carbonNovember 29, 2023by admin0

Corporate Sustainability Reporting Directive (CSRD): Shaping a Greener Future for Businesses

The Corporate Sustainability Reporting Directive (CSRD) has become a pivotal element in the European Union’s (EU) commitment to fostering sustainable business practices. Enacted on January 5, 2023, the CSRD is a legislative framework that compels EU businesses, including qualifying EU subsidiaries of non-EU companies, to provide comprehensive reports on their environmental, social, and governance (ESG) impacts. This initiative is a significant evolution from its predecessor, the Non-Financial Reporting Directive (NFRD).

Defining the CSRD: A Paradigm Shift in Reporting Standards

The NFRD, deemed insufficiently ambitious, has been replaced by the more robust CSRD, represented by the directive (EU) 2022/2464. The CSRD emerged as a response to the shortcomings identified by the European Parliamentary Research Service (EPRS) in the NFRD.

The lack of consistent and comparable data raised concerns about the negative impact on sustainability investments and increased data costs for stakeholders. By addressing these issues, the CSRD aims to simplify the disclosure process, enabling investors and consumers to make more informed decisions based on reliable and comparable sustainability data.

Unlike its predecessor, the CSRD extends its reach beyond financial reporting, focusing on three additional dimensions: the impact of the activity on the climate, climate risks affecting the company, and how the organization manages these issues. The directive seeks to align with the ambitions of the European Green Deal, aiming for carbon neutrality by 2050.

The Main Goals of the CSRD: Fostering Sustainable Business Models

The primary objective of the CSRD is to stimulate economic flows towards more sustainable business models throughout the European Union. The CSRD aims to enhance transparency, enabling investors, analysts, consumers, and other stakeholders to assess the sustainability performance of EU companies accurately.

The European Union has been at the forefront of environmental initiatives, and the CSRD reinforces the region’s dedication to cultivating sustainable business practices. The directive is designed to serve as a unifying force, encouraging businesses to adopt sustainable development strategies in line with the EU’s broader objectives.

Unlike the NFRD, the CSRD adopts the concept of double materiality, necessitating companies to divulge how their business activities affect the planet and its people and, conversely, how their sustainability goals and risks influence their financial health.

Who Does the CSRD Affect?

The CSRD targets both financial and non-financial companies falling under the purview of the Accounting Directive and the Transparency Directive. The categories of affected entities include:

  • Companies listed on European regulated markets, including listed SMEs (micro-enterprises identified by the Accounting Directive are excluded).
  • Other large European companies, listed or not, that exceed two of the three defined thresholds (250 employees, 40 million euros in revenue, and/or 20 million euros in total assets).
  • Non-European companies whose subsidiaries or branches have revenues exceeding 150 million euros within the European Union.

More specifically, by the year 2028, CSRD will mandate compliance from the following entities or undertakings:

  • Large Listed Undertakings: This category encompasses companies listed on an EU-regulated market exchange. However, ‘micro undertakings’ failing to meet two out of the following three criteria on consecutive balance sheet dates—total assets of at least EUR 350,000 (437,500*), net turnover of at least EUR 700,000 (857,000*), and a minimum of 10 employees (on average) throughout the year—are exempted.
  • EU-Based Large Undertakings, Listed or Not: This includes both listed and non-listed companies that satisfy two of the following three criteria on any two consecutive balance sheet dates: total assets of at least EUR 20 million (25* million*), net turnover of at least EUR 40 million (50* million*), and a workforce of at least 250 employees (on average) during the year.
  • Third-Country Undertakings: This category comprises non-EU parent companies of EU subsidiaries. To fall under the CSRD, these entities must have annual EU revenues of at least EUR 150 million in the most recent two years and own either a large EU-based undertaking, an EU-based subsidiary with securities listed on an EU-regulated market exchange, or an EU branch office with a minimum net turnover of EUR 40 million.

Implementation Timeline: When Will the CSRD Take Effect?

The implementation of the CSRD will occur in phases. These are:

  • January 1, 2025 (for the 2024 fiscal year): European and non-European companies are already subject to NFRD reporting.
  • January 1, 2026 (for the 2025 fiscal year): Large European companies and non-European companies listed on a European-regulated market not subject to NFRD.
  • January 1, 2027 (for the 2026 fiscal year): Listed European and non-European SMEs, with an additional two-year extension subject to justification.
  • January 1, 2028 (for the 2027 fiscal year): Non-European companies with European revenue exceeding 150 million euros through a subsidiary or branch.

