Navigating the Corporate Sustainability Reporting Directive (CSRD): A Strategic Guide for Businesses

What is Corporate Sustainability Reporting Directive?

The Corporate Sustainability Reporting Directive (CSRD) came into force on January 5, 2023. It mandates that businesses report on how their operations affect society and the environment and that the information they provide be audited. The CSRD enhances and strengthens regulations requiring businesses operating within the EU to disseminate detailed social and environmental information.

What Warrants the Need for Having CCRD for Companies?

The need for transparency in the disclosure of high-quality and reliable information related to sustainability led to the birth of the latest Corporate Sustainability Reporting Directive (CSRD). The pivotal European Union (EU) legislation has been introduced in order to facilitate the quality and consistency of sustainable development reporting for European companies. The main reason for introducing CSRD is to increase the economic flow towards more sustainable business models throughout the European Union. Thus, the introduction of CSRD has given an opportunity for more funding.

Some Crucial Aspects of CSRD

Under this directive, companies will be required to start reporting as per CSRD between 2025 and 2029, depending on the size of the company. CSRD is applicable to large companies that are based in the EU or with an annual turnover of above €150 million in the EU. It is also applicable to EU subsidiaries on non- EU companies. Companies which meet at least two of the following three conditions will have to comply with the CSRD:

• €40 million in net turnover
• €20 million in assets
• 250 or more employees

Implementation Timeline

• January 1, 2025: Both European and non-European companies already subject to Non-Financial Reporting Directive (NFRD) reporting
• January 1, 2026: Large European companies and non-European companies listed on a European-regulated market not subject to Non-Financial Reporting Directive (NFRD)
• January 1, 2027: Listed European and non-European SMEs (with an additional two-year extension subject to justification)
• January 1, 2028: Non-European companies whose European revenue exceeds 150 million euros through a subsidiary or branch

Disclosure Requirements

The CSRD requirements are to be fulfilled at three different levels:

Mandatory Industry Agnostic Disclosures:

• These disclosures have been set up by the European Financial Reporting Advisory Group (EFRAG) in line with the European Sustainability Reporting Standards (ESRS). These cover a wide range of ESG topics and sustainability risks pertaining to all businesses.

Mandatory Industry Specific Disclosures:

• This part of the mandate requires the companies to report on the activities that pertain to the specific business sector. These disclosures are being defined by European Sustainability Reporting Standards (ESRS).

Company Specific Information:

• This part of the disclosure covers any other information that is not covered in sustainability or annual reports.

The CSRD requires companies to report their sustainability-related performance consistently. The companies are required to publish sustainability-related information in their management report, which is to be published alongside financial information. In order to ensure comparability, this sustainability report is to be submitted in a standardized digital format and stored in the European single access point database (using the European Single Electronic Format). This allows easy accessibility by investors and other stakeholders through the European Single Access Point (ESAP) database. Companies must integrate CSRD disclosures into their management report, merging financial and sustainability information, thereby making it easily accessible to governing bodies, investors, and other stakeholders. Specific attention is required to disclose the following:

• Environment – greenhouse gas emissions, water use, and biodiversity.
• Social – Human rights, labor practices and diversity.
• Governance – Board diversity, executive pay, anti-corruption policies.
• Business model - information on supply chain sustainability and product life cycle.

Key to CSRD

The key concept of CSRD is double materiality. This concept requires businesses to evaluate and report on sustainability matters from both an impact and a financial perspective. This dual approach ensures transparency. The measurement of impact materiality evaluates how a company's actions affect external stakeholders, such as the environment and society. It encompasses the impacts throughout the company's operations as well as its upstream and downstream value chains. Financial materiality concentrates on sustainability issues that could reasonably impact the company's financial performance. This aspect evaluates the risks and opportunities that could influence the company's cash flows, cost of capital, access to finance, and overall financial well-being.

Non-Compliance of CSRD

One of the most immediate outcomes of failing to comply with the CSRD is the risk of facing legal consequences. The penalties differ based on the gravity of the non-compliance and the particular national regulations of the EU member states where the business functions, as each state has the discretion to implement penalties. These penalties may vary from financial fines to restrictions on business activities, or in serious instances, could potentially lead to the revocation of operating licenses. France is the only country that has currently integrated the CSRD into its national laws. The regulations include monetary fines (up to €18,750) and additional penalties (such as exclusion from public procurement contracts) for not publishing the sustainability report.

Road ahead

Although CSRD has been applied in the European Commission, it will have a global impact. Many other countries have plans to create regulations in alignment with the CSRD or match its scope. The CSRD also puts sustainability reporting on the same level as financial reporting, requiring that information about sustainability risks is more publicly available. The European Union (EU) currently consists of 27 member countries, each of which is in the process of implementing the CSRD. Additionally, Iceland, Liechtenstein, and Norway, which are members of the European Economic Area (EEA), will also adopt the directive. These countries are aligning their implementation schedules with the CSRD’s requirements. France is leading within the EU by transposing the CSRD into its national legislation. Other European countries, including Finland, Denmark, the Netherlands, Slovakia, and Slovenia, are also progressing toward adopting the CSRD. However, each country is taking an individualized approach to implementation.