In the woke culture of increasing environmental consciousness and the pressing need for transparent corporate governance, the European Union (EU) has introduced the Corporate Sustainability Reporting Directive (CSRD).
Besides the Mandatory Company Carbon Reporting, this directive represents a significant shift in how companies are expected to report their sustainability practices and performance.
As businesses navigate this new regulatory landscape, it is crucial to understand what CSRD entails and the consequences it brings for companies.
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Understanding CSRD
CSRD stands for Corporate Sustainability Reporting Directive and mandates that large companies in the EU provide a standardise and detailed report on their environmental, social, and governance (ESG) impacts, risks, and opportunities.
The CSRD is an update and expansion of the existing Non-Financial Reporting Directive (NFRD) which came into effect in 2018. This directive is part of the EU’s broader agenda promoting sustainable finance and integrate sustainability considerations into business practices.
Who needs to comply with CSRD
Starting 2024, large companies with more than 500 employees are required to report under CSRD. The companies in scope of the Corporate Sustainability Reporting Directive (CSRD) will report against the European Sustainability Reporting Standards in 2025 for the financial year 2024.
Beginning 2025, the directive will also apply to companies that meet at least two of the following criteria:
- more than 250 EU-based employees;
- a balance sheet exceeding EUR 25 million;
- net revenue exceeding EUR 50 million.
Key Elements of CSRD
1. Scope
Unlike the NFRD, which applied to around approx. 11,000 companies, the CSRD will cover approximately 50,000 companies, including listed companies, large corporations, and Small-Medium Enterprises meeting certain criteria.
2. Reporting Requirements
Companies subject to the CSRD will have to report according to European Sustainability Reporting Standards (ESRS).
Companies must report on a wide range of sustainability metrics, including climate-related risks, biodiversity impacts, human rights, and diversity. The CSRD introduces the concept of double materiality, meaning companies must consider both the impact of the environment on the business and the business’s impact on the environment.
Reports must be prepared in a digital readable format to facilitate data analysis and comparison across companies.
There is a guidance supporting companies and is called the guidance on the interoperability between the European and international sustainability reporting standards.
3. Third-Party Assurance
Sustainability reports will require independent verification, ensuring the accuracy and reliability of the disclosed information.
4. Alignment Global Standards
The CSRD aligns with global sustainability frameworks like the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainable Finance Disclosure Regulation (SFDR).
CSRD is a comprehensive directive for sustainability reporting, whereas TCFD specifically addresses climate-related financial disclosures. CSRD will not replace SFDR; instead, they function as complementary regulations.
While GRI offers a global framework for sustainability reporting, CSRD is a specific EU directive with mandatory reporting requirements.
Consequences for Companies
The introduction of CSRD brings significant implications for companies, both positive and challenging.
- Transparency and Accountability: Companies will need to provide comprehensive and detailed sustainability information, leading to greater transparency and accountability.
- Operational Changes and Strategic Reassessment: To meet CSRD requirements, companies may need to reassess and adapt their operational strategies. This includes investing in sustainable technologies, adopting greener practices, and ensuring supply chain sustainability. Such changes can drive long-term business resilience and competitiveness.
- Compliance, Costs and Administration: Preparing detailed sustainability reports and obtaining third-party assurance will entail significant costs and administrative efforts. Smaller companies, in particular, might face challenges in meeting these requirements due to limited resources and expertise.
- Risk Management: The CSRD’s emphasis on reporting climate-related risks and other ESG factors will compel companies to integrate these considerations into their risk management frameworks. This can lead to better identification, assessment, and mitigation of risks, ultimately safeguarding business continuity.
- Company Reputation: Companies that excel in sustainability reporting and performance can differentiate themselves in the market. A strong sustainability profile can enhance a company’s reputation, attract environmentally conscious consumers, and provide a competitive edge.
- Investor Relations: With growing investor interest in ESG factors, compliance with the CSRD can improve a company’s attractiveness to investors. Transparent and reliable sustainability reporting can facilitate access to capital and potentially lower the cost of capital.
- Legal and Regulatory Risks: Non-compliance with the CSRD can result in legal and regulatory repercussions, including fines and reputational damage. Companies must ensure robust governance and reporting mechanisms to avoid such risks.
Preparation CSRD
To effectively navigate the CSRD landscape, companies should take proactive steps:
Step 1: Conduct a Gap Analysis
Assess current reporting practices against CSRD requirements to identify gaps and areas for improvement.
Step 2: Invest in Data Collection and Management
Implement robust systems for collecting, managing, and reporting sustainability data.
Step 3: Engage Stakeholders
Collaborate with stakeholders, including investors, customers, and employees, to align sustainability goals and reporting practices.
Step 4: Seek Expert Guidance
Engage with sustainability experts, auditors, and legal advisors to ensure compliance and leverage best practices.
The directive also offers opportunities for companies to enhance their sustainability performance, building trust with stakeholders, and driving long-term value. Contact us today to learn how we could support you. Book your free consultation call today!
