What is CSRD – Corporate Sustainability Reporting Directive?
One of the buzzing needs for the hour in sustainable reporting was to create better transparency and awareness of the sustainability impact of the business. It was found that the Non-Financial Reporting Directive (NFRD) provided insufficient information. It omitted information that provides metrics to compare company to company. There needs to be more information on the credibility of the data from the reports. That is what led to CSRD.
The European Commission highlighted the “accountability gap”. Low-quality sustainability reporting has drastic effects on consumer decisions and persuading business investments. Having a strong credible base of information makes it easier for the stakeholders and investors to make a sound decision.
Hence, The Corporate Sustainability Reporting Directive was introduced to improve the Non-Financial Reporting Directive. On the 21st of April 2021, The EU Commission introduced CSRD to comply with the conditions made under the European Green Deal.
Table of contents
- About CSRD directive 2023 – What is the new CSRD regulation
- What is the difference between NFRD and CSRD?
- Current regulatory updates on CSRD
- Who needs to report to CSRD?
- Application dates released for CSRD regulations
- How do I prepare for CSRD?
- Penalties and dues
About CSRD directive 2023 – What is the new CSRD regulation
The CSRD was officially approved by the EU parliament and the European Council in November 2022 and came into law in 2023.
- General Disclosures (ESRS 2) and topical data points that are given in ESRS 2 Appendix C
- Climate Change (ESRS E1)
- Own workforce (ESRS S1) – It is applicable for organizations that have more than 250 employees, application of human and labour rights, have a good relationship with their stakeholders, and also provide assistance in relative impacts.
What is the difference between NFRD and CSRD?
Non-Financial Reporting Directive (NFRD) was introduced in 2014 and mostly covers large companies with more than 500 employees listed in the European Union.
The CSRD improves the scope of NFRD by requiring the disclosure of information from around 11,700 to 50,000 companies in the European Union and additionally more than 3000 US-based companies.
Current regulatory updates on CSRD
According to the statement published by the EU’s Official Journal in December 2022, new rules shall be implemented by the state member after 18 months of its implementation.
- EU Taxonomy of Sustainable Activities: It establishes the list of sustainable actions that are relative to the six environmental objectives proposed by the European Union – climate change mitigation, climate change adaption, sustainable use, protection of water and marine resources, transition to the circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystem. It provides the stakeholders, investors, public and policymakers with information rich in science-based technical criteria.
- Sustainable Finance Disclosure Regulation (SFDR): It covers reporting on ESG qualities of the financial products offered by the companies. It requires the company to mitigate any negative impacts within its operations and subsidiary. It also focuses on disclosures value chain impacts and transition plans aligning with the agreement.
- European Green Bond Standard: It is yet another standard in development, which is voluntary. It will help to generate the importance of sustainability in the green bond market. It will enable the companies to issue “EU green bonds” – improving the scope of investments in sustainability.
Who needs to report to CSRD?
The scope of CSRD is wider than NFRD and is likely to affect the activities of US-based companies in the EU. It applies to
1. Large companies: According to the European Union, it applies to companies that are listed in the regulated market and unlisted as well as subsidiaries of the US parent companies in the EU that have:
- Greater than 20 million euros balance sheet total
- Greater than 40 million euros of net turnover
- More than 250 employees
2. MSME: Medium and small companies that are subsidiaries of any US-based companies which have:
- Small companies with not more than 4 million euros in the balance sheet or not more than 8 million net turnovers as of July 31, 2023 or not more than 50 employees
- Medium companies with not more than 20 million euros in balance sheet total or 40 million euros in the net turnover as of July 31, 2023, or not more than 250 employees.
- Micro companies with not more than 350,000 euros in the balance sheet total and 700,000 euros in the net turnover as of July 31, 2023 or not more than 10 employees.
3. US-based companies that have earned more than 150 million euros in the European Market or have one large or listed subsidiary in the EU that has more than 40 million euros of net turnover.
