The European CSRD (Corporate Sustainability Reporting Directive) aims to introduce new and more demanding obligations regarding sustainability reporting. Scheduled to come into force in 2024, it will have significant implications for many companies across Europe.
What is the CSRD Directive?
The CSRD was adopted in response to the growing demand for transparency and reliable information on the environmental and social impact of companies. Before the CSRD, the NFRD established reporting principles for large companies, but the information provided was found to be insufficient and difficult to compare from one company to another.
The CSRD aims to remedy these shortcomings by establishing clear, standardized requirements for sustainability reporting, enabling consumers and investors to make informed decisions based on reliable, comparable information.
The main provisions of the CSRD
The CSRD introduces several important provisions. In addition to expanding its scope, the directive requires companies to publish detailed information on their impacts, risks, and opportunities related to environmental, social, and governance issues.
One of the major innovations of the CSRD is the introduction of the concept of "double materiality". This refers to the obligation for companies to report both on the impact of their activities on society and the environment, and on the impact of these issues on the company itself.
- Financial materiality (also called single materiality) only takes into account the positive impacts (opportunities) and negative impacts (risks) generated by the economic, social, and natural environment on the company's development, performance, and results.
- Impact materiality (also called socio-environmental materiality) takes into account the negative or positive impacts of the company on its economic, social, and natural environment.
Companies will therefore be required to adopt an approach centered on sustainability-related risks and impacts across their entire value chain. They will need to transparently share information about their ESG strategy. These companies will need to set greenhouse gas emission reduction targets in line with the Paris Agreement.
Which companies are affected?
The scope of the CSRD is notably broader than that of the NFRD, multiplying the number of companies affected by four. While the NFRD targeted approximately 10,000 companies, the CSRD will encompass more than 50,000.
The new element lies in the broadening of inclusion criteria: beyond companies with more than 500 employees, the framework now encompasses a large number of companies with more than 250 employees as well as a large majority of listed companies, including many SMBs that were previously exempt.
The CSRD will apply to listed companies meeting at least two of the following criteria.
For large listed companies
- 250 employees,
- Total balance sheet of €20 million,
- Net revenue of €40 million.
For listed SMBs
- Between 10 and 250 employees,
- Total balance sheet between €350K and €20M,
- Net revenue between €700K and €40M.
For non-European companies
The CSRD will also apply to non-European companies operating in European territory, with a criterion based on net revenue generated in Europe, set at more than €150M.
For unlisted companies
The European Union also encourages other companies (such as SMEs, SMBs, or unlisted entities) to adopt extra-financial reporting practices. In this regard, the text mentions in particular EFRAG, which proposes reporting standards adapted to these organizations.
The CSRD implementation timeline
The CSRD will apply to a broad range of companies across Europe. According to the implementation timeline, approximately 50,000 companies should be covered by the directive.
- starting January 1, 2024, large companies within the scope of the current European NFRD;
- starting January 1, 2025, all other large European companies, i.e., those meeting 2 of the following 3 criteria: more than 250 employees, revenue of more than €40 million, or a total balance sheet of more than €20 million;
- starting January 1, 2026, SMBs listed on a regulated market, with the exception of microenterprises.
- starting January 1, 2028, certain large non-European companies with European revenue exceeding €150M and a subsidiary or branch based in the European Union.
The European Sustainability Reporting Standards (ESRS)
Another major innovation introduced by the CSRD is the creation of European Sustainability Reporting Standards ESRS (European Sustainability Reporting Standards). These standards will provide a framework for companies' sustainability reports and help harmonize the data published.
Universal standards
Universal standards will apply to all companies, regardless of their industry. They will cover cross-cutting issues as well as all socio-environmental themes. These standards appear in a delegated act from June 2023.
Sector standards
Sector standards will be specific to each industry. They will be adopted by a second delegated act planned for June 2024.
Specific standards for SMBs
There are also specific standards for SMBs listed on regulated markets. These standards will be lighter than those applicable to large companies and will also be adopted in June 2024.
How to prepare for CSRD obligations
With the implementation of the CSRD, it is essential for companies to understand and prepare for its requirements. Here are some key steps to prepare effectively:
1. Understand the Directive:
Reading and understanding the text of the CSRD directive is the first crucial step. It is essential to understand the scope, reporting requirements, and deadlines associated with the directive.
2. Assessment of current state:
Assess where your company stands on non-financial reporting. Identify the gaps between current and future requirements and determine the resources needed to close these gaps.
3. Establishing a dedicated team:
Form a dedicated cross-functional team to manage the transition to CSRD compliance. This team should include members of management and experts in sustainability, reporting, and compliance.
4. Training and Awareness:
Organize training sessions for internal and external stakeholders to raise awareness of CSRD requirements and the implications for the company.
5. Technology and Systems:
Invest in technologies and systems that can facilitate the collection, management, and disclosure of data in accordance with CSRD requirements.
6. Engagement of Suppliers and Partners:
Engage your suppliers and partners to ensure they understand your reporting requirements and are able to provide the necessary information.
7. Review of Policies and Procedures:
Review and, if necessary, update your policies and procedures to ensure ongoing compliance with the CSRD.
8. Audit and Assurance:
Implement internal and external audit processes to ensure the accuracy and completeness of disclosed information.
9. Communication:
Develop a communication strategy to inform stakeholders of your efforts to comply with the CSRD and demonstrate your commitment to transparency and sustainability.
10. Regulatory Watch:
Establish regulatory monitoring to stay informed of future regulatory developments that could affect your non-financial reporting obligations.
Preparing for the CSRD directive requires a collaborative and proactive effort from companies to ensure compliance and capitalize on the opportunities it offers in terms of transparency and sustainability.
A sustainable finance challenge
This directive also has a financial objective. The European Union, through this harmonization, seeks to increase the value of extra-financial ratings for investors. As a result, it is part of the trend toward democratizing more sustainable finance that has developed in recent years.
Conclusion
The European CSRD Directive represents a major evolution in sustainability reporting regulation. It promises to transform the corporate reporting landscape and improve the quality of information available on companies' sustainability performance.
However, complying with the CSRD will also represent a major challenge for many companies. To succeed, it will be crucial to understand the directive's requirements, assess its impact on your company, and put a solid action plan in place.
With adequate preparation, the CSRD can represent an opportunity for companies to demonstrate their social and environmental commitment and to improve their long-term performance.