The Corporate Sustainability Reporting Directive (CSRD) is the intended successor to the 2014 European Non-Financial Reporting Directive (NFRD). As its name suggests, the CSRD sets out requirements for sustainability reporting. Once the CSRD comes into force, all large companies in the European Union (EU) will have to report on their sustainability performance.
NFRD becomes CSRD
In 2020, the European Commission (EC) concluded that the NFRD, combined with the two EC guidelines on non-financial reporting, was not having the desired effect. For that reason (and as part of the European Green Deal), the EC proposed a new version of the NFRD. This proposal, the CSRD, entered into force on Jan. 5, 2023, as part of the EC’s Sustainable finance package.
Because these guidelines are non-binding on companies, the information reported does not provide sufficient insight for stakeholders to get a good picture of how the company is dealing with sustainability issues. The EC hopes that high quality and reliable public reporting on sustainability aspects will lead to more funding towards sustainable activities.The technical implementation of the CSRD is done by issuing a delegated act that is directly applicable: the European Sustainability Reporting Standards (ESRS).
NFRD versus CSRD: what are the differences?
Under the NFRD, companies covered by the scope must disclose non-financial information. This term is actually incorrect because it implies that this information is not relevant from a financial point of view. However, information on sustainability is becoming increasingly relevant for a proper assessment of company performance, which is why the CSRD introduces the term “sustainability information.”
The management report is significantly expanded to include a “sustainability report,” which must include much detailed information on the impact of corporate activities on the environment, society and good governance. In this context, the abbreviation “ESG,” which stands for Environmental, Social and Governance, is often used.
In addition to the sustainability report, the company must also provide information on the diversity policy pursued with respect to the board of directors and, if applicable, the supervisory board.
Relative to the NFRD, the CSRD will result in the following substantive changes, among others:
- Conducting a materiality assessment to identify the material topics to be reported on. This relates to the impact of the company on society and the environment on the one hand, and the impact of society and the environment on the company itself on the other.
- Formulating long-term environmental, social and governance objectives and policies (in line with the Paris Climate Agreement).
- Conducting an ongoing due diligence process on the company’s own business and value chain, in order to identify sustainability risks and negative impacts on people and climate in a timely manner.
- More detailed reporting requirements and mandatory use of European sustainability reporting standards.
- Reporting in line with the SFDR and Taxonomy Regulation.
- Mandatory auditing of information published under the CSRD.
- The information must be “machine readable” and capable of being included in the European Single Access Point.
Another important difference between the NFRD and the CSRD is the scope. The scope of the CSRD is quite a bit larger than that of the NFRD. The CSRD is expected to apply to about 50,000 companies operating in the EU, while the NFRD applied to less than 12,000 companies.
The CSRD is expected to apply to about 50,000 companies operating in the EU, while the NFRD applied to less than 12,000 companies.
Scope of the CSRD
Once the CSRD comes into force, many more companies will have to start reporting on sustainability. Now, these are only the large listed companies, banks and insurers. Soon this will be all large companies, listed and unlisted, more specifically the following companies will have to report:
All EU listed companies that meet at least two of the following criteria:
- balance sheet total of more than 350,000
- more than 700,000 net turnover
- more than 10 employees
Large companies, meeting at least two of the following three criteria:
- balance sheet total of more than 20 million
- more than 40 million net sales
- more than 250 employees
Parent companies of large groups, meeting at least two of the following three criteria on a consolidated basis:
- balance sheet total of more than 20 million
- more than 40 million net sales
- more than 250 employees
Parent companies of large groups located in a third country and which have publicly traded subsidiaries in Europe
CSRD: from proposal to implementation
With the enactment of the CSRD, the EC has embarked on an ambitious plan to improve the quality and quantity of sustainability information. That includes the timeline and follow-up steps to be taken in that regard. Since this is a directive, it will have to be transposed into national legislation.
So the transposition of the CSRD into Dutch law has yet to take place. And the EC still has to transpose the final versions of the ESRS into so-called “delegated acts” by the end of June 2023 at the latest. The ESRS published therein will then have direct effect in all EU member states.
The addition of the sustainability report will significantly expand the governance report. Companies will have to strategically address many more impacts, risks and opportunities than they do today. Companies in scope will need to find out information from the value chain regarding sustainability issues. They will need knowledge of the products or services they purchase, where and how their product or service is created, and what happens after they sell the product or service. Information from companies in the value chain that are not directly traded with should also be found out by the reporting company.
As these regulations become applicable to companies in stages, and therefore more and more sustainability statements are published, these standards will continue to play a growing role in promoting the publication of sustainability information in a comparable manner worldwide.
”The days of judging companies solely on the basis of financial performance are now definitely a thing of the past.”
CSRD entry into force
The entry into force of the CSRD will be in steps. It is expected to involve the following steps:
- Financial year 2024: companies in scope of the NFRD
- Financial year 2025: large companies not in scope of the NFRD
- Financial year 2026: small and mid-sized companies
- Financial year 2028: parent undertakings established in a third country
How can we help?
The transition of the CSRD into national legislation has yet to take place. And the EC has yet to transpose the final versions of the ESRS into so-called ‘delegated acts’ by the end of June 2023. On March 30, 2023, regulator AFM published a scoping report on the reporting on the ESG theme climate by 27 listed companies and their auditor’s assurance report on this. The published report shows that the companies in question still have a lot of homework to do before 2024 to comply with the CSRD and ESRS. So don’t wait to implement the CSRD within your organisation!
Our consultants will be happy to help you on your way to a sustainability report that meets all the requirements of the CSRD and ESRS. Feel free to get in touch.