Let's leap ahead to December 2024, diving straight into the pulse of the holiday season within the corporate world. As cities embrace the holiday spirit with festive events, workplaces buzz with year-end activities. While most employees are caught up in the holiday cheer, there's two teams with a different agenda. Alongside the accountants wrapping up yearly figures, the sustainability squad is also back in action. From this year on, their mission involves navigating the Corporate Sustainability Reporting Directive, signalling a notable shift in business priorities.
Understanding the CSRD
In the fast-paced world of corporate operations, the Corporate Sustainability Reporting Directive (CSRD) is making waves. But what exactly is it?
Introduced in April 2021, this fresh EU legislative framework, crafted by the European Financial Reporting Advisory Group (EFRAG), is set to unfold gradually over the coming years. It represents an advancement from the Non-Financial Reporting Directive (NFRD), which has governed reporting practices since 2018.
Similar to its predecessor, the CSRD sets reporting requirements encompassing environmental, social, and governance (ESG) aspects for companies. Its fundamental aim is an expansive enhancement compared to the NFRD, casting a wider reporting net and demanding more comprehensive disclosures regarding corporate sustainability efforts.
Talk numbers: Businesses affected by the CSRD
The CSRD replaces and expands the existing requirements of the NFRD and extends the scope of companies required to disclose sustainability information from approximately 11,700 to 50,000 companies in the European Union, with another 3,000 or more U.S.-based companies estimated to be affected. This shift isn't limited to these entities alone. For most large companies, supply chains constitute a significant portion of their environmental footprint. The directive mandates primary environmental data from these key suppliers, compelling companies to prompt their partners to conduct 'product footprints’.
In the phased implementation of the CSRD obligations, a clear timeline delineates the gradual expansion of its scope over the upcoming years.
Financial Year 2024:
Public interest entities previously subject to the Non-Financial Reporting Directive (NFRD) will be included if they meet at least two out of three specified criteria: employing a minimum of 500 individuals, achieving a net turnover of at least 40 million EUR, and possessing assets valued at 20 million EUR or more.
Financial Year 2025:
Moving into 2025, a similar condition prevails: companies, both substantial listed and non-listed ones, will be encompassed if they meet at least two out of the same three criteria: employing at least 250 individuals, attaining a net turnover exceeding 40 million EUR, and possessing assets valued at 20 million EUR or more.
Financial Year 2026:
By the financial year 2026, the mandate further broadens to encompass small and medium-sized enterprises (SMEs) listed on EU-regulated markets, small and non-complex institutions, and captive insurance undertakings.
Financial Year 2028:
Finally, in 2028, the regulatory reach extends beyond the EU, now encompassing non-EU companies meeting specific criteria: generating a net turnover of 150 million EUR within the EU and maintaining at least one subsidiary or branch within its bounds.
Basic components of the directive
The CSRD sets specific requisites for companies, mandating adherence to several critical components. These include the incorporation of double materiality—a dual focus on how sustainable factors influence a firm's financial value and its broader impact on the environment and society.
Adherence to the European Sustainability Reporting Standards (ESRS) serves as a cornerstone, with two distinct sets stipulated: the first, sector-agnostic reporting standards adopted on July 2023, and the second, incorporating sector- and SME-specific standards, to be implemented by June 2024. These ESRS categories encompass a comprehensive range from Climate Change and Pollution to Business Conduct, necessitating reporting on various facets impacting sustainability.
Moreover, the directive calls for thorough presentation within the management report, published in a digital XHTML format. To ensure accuracy and credibility, third-party auditing becomes mandatory, initially involving limited assurance of reported information, which will transition to a requirement for reasonable assurance by 2028.
The compliance imperative
If a business is guilty of non-compliance with the CSRD, it can expect administrative sanctions and three possible penalties: a public denunciation; an order to change conduct; and financial punishment. Each EU member state will set the penalty and define the limits of the sanctions within their jurisdiction.
Investors, the guides of the business realm, now steer towards sustainability metrics, and CSRD non-compliance could mean vanishing from their radar. Moreover, in the bustling marketplace, CSRD compliance paves the way for optimised reporting, fostering authenticity and enabling comparisons. Navigating this terrain isn't merely about ticking boxes; it's about embracing sustainability as a core principle for building trust and ensuring lasting success.
Shaping the future with the CSRD
Embracing the CSRD goes beyond compliance. To lead the way, companies must weave compliance into their ethos, collaborate for impact with suppliers, and set ambitious yet measurable sustainability goals. Welcoming this challenge sparks innovation, driving us towards a future where sustainability stands as the cornerstone for lasting success and positive change.