October 11, 2023

A Guide to Navigating the CSRD (Corporate Sustainability Reporting Directive)

Understanding the CSRD

As of January 5, 2023, a transformative sustainability reporting regulation took effect in the EU, bringing nearly 50,000 companies under its ambit. These businesses now stand at a pivotal juncture to adapt, innovate, and streamline their operations, given the comprehensive data collection and preparation demands of the CSRD framework.

Understanding the CSRD

The CSRD aspires to establish a unified and standardised vocabulary for sustainability reporting, elevating its significance to par with financial disclosures. By doing so, the regulation supports a more transparentand accountable climate, underpinning the EU's commitment to the European GreenDeal and its ambition for climate neutrality by 2050.

Who Needs to Take Note?

Businesses surpassing two out of these three criteria are directly affected:

  • Assets over €25M,
  • Turnover exceeding €50M, or
  • Workforce of more than 250 employees.

In addition, listed entities, as well as international and non-EU firms with annual EU revenues over €150M, will be obliged to align with the new directives. Even entities outside this scope may experience growing demand for sustainability data, given the evolving market dynamics.

Distinguishing Between NFRD and CSRD

The newly introduced CSRD emerges as a robust successor to the NFRD, which was initiated in 2014 with the objective of streamlining non-financial disclosures.

Here are the pivotal shifts to be cognisant of:

  • Digital Transformation: Reporting now mandates the use of the unique European electronic format, xHTML, ensuring standardized reporting methods and increased accessibility of data.
  • Broadened Reach: The directive's remit has substantially expanded, enveloping nearly 50,000 companies compared to the initial count of 11,600 under NFRD. This broader coverage reflects the EU's commitment to make sustainability reporting more comprehensive.
  • Meticulous Verification: Information rendered in reports will undergo scrutiny either by an auditor or an independent entity, ensuring accuracy and credibility. This emphasis on verification enhances the reliability of sustainability data.
  • Double Materiality Principle: CSRD introduces a twin focus on environmental and financial metrics, intertwining them to offer a holistic perspective. This approach acknowledges the interconnectedness of financial and sustainability aspects of a business.
  • Dedicated Reporting Section: The data will be housed in a specially carved out section within the management report, making it easier for stakeholders to access and analyse sustainability information.

An important note: Earlier provisions under NFRD limited the reporting obligation to public interest entities, predominantly banks and insurance firms, with a workforce of over 500. With the advent of CSRD, this obligation expands to a broader range of companies, increasing transparency and accountability across various sectors.

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CSRD Timeline

The rollout of CSRD mandates is scheduled as follows:

  • January 1, 2025 (for the 2024 fiscal year): Both European and non-European companies already under NFRD regulations will transition to CSRD reporting. This initial phase ensures that companies already accustomed to sustainability reporting will be well-prepared for the transition.
  • January 1, 2026 (for the 2025 fiscal year): This phase is earmarked for large European entities and non-European firms listed on European regulated markets, which previously were not covered under NFRD. This expansion of the directive's coverage will necessitate significant adjustments for larger companies.
  • January 1, 2027 (for the 2026 fiscal year): Here, listed SMEs, irrespective of their origin (European or non-European), will migrate to the new directive. Notably, these SMEs can avail of a two-year extension, albeit with a valid rationale. This grace period acknowledges the resource constraints that smaller enterprises may face in complying with the new regulations.
  • January 1, 2028 (for the 2027 fiscal year): Non-European corporations, provided their European revenue crosses the threshold of 150 million euros via a branch or subsidiary, will need to adhere to CSRD stipulations. This further expansion of the CSRD's reach reflects the global nature of business operations and the importance of sustainability reporting on a global scale.

After the CSRD's final text was publicised in the Official Journal of the European Union on December 16, 2022, EU member states have been granted an 18-month window to integrate it into domestic legislation, with the deadline set for July 6, 2024.

The CSRD's inception underscores the EU's steadfast commitment to sculpting a resilient and sustainable corporate arena, and businesses have a golden opportunity to lead the change.

In conclusion, the CSRD represents a significant leap forward in sustainability reporting, encompassing a wider array of businesses and emphasising the need for accurate and comprehensive reporting. As companies navigate this new regulatory landscape, they will need to adapt, innovate, and streamline their operations to meet the demands of the CSRD framework, contributing to a more sustainable and accountable future for the European business landscape.