Now is the time to start thinking about CSRD
CSRD is an EU directive which will replace and build on the NFRD in order to encourage more companies to disclose detailed and extended sustainability reports.
What is CSRD and why is it important?
CSRD, the Corporate Sustainability Reporting Directive, is a directive from the European Union which seeks to ensure that companies report and follow a standard for reporting on sustainability. The CSRD will replace the Non-Financial Reporting Disclosure (NFRD) that contains sustainability reporting guidelines for EU companies above a certain size. The new directive will include several Environmental, Social and Governmental (ESG) topics such as policies, risks and impact on the planet and society.
The European Financial Reporting Advisory Group (EFRAG) is responsible for drafting the standard, and the European Parliament and the Member States are expected to settle on a final legislative text by mid/end 2022. The directive will be put into force in 2024 and cover the fiscal year of 2023, which is why it is so important to start to understand the directive immediately.
The need for the new directive
Currently, there are challenges due to insufficient information and inadequate validation of companies’ sustainability reports. Consequently, stakeholders, consumers and investors cannot obtain the information they require to make appropriate choices. For example, investors often lack a reliable overview of sustainability-related risks to which companies are exposed, which affects their efforts to build a sustainable portfolio.
The intention of this directive is to make reports coherent, reliable and comparable. The CSRD has been created to align with other EU initiatives, in particular the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation, so that all the EU directives and legislation on sustainability matters speak the same language. A crucial issue to note is the focus on enhanced accuracy and reliability of sustainability reporting. CSRD will be the first directive to require auditing (third-party validation) of reported sustainability information.
Who will be obliged to report under the CSRD?
The new directive will encompass 49,000 organizations compared to the 11,000 companies that are currently included in the NFRD. Thus, the CSRD will not only impose stricter requirements, it will also apply to more companies.
These are the companies that will be covered:
All listed companies (including SMEs)
All companies that fulfill two of these three criteria:
- A balance sheet total of €20M or more
- Net revenue of €40M or more
- More than 250 employees
By 2024, the largest of these required companies will start reporting in line with this directive. Small and medium-sized companies will be expected to conform to the directive in 2026. To limit the burden on listed SMEs, reporting standards will be simpler than those which will apply to large organizations.
Should you care if your company is not included on that list?
The simple answer is yes. Here are some short examples to highlight the importance of complying.
The introduction of the directive will see a growth in demands and greater interest in sustainability alongside an increased need to conform to developments in the market. Companies that are not required to report according to CSRD could find themselves excluded from investment portfolios if they do not manage to report their sustainability efforts in a satisfactory way.
Moreover, the lack of adequate non-financial information creates an accountability gap between companies and society. Trust diminishes, demand decreases and consumer satisfaction wobbles. Lack of transparency and accountability imposes greater investment and supply-chain risks and inhibits financial flows that were tailored to address sustainability efforts. Therefore, the development of new directives will indirectly affect all companies, organizations and governmental institutions in the EU.