EU rules on the Corporate Sustainability Reporting Directive, also known as CSRD will come into force shortly. The goal of the new requirements is to ensure that companies report reliable and comparable sustainability information in order to redirect investment toward more sustainable technologies and businesses.
What is CSRD?
The Corporate Sustainability Reporting Directive, or the CSRD, is part of an EU law that requires certain large companies to disclose information about how they address social and environmental challenges.
To improve the flow of funds for sustainable activities in the European Union, the European Commission adopted the ambitious and comprehensive Sustainable Finance Package on April 21, 2021. One of the proposed measures within the package is the Corporate Sustainability Reporting Directive (CSRD). The directive will require all large companies and all companies listed on regulated markets to provide investors and other key stakeholders with high-quality and comparable information on material ESG-related risks and opportunities impacting their business in order to drive sustainability across the private sector.
In addition, reporting on these issues enables companies to develop more responsible approaches to the way they do business.
The EU wants companies to be more transparent in their sustainability reporting with the implementation of the CSRD. Companies will be required to report on ESG factors related to their business activities:
Environment
- Climate change mitigation
- Climate change adaptation
- Water and marine resources
- Resource use and circular economy
- Pollution
- Biodiversity and ecosystems
Governance
- Anti-corruption and anti-bribery
- Lobbying activities
- Payment practices
- Internal control and risk management
Social factor
- Equal opportunities for all
- Working conditions, including wages
- Respect for the human rights, fundamental freedoms, democratic principles
How many companies are concerned by CSRD?
CSRD will affect 49,000 companies, compared to 11,000 under the previous Non-Financial-Reporting-Directive (NFRD). Companies which are under the scope of the CSRD are all companies which are considered ‘large’ established in an EU member state.
A large company is covered by the CSRD if it meets two of the following three criteria:
- The company has €40 million in net turnover,
- The company reports at least €20 million on its balance sheet
- The company has at least 250 employees
In addition, companies that meet these requirements and are not based in the EU but have securities in EU-regulated markets are also affected by the CSRD.
Will third party assurance be required for CSRD?
Third party assurance will be required for the CSRD. The data submitted for the CSRD will be verified by a third party. Therefore, an auditor will need to review the reports for quality and authenticity.
When will CSRD be effective?
Companies must comply with the Corporate Sustainability and Responsibility Directive (CSRD) by January 1, 2024 for fiscal year 2023.
The European Commission plans to adopt a preliminary set of standards by the end of 2022. Once the preliminary standards are in place, a second set of complementary standards will be adopted by October 2023. This second set of standards will contain sector-specific information.
However, it is critical for companies to act now. While 2024 may seem several years away, the sooner companies take the time to prepare reports and measurements, the sooner they will begin reporting to create a smoother transition when the new regulations are implemented.