The Corporate Sustainability Reporting Directive (CSRD) is a European Union Directive which became operative on the 5th of January after having been published in the Official Journal of the European Union. This Directive will require the companies which fall under its scope to report and disclose to the public certain environmental, social and governance (ESG) issues.
In recent years, sustainability has become a crucial issue for businesses worldwide. Companies are increasingly expected to consider their social and environmental impact and take steps to reduce their negative effects. In response, many enactments have been introduced to promote corporate sustainability, including mandatory sustainability reporting.
One of the main aims of the CSRD is to improve the comparability and reliability of sustainability reporting. The directive requires companies to report on a set of standardized sustainability indicators, including social, environmental, and governance issues. This will make it easier for investors, stakeholders, and regulators to compare the sustainability performance of different companies and assess their sustainability risks and opportunities.
The CSRD is one step taken by the EU to promote corporate sustainability and to combat issues such as environment degradation and climate change. It aims to improve upon the current Non-Financial Reporting Directive (NFRD) which is the directive currently in force which deals with the reporting of various matters regarding corporate sustainability.
The CSRD aims at tackling corporate sustainability problems and environmental problems through a number of methods. Firstly, as previously mentioned, companies will have to report and publicize ESG issues according to reporting standards known as the European Sustainability Reporting Standards (ESRS) which will be the responsibility of the European Financial Reporting Advisory Group (EFRAG). Ultimately, this will allow the public to be privy to the impact a company is having on the environment and on society in general. Furthermore, the CSRD aims at achieving these goals by also providing for mandatory audits of ESG reports by independent auditors.
The CSRD will apply extensively. In fact, large companies and companies which are listed on regulated markets, barring some exceptions (micro-undertakings), all fall under the scope of the CSRD. Moreover, all companies which are based in the EU and meet two out of the three following specifications also fall under the scope of the CSRD:
- Over 250 employees;
- Over €40 million Net Turnover; and/or
- Over €20 million Total Assets.
Furthermore, listed SMEs as well as certain non-European companies are also subject to the CSRD. The scope of this directive is clearly far-reaching and will apply to more than 50,000 companies. This is a great step forward from the current 11,700 companies which are within the remit of the NFRD. The CSRD is clearly intended to override and overreach the NFRD by increasing the number of companies which are required to report on corporate sustainability matters.
Timeline of CSRD’s Application
The application of the CSRD will be done in a number of phases. However, prior to this the Member States must first transpose the CSRD into their respective national laws. This is to be done by the 4th of July 2024 and once transposed, the CSRD will apply in phases, as per below:
- Reports published in 2025 regarding the financial year of 2024 - this shall apply to companies that are already under NFRD rules.
- Reports published in 2026 regarding the financial year of 2025 - this shall apply to large companies that are not currently under the scope of the NFRD rules.
- Reports published in 2027 regarding the financial year of 2026 - this will apply to SMEs. There is, however, the possibility of an opt-out which would exempt SMEs from reporting until 2028.
- Reports published in 2029 regarding the financial year of 2028 - this will apply to certain third-country undertakings.
In conclusion, the introduction of the Corporate Sustainability Reporting Directive is a positive step towards promoting corporate sustainability and addressing the challenges of climate change and environmental degradation. The directive will help to promote the much-needed integration of sustainability into business strategies and decision-making processes.
About the Authors
This article has been authored by Dr Edward Meli, Senior Associate and Assistant Manager, and Alec Sladden, Legal Intern. Contact us on https://www.csbgroup.com/contact-us/ for more information.