Introduction to the Corporate Sustainability Reporting Directive (CSRD)

03 Aug 2023

This introductory guide breaks down the CSRD requirements, outlines which companies are impacted, stages of application, and actions to take now.

On the 5th of January 2023, CSRD entered into force and strengthens the rules concerning the social and environmental information that companies have to report.

In the past few years we have witnessed acceleration from stakeholders and investors across the globe demanding that organizations provide greater transparency in ultimately disclosing their environmental, social and governance risks and opportunities. In the past, annual reports primarily focused on disclosures of financial information, but a lot has changed in recent years, with more attention being placed on reporting non-financial information.

Non-financial reporting directive NFRD - that came into effect in 2018, was created as a first step towards extending reporting directive. It was specifically targeted at two main goals at that time:

• Provide stakeholders and investors with non-financial information needed to assess value creation and risks of the establishment.
• Encourage responsibility to social and environmental issues.

Key limitations are eligibility criteria as organizations to which NFRD apply are larger in size with basic requirement of 500 employees. This means that a significant proportion of companies could be excluded from reporting their non-financial information. Another challenge is that companies can choose between different reporting standards, which means that there is no unified framework. This makes it very difficult to draw comparisons and in return challenging to produce reliable and detailed disclosures of company's social and environmental impacts and overall sustainability of their business operations.  

So as a result, the proposal of the CSRD was made in April 2021, extending the scope of the requirements to all listed companies and large companies, with indications that about 50,000 companies will be reporting their data with the CSRD.

Companies impacted by CSRD and requirements

CSRD impacts all large and listed EU companies meeting at least two out of the following three criteria:

• More than 250 employees
• Turnover exceeding €40m
• A balance sheet exceeding €20m  

For non-EU companies it would be if their net turnover generated in the EU exceeds €150m and they have at least one branch or subsidiary in the EU. So companies in scope will need to report in accordance with the mandatory European Sustainability Reporting Standards, ESRS, developed by EFRAG.

Stages of CSRD application

• Reporting in 2025 on the financial year 2024 for companies already subject to the non-financial reporting directive.
• Reporting in 2026 on the financial year 2025 for other large companies
• Reporting in 2027 on the financial year 2026 for listed SMEs except micro companies 
• Reporting in 2029 on the financial year 2028 for non EU companies with net turnover above €150 million in the EU, if they have at least one subsidiary, or branch in the EU exceeding certain thresholds.

A special transition period of three years is also given to SMEs to provide them the flexibility for the provision of information on their value chains, which can be ultimately a costly process for organizations with limited resources. SMEs may choose not to participate until 2028.

NB: Reporting could begin as early as fiscal year 2024 for that cohort. So there are obviously a few different timelines depending on where you fall within those categories but they are all very soon and a lot has to be done to get ready.

Implications of CSRD for organizations outside the EU

These are potentially significant. Firstly, UK companies operating in the EU will have to comply with the new Directive's reporting requirements, specifically those firms with securities listed on a regulated EU market. This means that UK companies are likely to face increased scrutiny and pressure to improve their ESG performance as their performance is going to be compared to that of their European counterparts.

So ultimately, these regulations will set the precedent for sustainability across the world, and we know that that's likely to continue to expand upon at great pace. The sustainability reporting requirements for non-EU companies is expected to be adopted by the EU and there is also an option to report in accordance with ESRS or standards that are deemed to be equivalent.

Actions to take now

The CSRD asks for a higher frequency of data. Yearly reporting on material sustainability topics should cover to some extent environmental impact, social matters and treatment of employees; respect for human rights, anti-corruption and bribery, diversity of Board Directors - looking at gender, age, professional and educational background. Also, information on sustainability risks and important negative effects, including those in the value chain.

And that's all on top of due diligence with suppliers to minimize these negative effects. Moreover, it should be transparent on how these materials topics are taken into account in the organization, its strategy, governance policies, processes, systems, KPIs, targets and results. Scenario planning and target setting in line with the Paris Agreement and tracking of the performance of these targets will also be part of the reporting standard.

So even if the deadlines seem to be not so close, it's important for companies to start asking internally:

• What data do we already collect?
• What data will we need to start collecting?
• What KPIs will be used?
• Which tool will we use to automate the process?

The reported information must be qualitative and quantitative. So forward looking and retrospective information assessing sustainability.

Third party assurance requirements

Reporting must be certified by an accredited independent auditor or certifier. To ensure companies ultimately comply with the reporting rules, an independent auditor or certifier must ensure that the sustainability information complies with the certification standards that have been adopted by the EU. Reporting of non-European companies must also be certified either by a European auditor or by one established by a third country.

Assurance requirements will be applied progressively from limited assurance to more fulsome, reasonable assurance by 2028. Companies must report the relevant information in their annual management reports rather than in their separate sustainability report. The management report should be prepared in a single electronic reporting format, and it is expected that the Commission in its delegated acts will require to digitally tag the reported information, so it is machine readable and ultimately feeds into the European single access point envisaged in the capital markets Union Action Plan.

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