The world of ESG is changing; The Corporate Sustainability Reporting Directive (CSRD) was proposed by the European Commission in April 2021, with the intention of promoting corporate transparency around ESG-related topics such as environmental matters, anti-corruption, abiding by human rights frameworks, and diversity within companies. The Directive builds upon the pre-existing Non-Financial Reporting Directive (NFRD) and requires around 49,000 companies who operate in Europe to disclose information about their policies, strategies and targets to demonstrate whether they align with ESG objectives. This article will outline some of the changes you can expect in light of the CSRD and what this might mean for your policies and strategies.
A significant change
The CSRD represents a significant change in the ESG field, as it intends to implement mandatory sustainability reporting obligations for companies. Thus, putting the plan in motion towards ESG reporting being a ‘must have’ rather than a ‘nice to have’. The CSRD also intends to standardise sustainability reporting. It has introduced the concept of ‘digital reporting, which requires sustainability reports to be prepared in a specific format called Extensible Business Reporting Language (XBRL) format. By standardising ESG reporting in this way, the Directive should contribute to data collection that has better consistency, is easier to analyse, and displays better comparability.
The CSRD aims to change reporting requirements for companies, starting with large companies and then SMEs (Small and medium enterprises) to follow. The directive came into force on the 5th of January 2023. It outlines different dates whereby firms of different sizes and categories must comply with CSRD standards. Companies already required to report under the NFRD must comply by 1st Jan 2024, large EU companies not subject to the NFRD must comply by 1st Jan 2025 and SMEs by 1st Jan 2026.
A large company is defined under the EU Accounting Directive as an EU firm that exceeds at least two of three criteria:
- Balance sheet total: €20 million
- Net turnover: €40 million
- Average number of employees during the financial year: over 250
An SME is defined under the EU Accounting Directive as an EU firm that exceeds at least two of three criteria:
- Balance sheet total: €350,000
- Net turnover: €700,000
- Average number of employees during the financial year: over 10
Changing the path of the CSRD
The Directive has not been introduced without speed bumps. It has received some pushback for placing unfeasible expectations on companies, particularly SMEs. There are numerous externalities in the private sector that CSRD implementation could cause. It is important to recognise the potential cost and administrative consequences that changes to reporting requirements and an overly ambitious timeframe could have on businesses. As part of the CSRD, companies must follow the European sustainability reporting standards (ESRS) when they conduct reporting. The European Commission has notably backtracked on some commitments outlined in the standards. These include:
- Certain disclosures are now voluntary rather than mandatory, including transition plans for biodiversity and ecosystems
- Allowing companies to decide on materiality; In year 1 of reporting, companies are not required to disclose anticipated financial effects from all environment-related impacts, risks and opportunities.
- Phase-in provisions for companies with less than 750 employees.
An evolving landscape: The CSRD as a model for the future of sustainability reporting
The CSRD has the potential to revolutionise ESG reporting in the EU and eventually beyond. It is part of a broader global movement towards sustainability strategies and ESG integration. Despite tweaks to the Directive, the timeline and policies are still ambitious and reflect the changing landscape of sustainability reporting in which companies are increasingly scrutinised for their business decisions.
However, recently proposed changes to the CSRD risk slowing the process of greater transparency and change. Allowing firms to decide which areas are material may allow opportunities for firms to curate their sustainability discourses and may allow ‘greenwashing’ practices to flourish. Changing the timeline may demonstrate a lack of scrutiny towards environmental, social and governance issues at a governmental level.
In the interests of policymakers, companies and the climate, the CSRD requires consistent evaluation to ensure it is keeping up with ESG trends. The CSRD can play a crucial part in the global alignment of ESG reporting. Keeping on track with its timeline and ensuring companies are held accountable for their policies and business strategies will provide a model for other ESG reporting standards across the world, and could lead to greater harmony and comparability in sustainability reporting.
Next in this series, we will be sharing an article that outlines more information about the CSRD, how your organisation can prepare for it and the potential consequences of non-compliance.