Reporting in 2029 on the financial year 2028 for non-EU undertakings with net turnover above €150 million in the EU if they have at least one subsidiary or branch in the EU exceeding certain thresholds.
4. Why has CSRD been passed now?
Put simply, the EU believes that consumers and investors deserve to know the sustainability impact of businesses, and CSRD was created because the existing legislation wasn’t cutting it.
Before CSRD, the NFRD established the reporting principles for large companies. However, the European Commission discovered that the information reported by companies was insufficient:
“Reports often omit information that investors and other stakeholders think is important. Reported information can be hard to compare from company to company, and users of the information are often unsure whether they can trust it.” — The European Commission.
The European Commission reports that low-quality sustainability reporting can have cascading effects, particularly in regard to promoting sustainable investments. To ensure the market for green investments is credible, investors need a clear picture of their investment portfolio’s sustainability impacts. Even investors who aren’t particularly motivated to invest in green companies still need to meet the disclosure requirements of the Sustainable Finance Disclosure Regulation (SFDR).
The European Commission also cited the “accountability gap” in its reasoning for proposing CSRD: “High-quality and reliable public reporting by companies will help create a culture of greater public accountability.” — The European Commission.
And so, CSRD was created, with the goal of improving disclosure and providing the data investors need when determining a company’s sustainability.
5. Early compliance with CSRD offers advantages
Early compliance with CSRD offers many advantages: new insights arise when companies get a grip on the non-financial indicators relating to corporate activities. For example, new opportunities for cost savings (including energy reduction and optimisations) and innovations in the production process.
In line with the proposed tightening of climate ambitions, the EU will introduce more stringent legislation on ESG over the coming years, affecting both large companies and SMEs. Early anticipation of how this affects your own corporate activities and drawing up strategic plans to reduce any negative impact will ensure that your company is more agile and future-proof to face these challenges. Actively focussing on ESG provides you with a competitive advantage over companies that have no reporting obligation yet.
