Sustainability reporting is entering a new era with the European Union’s Corporate Sustainability Reporting Directive (CSRD). This directive, aimed at enhancing the transparency and comparability of corporate ESG disclosures, represents a major shift in how companies communicate their sustainability efforts.
As businesses prepare to adapt to these new requirements, we will break down the essentials of the CSRD, its scope, and the impact it will have on corporate reporting practices. We also look at ESG frameworks reporting software, and how it assists companies in meeting the requirements of CSRD and other major frameworks.
What is the Corporate Sustainability Reporting Directive (CSRD)?
The Corporate Sustainability Reporting Directive (CSRD) is a robust legislative measure adopted by the European Union (EU) to strengthen and broaden the scope of sustainability reporting for companies operating within its member countries. Officially adopted by the EU Council on November 28, 2022, and entering into force on January 5, 2023, the CSRD aims to provide a common framework for non-financial reporting, ensuring that companies disclose accurate and comparable sustainability information. This directive supports investors, consumers, policymakers, and other stakeholders in evaluating companies’ non-financial performance, promoting responsible business practices.
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Key challenges and opportunities of the CSRD
The implementation of the CSRD presents both challenges and opportunities for companies:
Challenges
- Data collection and management: companies need to collect and manage vast amounts of data related to their sustainability practices, which can be resource-intensive.
- Compliance costs: ensuring compliance with the detailed reporting requirements may incur significant costs, particularly for smaller companies.
- Third-party audits: the requirement for third-party auditing of sustainability reports adds another layer of complexity and expense.
Opportunities
- Transparency and trust: enhanced reporting can build greater trust with stakeholders, including investors and consumers, by demonstrating a commitment to sustainability.
- Competitive advantage: companies that excel in their sustainability reporting can differentiate themselves in the market.
- Improved risk management: detailed reporting can help companies better understand and manage their sustainability risks.
Which companies have to comply with the CSRD?
The CSRD significantly expands the scope of companies required to report their sustainability practices compared to its predecessor, the Non-Financial Reporting Directive (NFRD). Under the CSRD, the following entities must comply:
- Large companies: defined as companies in the EU with over 250 employees, €50 million in turnover, and €25 million in total assets.
- Listed companies: all listed companies on EU-regulated markets, except micro-enterprises, must report their sustainability performance.
- Non-European companies: non-EU companies with branches or subsidiaries in the EU and a net turnover of €150 million or more within the EU will also need to comply, though this requirement will be enforced later.
In total, approximately 50,000 companies across the EU, representing 75% of all EU companies’ turnover, will be required to adhere to the CSRD.
Has the CSRD replaced the NFRD?
Yes, the CSRD has replaced the Non-Financial Reporting Directive (NFRD). The NFRD, which has been in effect since 2018, required large public-interest entities with over 500 employees to report on their sustainability performance. The CSRD extends these requirements to a broader range of companies and introduces more detailed reporting standards, making sustainability reporting more comprehensive and standardised across the EU.
What is the difference between the CSRD and the NFRD?
While both directives aim to enhance corporate transparency regarding sustainability practices, there are key differences between the CSRD and the NFRD:
- Scope of applicability: NFRD applied to large public-interest entities with over 500 employees, whereas the CSRD extends to all large companies with over 250 employees, as well as all listed companies (excluding micro-enterprises) and certain non-European companies.
- Reporting standards: CSRD introduces more detailed and standardised reporting requirements, aligned with EU sustainability reporting standards, while the NFRD provided more general guidelines.
- Auditing requirements: CSRD mandates third-party auditing of sustainability reports, enhancing the reliability and comparability of the information provided.
What does the CSRD require in practice?
The CSRD requires companies to provide detailed disclosures on various sustainability-related topics, including:
- Environmental protection measures: companies must report specific initiatives to reduce their environmental footprint, such as resource conservation and pollution prevention strategies.
- Social responsibility and employee treatment: this includes reporting on employee health and safety, benefits, and company culture.
- Respect for human rights: companies must discuss their policies on human rights and how they ensure these rights are upheld within their operations.
- Anti-corruption and bribery measures: businesses need to explain their strategies to prevent corruption and bribery, including corporate governance measures and ethics training programs.
- Board diversity: companies must provide a detailed breakdown of the diversity of their board members, focusing on aspects such as gender, age, and nationality.
Additionally, businesses must report how sustainability risks might affect their performance and align their reporting with other EU regulations such as the Sustainable Finance Disclosure Regulation (SFRD) and the EU Taxonomy.
Timing and timeline of the CSRD
The implementation of the CSRD follows a phased timeline:
- End of 2023: EU Member States must adopt the EU Directive into national law.
- 1st January 2024: Companies currently reporting under the NFRD must start reporting their FY 2024 data in 2025. All other large EU companies within the CSRD’s scope must also begin reporting.
- 1st January 2025: Businesses already subject to the NFRD must start reporting in the financial year 2024.
- 1st January 2026: SMEs listed on a regulated market (excluding micro-enterprises) must report for FY 2025, with less stringent requirements.
- 1st January 2028: Small and medium enterprises, small and non-complex credit institutions, and captive insurance undertakings will start reporting for 2027, with a voluntary opt-out until 2028.
- 1st January 2029: Non-European companies with branches or subsidiaries in the EU with a net turnover of €150 million in the EU must start reporting.
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Navigating the complexities of the CSRD can be challenging without the right tools. Ikano Insight’s ESG Optimiser, powered by IBM Envizi, includes a comprehensive solution to streamline ESG reporting. This framework provides:
- Data management: efficiently compile and manage data requirements across multiple stakeholders.
- Framework integration: keep track of multiple ESG framework disclosures, reducing time and resource strain while ensuring accuracy and auditability.
- Custom questions: tailor reporting to meet specific requirements not covered by public ESG frameworks.
- Best practice guidance: access best practice guidance on responding to framework questions and sourcing ESG metrics.
By leveraging IBM Envizi from Ikano Insight, companies can ensure their CSRD reporting is comprehensive, accurate, and efficient, paving the way for a more sustainable future.
