The EU Corporate Sustainability Reporting Directive (CSRD) is a regulatory framework that aims to enhance corporate sustainability reporting and disclosure requirements for companies operating within the European Union. It builds upon the existing Non-Financial Reporting Directive (NFRD) and is part of the broader European Union's efforts to promote sustainability and climate action, as outlined in the European Green Deal and the Sustainable Finance Action Plan.
The CSRD was proposed by the European Commission in April 2021, and was entered into force on the 5th of January 2023. The directive is part of a broader strategy to integrate sustainability and environmental considerations into corporate reporting to ensure that financial markets, investors, and the public have access to accurate and comparable sustainability information.
Scope of the CSRD
The CSRD extends the scope of sustainability reporting by requiring a broader range of companies to disclose non-financial information. While the NFRD only applied to large public-interest entities, the CSRD covers all listed companies on regulated markets within the EU, including small and medium-sized enterprises but excluding micro-enterprises. It also applies to all large (listed or not) companies if they meet at least two of the following three criteria:
- Balance sheet total of more than EUR 20m
- Net turnover of more than EUR 40m
- The average number of employees during the financial year of more than 250
- Non-EU undertakings with turnover above EUR 150 million in the EU if they have at least one subsidiary or branch in the EU exceeding the above thresholds.
Companies subject to the CSRD are required to report according to the European Sustainability Reporting Standards (ESRS). The information required to disclose is divided into four areas:
- General requirements and disclosures: Cross-cutting standard and applies to everyone.
- Environmental: The most extensive one, designed with the intention of making it easier for readers of reports to understand how a company plans to change its business model and operations to align and excel in the shift to a sustainable economy. The report should also show how the company fits into the various environmental goals of the European Green Deal and other strategic and legal frameworks within the EU.
- Social: Relates to a company’s own workforce, employees in the value chain, communities impacted by their activities and customer and end-users of their goods or services.
- Governance: aims to improve users’ understanding of an organizations strategy and approach, processes and procedures as well as its performance regarding business conduct.
Consequences of not Complying
If a business is found to be non-compliant with the CSRD, the company is at risk of significant administrative sanctions. The nature of the sanctions and the fine amount will depend on the implementation in different Member States. The company will also risk a qualified audit report which would put the company at risk of shareholder action against it.
Key benefits for each stakeholder
- Improved Performance: The CSRD encourages businesses to assess and improve their sustainability practices, which can lead to operational efficiencies, cost savings, and reduced environmental impacts.
- Competitive Advantage: Strong sustainability reporting can differentiate a company from its competitors and attract environmentally and socially conscious consumers and investors.
- Access to Capital: Companies with robust sustainability reporting may find it easier to access capital, as more investors and financial institutions prioritize environmentally and socially responsible businesses.
- Risk Mitigation: Enhanced sustainability disclosure can help companies identify and mitigate environmental, social, and governance (ESG) risks that could impact their operations or financial performance.
- Stakeholder Engagement: Transparent sustainability reporting can foster better relationships with stakeholders, including employees, customers, suppliers, and local communities.
- Informed Investment Decisions: Investors benefit from more comprehensive sustainability reporting, which enables them to make more informed investment decisions based on a company's ESG performance.
- Risk Assessment: Access to detailed ESG data allows investors to assess a company's exposure to ESG risks, such as climate change, social issues, and governance problems.
- Long-Term Value: A company's commitment to sustainability can be indicative of its long-term value and resilience, making it an important consideration for investors focused on sustainable and responsible investment strategies.
- Alignment with Values: Investors with ethical or values-driven investment criteria can align their portfolios with companies that share their sustainability values.
- Enhanced Accountability: Regulators benefit from the CSRD by promoting greater corporate accountability in the areas of sustainability and ESG issues.
- Standardization: The CSRD encourages the use of recognized international standards for reporting, leading to greater standardization and comparability of sustainability data across companies and industries.
- Data for Policy Development: Regulators can use the aggregated data from CSRD reporting to develop and refine policies related to sustainability, environmental protection, and social responsibility.
- Informed Choices: Consumers benefit from increased transparency as it enables them to make informed purchasing decisions based on a company's sustainability practices.
- Alignment with Values: Consumers who prioritize sustainability in their purchasing choices can support businesses that align with their values.
- Demand for Responsible Products: Greater awareness of corporate sustainability practices may drive demand for products and services that are produced sustainably and ethically.
- Environmental and Social Progress: The CSRD contributes to the overall environmental and social progress by encouraging businesses to reduce their environmental footprint and address social issues.
- Transparency and Trust: Society benefits from increased corporate transparency and accountability, leading to greater trust in the business sector.
- Contribution to Sustainable Development Goals: The CSRD aligns with the United Nations Sustainable Development Goals (SDGs), which aim to address global challenges, including poverty, inequality, climate change, and environmental degradation.
How does the CSRD Impact Commercial Industrial Businesses?
Compliance Costs: Companies subject to the CSRD will incur costs related to collecting, verifying, and reporting sustainability data. This may include hiring experts, implementing new reporting systems, and dedicating resources to compliance.
Reputation and Stakeholder Trust: Enhanced sustainability reporting can build trust with investors, customers, and other stakeholders who are increasingly concerned about a company's environmental and social performance.
Competitive Advantage: Businesses that excel in sustainability reporting may gain a competitive advantage, as more investors and consumers are looking for companies committed to environmental and social responsibility.
Access to Capital: Some investors and financial institutions are placing greater importance on companies' sustainability performance when making investment decisions. Enhanced reporting can improve access to capital for businesses with strong sustainability credentials.
Operational Improvements: The process of collecting and analyzing sustainability data may lead to insights that can help companies identify areas for operational improvements, cost savings, and resource efficiency.
Legal and Regulatory Risks: Non-compliance with the CSRD can result in legal and regulatory risks, including fines and reputational damage.
If your organisation is required to report in line with the CSRD and needs support with ensuring compliance, NUS’ international Energy and Sustainability Services (ESS) can provide tailored advice and solutions for a range of compliance schemes. To see how NUS can help, contact your consultant, contact us online, or email email@example.com.
More: Market Updates, Environmental, Social, and Governance (ESG), ESG Reporting, EU Corporate Sustainability Reporting Directive (CSRD), Sustainability