Key Changes and Impacts

  • Double Materiality Assessment: The CSRD introduces the concept of double materiality, requiring companies to assess both their impacts on people and the environment (impact materiality) and sustainability matters that financially impact the undertaking (financial materiality). This more intricate assessment poses a challenge for companies unfamiliar with such complexities.
  • Targets and Progress Reporting: Beyond disclosing policies and initiatives, the CSRD mandates companies to set targets, establish baselines, and report progress. This encourages a proactive approach towards sustainability goals and necessitates robust monitoring mechanisms.
  • Vastness of Information: Companies will need to disclose comprehensive information, combining forward-looking and retrospective data, and extending the reporting scope throughout the entire value chain. This demand for a holistic view poses both a challenge and an opportunity for organizations to enhance their sustainability practices.
  • Link with the European Taxonomy: The CSRD aligns reporting requirements with the EU Taxonomy, emphasizing the need for consistency in sustainability reporting. This linkage aims to streamline reporting and enhance comparability across diverse industries.
  • Mandatory Assurance and TCFD Alignment: Limited assurance becomes mandatory initially, with a potential shift towards reasonable assurance over time. Moreover, the CSRD requires disclosure in line with the Task Force on Climate-Related Financial Disclosures (TCFD), emphasizing the importance of climate-related reporting.
  • Embedding Sustainability Knowledge: Companies must integrate sustainability knowledge into their organizational framework to implement CSRD requirements effectively. This underscores the need for a cultural shift towards sustainability within organizations.

CSRD reporting standards and disclosure requirements

The ESRS encompasses 12 standards categorized, which detail disclosures and metrics across sustainability matters in four (4) categories:

  1.  Cross-Cutting Reporting: Encompasses general principles and disclosures applicable to all organizations governed by the CSRD.
  2. Environmental Reporting: Enforces mandatory reporting on climate change, pollution, water and marine resources, biodiversity, and ecosystems, as well as resource use and circular economy practices.
  3. Social Reporting: Obliges reporting on various social aspects, including the organization’s workforce, workers in the value chain, affected communities, consumers, and end-users.
  4. Governance Reporting: Focuses on business conduct, ensuring organizations maintain high standards of governance in alignment with sustainability goals.

Double Materiality Framework

CSRD reporting mandates a dual assessment known as double materiality, requiring organizations to report on both:

  • Impact Materiality: The impact of business activities on sustainability matters.
  • Financial Materiality: The impact of sustainability matters on the organization’s finances.

Specific Disclosures

Organizations are required to disclose comprehensive information and management commentary on various topics, including:

  • Sustainability policies and due diligence.
  • Target metrics and transition plans toward a sustainable economy.
  • Value and supply chain due diligence processes.
  • Documentation of sustainability risks, their impact on the company, and resilience of business models.

Third-Party Auditing

CSRD mandates third-party auditing to ensure the sustainability of information and data presented in reports. Initially, limited assurance based on the organization’s representations is required, with a phased transition to reasonable assurance within the next three years. This transition involves a more thorough examination by auditors of the organization’s operations, processes, and controls.

Penalties for Non-Compliance: Ensuring Accountability

To enforce compliance, the CSRD requires EU member states to establish investigative and compliance entities capable of imposing “effective, proportionate, and dissuasive” penalties. Non-compliance penalties will be determined by individual member states based on relevant state laws, emphasizing the importance of staying informed and seeking legal advice to ensure compliance.

Non-compliance with the CSRD can lead to sanctions, with minimum penalties to be defined by each member state. According to Article 1 of the CSRD, penalties may include:

  • A public statement indicating the nature of the infringement and the person concerned.
  • Issuance of a cessation order related to the area of infringement.
  • Financial sanctions proportional to the profits made through the infringement and the financial strength of the company.

Building a Sustainable Future

As the CSRD ushers in a new era of stringent sustainability reporting, companies must proactively address the challenges it presents. Early compliance not only ensures regulatory adherence but also positions businesses to reap long-term benefits, from operational efficiencies to strategic partnerships. By embracing the CSRD, organizations can not only meet regulatory requirements but also contribute to a more sustainable and transparent business landscape.

Thanks for reading this piece

Found it interesting and would like more in the mail?

Share

Leave a Reply

Your email address will not be published. Required fields are marked *

Social Media Auto Publish Powered By : XYZScripts.com