CSRD How EU Sustainability Regulations are Driving Corporate Accountability and Impact (1/4)
Since January 2023, the European Corporate Sustainability Reporting Directive (CSRD) is applicable. It aims to give a frame for the corporate sustainability reporting, modernizing and strengthening the rules concerning the Environmental, Social and Governance (ESG) disclosures.
Objectives
The CSRD requires companies to reflect what they see as the risks and opportunities arising from social and environmental issues, and the impact of their activities on the society, and the environment.
It is meant to address the lack of consistency and comparability in ESG reporting across the EU. Before the directive, companies were not required to report on all ESG issues, and the reported information were often in different formats. The directive sets out to achieve the following objectives:
- Increase the reliability, comparability and relevance of sustainability information reported by companies.
- With more qualitative and transparent information on companies’ sustainability performances, investors will be able to make more informed decisions on their (sustainable) investments
- Promote sustainable business practices and encourage businesses to adopt more sustainable initiatives. This should lead to decrease the negative impact of business activities on the environment and on the society
- Enhance EU’s competitiveness by promoting sustainable and responsible practices. It should help companies to meet the growing demand for sustainable and transparent products and services
The information companies will be required to cover are for example:
à GreenHouse Gas (GHG) emissions, water consumption, social policies, and diversity and inclusion topics.
Context
The CSRD is part of EU’s efforts to promote sustainable finance and corporate social responsibility. It amends four existing European legislations:
- the Accounting directive
- the Transparency directive
- the Audit regulation
- the Audit directive
The CSRD builds on the Non-Financial Reporting Directive (NFRD), which was introduced in 2014. The NFRD has been criticized for being too vague and lacking enforcement mechanisms. With the CSRD, the EU aims to address these issues, by setting more specific and stringent standards.
It is part of a broader EU initiative for enhancing sustainability:
- Sustainable Finance Disclosure Regulation (SFDR): requires financial market participants to disclose ESG information
- Corporate Sustainability Due Diligence (CSDD) Directive (Article 2/4 coming soon): Align EU states’ regulation for companies Duty of vigilance (human rights, child labour & workers’ exploitation, harm to the environment) across their whole product/service value chain
- EU taxonomy (Article 3/4): EU’s complete definition and categorization of sustainable activities
- EU green Deal (Article 4/4) : EU’s strategic plan to make the EU’s economy sustainable and carbon-neutral by 2050
Companies required to comply with the CSRD
The CSRD introduces a broader scope of application. While the NFRD applied to 11 700 companies, it is now approximately 50 000 companies that will have to comply with the CSRD. All companies that exceed at least two criteria in a column will have to comply with the following agenda:
| All companies that already must comply with NFRD | Other companies | Listed SMEs on EU stock exchanges | Other large non-EU companies | |
| Employees | >500 | >250 | >10 | >150M€ turnover made within the EU through a subsidiary/branch in EU |
| Turnover | >40M€ | >40M€ | >700k€ | |
| Total balance sheet | >20M€ | >20M€ | >250k€ | |
| Reference exercise | 2024 | 2025 | 2026 * | 2028 |
| 1st reporting year | 2025 | 2026 | 2027 * | 2029 |
* Within a transition period of 2 years, the listed SMEs will be allowed not to comply with the full CSRD requirements if they mention in their management report the reasons for not complying with the directive.
When a mother companies already publishes a consolidated report that complies with CSRD requirements, its subsidiaries can benefit a reporting exemption. Minimum information are still required from the exempted subsidiary, such as exemption declaration and links to the consolidated report. This exemption does not apply to large listed companies.
SMEs and companies that are excluded from the scope of the directive can of course comply on a voluntary basis, and publicly disclose the relevant ESG information.
Requirements introduced by CSRD that complement NFRD
The CSRD introduces the creation of detailed sustainability norms called European Sustainability Reporting Standards (ESRS) enabling to shape, frame and harmonize companies’ disclosures. The European Financial Reporting Advisory Group (EFRAG) develops the draft standards. These norms will be gradually adopted via delegated acts, categorized under three types:
- Universal norms, applicable to all the companies, regardless their sector of activity. They will cover transverse challenges and all the socio-environmental topics. The adoption of the associated delegated act is planned for mid-2023
- Sector specific norms, that will be covered by a second delegated act planned for mid-2024
- Specific norms for listed SMEs, that will be covered by the act planned for mid-2024
The CSRD introduces the concept of “double materiality”. It obliges companies to systematically link the financial materiality (=how sustainability issues might create financial risks for the company) to the impact materiality (=company’s own impacts on people and the environment).
It also formalizes a unique location on where to publish the sustainable information, in a standard section of the annual report. In addition, companies will have to publish their report in a unique digital EU standardized format (xHTML). Further details (standard use of tags in the report) will be formalized in a new digital taxonomy through a delegated act.
In addition to the disclosure and format requirement, all the information will have to be audited by statutory auditors or independent assurance providers (choice from the Member state).
Conclusion
While the CSRD is a step in the right direction towards more sustainable and transparent business practices, it is not without challenges. Companies may struggle to gather the necessary data and resources to comply with the reporting requirements, and there may be concerns about the cost and burden of reporting. However, many companies have already recognized the importance of ESG reporting and are taking steps to improve their sustainability performances. The companies that already actively engaged in CSR initiatives and are reporting it, will be the winners of these measures, enabling to have more visibility, trust, and recognition, leading to a serious competitive advantage and reaching new opportunities.
Headmind Partners can help companies in planning, structuring, and formalizing their CSR strategies and the implementation of such strategies. We provide support in the CO2e emissions calculations, risk assessment & management, stakeholders’ dialogues and all necessary steps required for an adequate sustainable reporting.
Author: Adrien Panzer, Supervising Associate Consultant, Sustainable IT LAB PO