Corporate Sustainability Reporting Directive (CSRD): Made easy to understand
In this blog:
50.000 businesses in the EU will face sustainability reporting by law.
Find out more about what this means to your business and how you get started on CSRD sustainability reporting in this article.
Watch this video to understand what the Corporate Sustainability Reporting Directive (CSRD) is and what it takes for businesses to comply with sustainability reporting.
the corporate sustainability reporting Directive
For the first time ever, sustainability reporting will be on par with financial reporting, a crucial step in supporting the EU Green Deal's ambitions. The CSRD brings with it more stringent reporting requirements than its predecessor, the Non-Financial Reporting Directive (NFRD). Approximately 50,000 companies will now have to comply with these new rules, compared to just 12,000 under the NFRD.
Under the CSRD, companies will be required to disclose sustainability information in their management reports and file it in a digital, machine-readable format that complies with mandatory European sustainability reporting standards. The directive also requires a limited assurance on sustainability reporting.
This shift represents a major challenge.
Which companies must comply with the new rules?
The new rules apply to all listed companies on the EU regulated market, including listed SMEs, with the exception of micro-enterprises. Additionally, companies that exceed two of the following three criteria must comply:
250 employees during the financial year
A balance sheet total of EUR 20 million
A net turnover of EUR 40 million
Non-EU companies with a net turnover of more than EUR 150 million and a subsidiary or branch in the EU, which meets the criteria for EU companies, are also subject to these rules. Small and non-complex financial institutions and captive insurance and reinsurance undertakings are also included. These companies will also have to comply with Article 8 of the Taxonomy Regulation.
Subsidiaries and large group entities
Subsidiaries of large groups are exempt from the obligations under the Corporate Sustainability Reporting Directive (CSRD) if the parent company produces a consolidated sustainability report that meets the requirements of the CSRD. This exemption is applicable to subsidiaries that are public interest entities, except when they reach the thresholds for being considered a large undertaking.
If there are significant differences between the risks and impacts of the group and its subsidiaries, the parent company should provide a clear understanding of the risks and impacts of its subsidiaries, including information on any due diligence processes that may have been conducted.
The subsidiary exemption also applies to parent companies that are based in third countries and produce sustainability reporting information in accordance with European or equivalent sustainability reporting standards. While the equivalence of sustainability reporting standards will be assessed at a later stage, transitional provisions have been put in place for a period of seven years to allow EU subsidiaries to report under European standards.
when will the new rules apply?
The new rules will be implemented as follows:
For companies that are already within the scope of the Non-Financial Reporting Directive (NFRD):
The rules will start applying on January 1st, 2024
The first reports must be submitted in 2025
For other large companies:
The rules will start applying on January 1st, 2025
The first reports must be submitted in 2026
For listed SMEs:
The rules will start applying on January 1st, 2026
The first reports must be submitted in 2027
For non-EU companies with branches or subsidiaries:
The rules will start applying on January 1st, 2028
The first reports must be submitted in 2029
Note: The above timeline is subject to change based on any updates or modifications that may be made to the rules.
The scope ahead
The EU's Corporate Sustainability Reporting Directive (CSRD) requires companies to provide comprehensive and accurate information regarding their impacts on sustainability matters and their effect on the company's overall performance, development, and position. The reporting requirements are in line with EU standards, and the scope of information that must be reported includes the following:
A description of the company's business model, strategy, and resilience to sustainability risks and its transition plans
Targets and indicators to track progress towards sustainability goals
The governance structure responsible for overseeing sustainability efforts and its expertise in this area
Policies and incentives related to sustainability matters
Due diligence processes for identifying and mitigating sustainability risks
Detailed information on the company's principal and adverse impacts on sustainability and actions taken to address these impacts
Information on the management of principal risks related to sustainability
A consideration of "double materiality" in sustainability reporting
Information on the company's business operations, value chain, products and services, and its supply chain
Listed small and medium enterprises (SMEs) and small and non-complex financial institutions may be subject to proportionate reporting requirements using proportionate SME reporting standards.
Reporting Requirements for Companies
Companies are required to include sustainability information in their management report through a dedicated section. This means that sustainability reporting should be integrated with the publication of their annual report.
What are the deadlines
The European Commission (EC) is responsible for adopting the European Sustainability Reporting Standards (ESRS) through delegated acts.
The adoption timeline is as follows:
By June 30th, 2023, the EC will adopt cross-cutting standards and standards for all sustainability topics such as environment, social, human rights, and governance, to meet the needs of financial market participants under the Sustainable Finance Disclosure Regulation (SFDR).
By June 30th, 2024, sector-specific standards, proportionate standards for listed Small and Medium-sized Enterprises (SMEs), and standards for non-European Union (EU) companies exceeding EU turnover thresholds will be adopted.
The EC has tasked the European Financial Reporting Advisory Group (EFRAG) with developing technical advice on the ESRS, which the EC will take into consideration when adopting the delegated acts.
The EC will review the ESRS at least every three years to ensure they remain relevant and aligned with relevant developments, including international standards.
The ESRS will specify the information that companies must report, including the structure of the report, and will align with the reporting requirements.
expected reporting formats
The format for preparing the management report is electronic and must be in compliance with the provisions outlined in the Delegated Regulation on single electronic reporting format.
For any business looking to get a head start we recommend following and implementing the GRI standards as the GRI (Global Reporting Initiative) was appointed by EC to help develop the disclosure frameworks.
For more information on how to get started please get in contact.