Application dates released for CSRD regulations
- For companies already subject to NFRD, reporting in 2025 for the financial year 2024.
- For newly added large companies, reporting starts in 2026 for the financial year 2025.
- For listed MSMEs, small credit and insurance undertakings, reporting starts in 2027 for the financial year 2026
- For eligible third-country, reporting in 2029 for the financial year 2028.
How do I prepare for CSRD?
- The first step is to check if the company falls under the scope of CSRD
- The next and most crucial step is to analyze the requirements under this regulation. The companies are required to set a standard process of a double materiality analysis to identify key focus areas in the organization.
This concept helps to attach materiality to sustainability by measuring it based on the impact and finance.
For this purpose, EFRAG is used to develop the reporting standards under CSRD. The following European Sustainability Reporting Standards (ESRS) are segregated into three broad divisions
- General Requirements (ESRS 1)
- General Disclosures (ESRS 2)
Environmental Topical Standards
- Climate Change (ESRS E1)
- Pollution (ESRS E2)
- Water and Marine Resources (ESRS E3)
- Biodiversity and ecosystems (ESRS E4)
- Resource use and circular economy (ESRS E5)
Social Topical Standards
- Own workforce (ESRS S1)
- Workers in Value Chain (ESRS S2)
- Affected communities (ESRS S3)
- Consumers and End Users (ESRS S4)
Governance Topical Standard
- Business conduct (ESRS G1)
- This-party gap analysis: This helps to understand all the aspects that are relevant to the standards mentioned and the guidelines issued by the CSRD regulations.
- Impact materiality: It is the measure of the effect of the organization’s action on the community, economy, and environment – which can be positive or negative to overall sustainable development.
- Financial materiality: It helps to understand and estimate the sustainability-related risk to avoid financial losses and identify new opportunities for investments.
- Double materiality: This factor helps the organization to assess its impact from two different perspectives and get a detailed assessment.
These assessments can be done by the following process:
- Developing a quality internal data collection system that provides qualitative and quantitative data on different segments of the organization.
- Delegation of the reporting task to qualified professionals to carry out CSRD gap analysis.
- Creating a sustainability strategy to maintain good progress with the environmental impact and financial stability by managing risks and opportunities.
- Monitoring and preparing management reports and uploading them in the European Single Access Point Portal.
Penalties and dues
Even though the full information on the sanctions is unknown, the companies can expect some serious costs for violation of CSRD including significant fines.
Looking at NFRD, fines can go up to 10 million euros or half of the annual turnover. Other nonfinancial consequences can be damage to the company’s goodwill, loss of investment opportunities, and the possibility of legal action from non-governmental organizations.
Implementing CSRD will require a lot of resources. That’s where Imvelo is here to help.
- It is crucial for the companies to stay updated with the EFRAG announcements and ESRS guidance
- Assessing the information gathered according to the regulations
- Formulating goals on the basis of key parameters to check the progress.
- Hiring or delegating to the right professionals to help with this sustainability reporting transition.
What does CSRD mean?
CSRD stands for Corporate Sustainability Reporting Directive, focusing on enhancing corporate sustainability reporting for a greener and more transparent business landscape.
Who is in the scope of CSRD?
CSRD applies to large EU companies, requiring them to report detailed sustainability information, fostering corporate accountability.
What is the current status of CSRD? (as of 23rd Nov, 2023)
As of November 23, 2023, CSRD is under review.
Will CSRD replace SFDR?
CSRD and SFDR serve distinct purposes. While CSRD focuses on sustainability reporting, SFDR addresses disclosure requirements for sustainable finance.
Is CSRD mandatory?
Yes, CSRD mandates large EU companies to disclose comprehensive sustainability information, fostering transparency and responsible corporate practices.
What is the goal of CSRD?
CSRD aims to standardize and enhance sustainability reporting, providing stakeholders with clear, comparable, and reliable information for informed decision-making.