CSRD, or Corporate Sustainability Reporting Directive, is an initiative that redefines business practices to promote a more sustainable and ethical model. This emerging concept aims to go beyond the traditional responsibilities of companies, including environmental, social and governance aspects in their operations. The CSRD is an extension to the EU’s current Non-Financial Reporting Directive (NFRD), establishing comprehensive ESG reporting requirements in a separate section of the management report. Communication requirements are combined and modernize several existing frameworks.
Why was CSRD created?
CSRD was created to address the growing demand from investors, consumers, regulators and society in general for more transparency and responsibility from companies in relation to their sustainability impacts and risks. CSRD also seeks to contribute to the objectives of The European Green Deal and the Sustainable Finance Strategy, as well aligning with the United Nations Sustainable Development Goals (SDGs) and the Paris Climate Agreement.
On January 5, 2023, the Corporate Sustainability Reporting Directive (CSRD) came into effect. The new rules ensure that investors and other stakeholders have access to the data they need to assess the impacts of companies on people and the environment, so that investors can assess the financial risks and opportunities related to climate change and other sustainability issues. Companies subject to the CSRD will have to act in accordance with the European Sustainability Reporting Standards (ESRS)
Who establishes CSRD reporting standards?
The European Financial Reporting Advisory Group (EFRAG) is responsible for developing the new reporting standards for consideration by the EU Commission under the CSRD. These standards are known as the European Sustainability Reporting Standards, or ESRS.
To achieve this objective, EFRAG collaborates with several advisory bodies, including the European Banking Authority (EBA), the European Environment Agency (EEA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA). This collaboration aims to ensure alignment between CSRD standards and EU legislation.
Who does CSRD apply to?
The scope of application of the CSRD is broad and covers a large number of companies operating in the European Union. Its effects extend not only to companies established in the EU, but also to companies based outside the region, directly or indirectly, through competition and the value chain.
With the implementation of the new CSRD, it is expected that approximately 49,000 European companies, and companies governed by EU legislation, will be required to report sustainability data, instead of the 11,700 that currently do so. The CSRD is applicable to the following companies:
- All European companies listed on the stock exchange (except small companies).
- All large companies established in an EU Member State or governed by EU law, including those already governed by the NFRD. A large company is understood to be any company that meets at least two of the following criteria:
- Business revenues exceeding 40 million euros.
- A total balance of 20 million euros.
- 250 or more employees.
- Parent companies from a third country (including the US) that, on consolidation, net more than 150 million euros in EU business and meet any of the following criteria:
- It has a subsidiary that is considered a large company in the EU.
- It has a subsidiary with debt or equity securities listed on an EU-regulated exchange.
- It has a significant subsidiary in the EU with net revenues of more than 40 million euros.
- Insurance companies and credit institutions.
When does CSRD come into force?
CSRD comes into force in January of 2024, but the first reports will only appear in 2025:
- January 1, 2024: for companies already subject to the NFRD directive (with more than 500 employees), which must submit their reports in 2025.
- January 1, 2025: for large companies not currently subject to the NFRD directive (250 employees and/or revenues of €40 million and/or €20 million in total assets), and the parent companies of large groups that meet at least two of the three criteria above, which must present their reports in 2026.
- January 1, 2026: for listed SMEs (possibility of exemption until 2028), as well as for small and non-complex credit institutions and captive insurance companies.
What is the difference between NFRD and CSRD?
CSRD and NFRD are two EU guidelines that require companies to disclose non-financial data related to their environmental, social and governance (ESG) performance. The main differences between the two guidelines is the scope and content of these required disclosures.
The Non-Financial Reporting Directive (NFRD) was adopted in 2014 and requires some large EU companies to disclose non-financial information related to ESG issues in their annual management reports. The guideline applies to public interest entities with more than 500 employees, including listed companies, banks and insurance companies. The disclosures required under the NFRD relate to environmental, social, team member, human rights and anti-corruption issues. They must describe the company’s policies, results, risks and key performance indicators.
CSRD is a proposed new guideline that will replace the NFRD and expand the scope of sustainability reporting requirements. The directive will require companies to report on broader sustainability topics, including climate change, biodiversity and social issues. CSRD will also introduce more specific and prescriptive reporting requirements, such as reporting in a machine-readable digital format and using currently accepted reporting standards.
In addition to establishing a series of mandatory requirements for companies when preparing their sustainability reports, CSRD includes a number of new features that seek to improve transparency and coherence for reporting sustainability data:
- Mandatory adoption of a dual materiality approach. This should include both the data necessary to understand how the company affects people and the environment and sustainability issues that affect the company’s development, performance and position.
- With new common reporting standards at the European level, the ESRS will define in greater detail the content and parameters that organizations should use for their sustainability reports, which will be developed by the European Financial Reporting Advisory Group (EFRAG).
- Reporting in accordance with the EU’s Sustainable Finance Disclosures Regulation (SFDR).
- Third-party auditing of data to improve the reliability and credibility of sustainability reports.
What are the penalties for non-compliance?
CSRD requires EU Member States to have an investigation and compliance body to impose “effective, proportionate and dissuasive” sanctions based on a number of factors, including the severity and duration of the non-compliance and the financial situation of the company. Penalties for CSRD non-compliance will be determined by each Member State based on relevant state laws. It is recommended that all businesses stay up to date on any changes in legislation and obtain legal advice to ensure compliance to avoid potential investigations and penalties.
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