Corporate Sustainability Reporting Directive (CSRD) in Europe

A Comprehensive Explanation

The Corporate Sustainability Reporting Directive (CSRD) is a directive in force in the European Union (EU) that applies to nearly 50,000 companies. This directive aims to promote transparency and make sustainability reporting mandatory for companies within the EU. The CSRD replaces the Non-Financial Reporting Directive (NFRD) and introduces stricter reporting requirements and a larger number of companies to comply with these requirements.

What is the Corporate Sustainability Reporting Directive (CSRD)?

Why was the CSRD adopted?

The goal of the CSRD is to improve the existing reporting system and provide investors and consumers with reliable information about companies' sustainability impacts. Previously, it was found that the information reported by companies was often inadequate and difficult to compare with other companies. This lack of comparability and reliability of sustainability reports hinders the growth of sustainable investments and distorts the market for green investments.

The CSRD also aims to reduce the "accountability gap" and promote a culture of greater public accountability. Requiring companies to provide high-quality and reliable public reporting helps build stakeholder trust and encourage long-term sustainability.

Who is covered by the CSRD?

The CSRD significantly expands the number of companies required to report on sustainability. It now includes not only large companies, but also small and medium-sized enterprises (SMEs) that meet certain conditions. The companies covered by the CSRD are:

Large companies: Companies that meet at least two of the following three conditions:
- Net sales of €40 million or more
- A balance sheet total of €20 million or more
- 250 employees or more

Non-EU companies: Non-EU companies with an annual turnover of more than €150 million in the EU must also comply with the CSRD.

Small and medium-sized enterprises (SMEs) that are not listed currently have no obligation to report under the CSRD. However, it is proposed to develop separate standards for unlisted SMEs so that they can voluntarily report information tailored to their capabilities.

Although the CSRD Directive does not apply to SMEs, sustainability reporting can still be relevant to smaller companies. After all, many SMEs collaborate with large companies in the value chain. In that case, it may be important for SMEs to demonstrate that they are also working sustainably and thus contributing to the sustainable goals of the chain.

What should be reported under the CSRD?

Under the CSRD, companies must include sustainability information in their management reports. This means that financial and sustainability information must be published simultaneously. Sustainability data must be submitted in a standardized digital format, which provides a clear structure and comparability between companies.

The CSRD's proposed reporting requirements cover various aspects of sustainability. For example, companies must report on their impact on climate and the environment, such as greenhouse gas emissions. In addition, they must take into account the concept of "double materiality," reporting both the risks the company faces and the impact the company has on climate and society. Reporting Scope 3 emissions, that is, supply chain emissions, is also part of the CSRD requirements.

Companies need to be aware of and report their value chain emissions. The European Financial Reporting Advisory Group (EFRAG), a private association funded by the EU, is charged with developing reporting standards for the CSRD. Under the proposed standards, companies would be required to report Scope 3 emissions. These indirect emissions result from activities upstream and downstream of the company.

It is important for companies to begin preparing for the CSRD in a timely manner because measuring certain aspects of sustainability, such as Scope 3 emissions, is complex and takes time. By taking timely action, companies can prepare for the CSRD requirements and ensure they are compliant when it comes into effect.

What are the consequences of non-compliance with the CSRD?

Failure to comply with the CSRD can have serious consequences for companies. First, they may face fines and penalties from regulatory authorities. In addition, they can also suffer reputational damage, which can lead to loss of customers and investors. It is therefore crucial that companies take the CSRD seriously and ensure that they comply with all requirements.

How can companies prepare for the CSRD?

Companies can prepare for the CSRD by first gaining a thorough understanding of what it entails and what impact it will have on their business. They should review their current sustainability reporting practices and identify where improvements are needed. It may also be helpful to develop a sustainability reporting strategy and assemble a team responsible for its implementation.

In addition, it is important to start collecting and analyzing the necessary data. This can be challenging, especially when it comes to measuring Scope 3 emissions. Companies may consider hiring outside consultants to help them with this process.

Finally, companies should also communicate with their stakeholders about the CSRD and how they plan to comply with it. This can help build trust and show that the company is serious about sustainability.

Conclusion

The CSRD is an important step forward in promoting sustainability and transparency in the corporate world. While its implementation may present challenges, it also presents opportunities for companies to improve their sustainability efforts and demonstrate their positive impact on the world. By taking action now, companies can ensure they are ready for the CSRD when it goes into effect.

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