A New Era of Environmental Reporting
In an era marked by heightened awareness of environmental challenges and a collective call for corporate responsibility, the Corporate Sustainability Reporting Directive (CSRD) emerges as a pivotal milestone in shaping the future of transparent business practices.
This article delves into the implications of the CSRD, a directive that transcends conventional reporting standards by placing a spotlight on climate-related financial disclosure, sector-specific standards, and the nuanced concept of impact materiality.
As companies navigate the complexities of sustainability targets and strive to articulate their environmental, social, and governance commitments, the CSRD aims to foster a new era of accountability.
Read on to explore the multifaceted dimensions of this directive, dissecting its core components, and understanding how it positions businesses to meet the growing expectations for comprehensive and impactful corporate sustainability reporting.
What is the Corporate Sustainability Reporting Directive (CSRD)?
The Corporate Sustainability Reporting Directive is the newly adopted EU legislation (Oct 2022) that requires large companies to file an annual report on their environmental and social impact activities.
The CSRD serves as the EU's strategic initiative to address and mitigate environmental issues and climate risks, aiming to enhance sustainability performance and disclosure requirements within the corporate sector.
The overall aim is to reach climate neutrality by fostering a sustainable economy. The Corporate Sustainability Reporting Directive seeks to tackle the pressing challenges associated with climate risks, ensuring a proactive approach to managing sustainability disclosure.
The Corporate Sustainability Reporting Directive introduces a comprehensive reporting framework for non-financial data, thereby redefining the scope and nature of sustainability reporting.
The directive establishes standardised disclosures, marking the first instance of a common framework for business model transparency and non-financial data disclosures.
Having this new common reporting framework allows investors, consumers, policymakers, and stakeholders to evaluate the economic activities (especially the non-financial performance) of businesses and encourages the development of more responsible business models within the corporate sector.
Compliance is Coming Soon
Companies must submit their report aligning with the Corporate Sustainability Reporting Directive on 1 January 2025 (for the 2024 financial year). Data collection and auditing is an arduous process requiring time and resources
If you are not familiar with it or are wondering, "does my company need to comply?" then it is time to become an expert and CoolPlanet can help you learn about the CSRD and resolve your reporting and sustainability issues.
Who does the Corporate Sustainability Reporting Directive apply to?
The Corporate Sustainability Reporting Directive requires all large EU-based companies (or businesses listed in the EU-regulated market) - meaning companies with more than 250 employees and more than €40M turnover and/or more than €20 Million in total assets - and all listed companies (except micro - enterprises, less than 10 employees or below €20M in turnover - the CSRD does not apply to these micro undertakings, just as it does not apply to non-listed SMEs) to report on their sustainability.
Nearly 50,000 companies in the European Union will need to follow detailed EU sustainability reporting standards, corresponding to 75% of all EU companies turnover. This includes EU-based subsidiaries of non-EU companies.
An exemption exists where an individual entity (and its subsidiaries) are included in the management report of a parent company - in that case, the parent company takes on the reporting burden.
Otherwise, the company management reports must be filed in an electronic format by the entity.
How did CSRD come about?
To help improve money flow towards sustainable activities across the EU, the European Commission adopted the Sustainable Finance Reporting Package (April 2021).
One of the proposed measures within this package was the Corporate Sustainability Reporting Directive (EU CSRD). Evidence suggests that companies' information is not sufficient as is - hence the need for a single comprehensive reporting framework.
According to the European Commission, "reports often omit information that investors and other stakeholders think is important". Reported information can be difficult to benchmark from company to company with no common reporting framework in place. Users are often unsure whether they can trust it to accurately assess the business performance.
For example, investors need to assess this information to report under the Sustainable Finance Disclosures Regulation (SFDR) and channel money to sustainable activities.
Those involved in financial markets, such as investors, face considerable financial risks if they cannot accurately assess the entire value chain and environmental impact of the organisation.
The CSRD aims to ensure that businesses report reliable and comparable sustainability information to encourage sustainable investment.
Which Information Will Have to be Disclosed?
The Corporate Sustainability Reporting Directive includes existing EU regulations and brings an additional disclosure obligation with it.
The new directive will replace the Non-Financial Reporting Directive (NFRD) and will be phased in from the beginning of 2024. The CSRD goes beyond the NFRD and aims to make Europe a leader in sustainability reporting on a global scale.
Under the pre-existing NFRD (Non-Financial Reporting Directive) 2014/95/EU, businesses have to publish information related to several critical governance issues beyond the typical basic economic activities reported by asset managers:
- Environmental protection - to highlight the ecological impact of businesses
- Social responsibility and treatment of employees - having fair labour practices in that business but also in its supply chain
- Respect for human rights - emphasises ethical corporate conduct
- Anti-corruption and bribery - to ensure the integrity of business operations
- Corporate board diversity - focuses on whether the business emphasises inclusivity within its leadership teams. The board of directors must disclose information (in terms of age, gender, etc.), to help underscore the importance of diversity on company boards.
The CSRD is adding a wide range of regulatory requirements as follows:
- Double materiality assessment: Sustainability risk (including climate change) affecting the company plus companies' impact on society and the environment
- Process to select material topics for stakeholders. More forward-looking information, including targets, climate impact, and opportunity management
- Disclose information relating to intangible, non-financial indicators (impact on people, intellectual capital, and governance factors)
- Reporting in line with Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation
- Businesses will correspondingly have to start reporting how sustainability risks might affect their performance.
While the EU provides voluntary guidelines for NFRD reports, the CSRD introduces more detailed reporting requirements and requirements to report according to mandatory EU sustainability reporting standards.
The CSRD will align with the already existing Sustainable Finance Disclosure Regulation and the EU Taxonomy.
What are the Next Steps?
- 2025: Businesses already subject to the NFRD will have to start reporting on the financial year 2024
- 2026: Large undertakings not currently subject to the NFRD will have to start reporting on the financial year 2025
- 2027: Small and medium enterprises and small and non-complex credit institutions and captive insurance undertakings will have to start reporting for the financial year 2026 - with a further possibility of voluntary opt-out until 2028
- 2029: Non-European companies that have branches or subsidiaries will have to start reporting
Penalties for Non-compliance
The sanctions imposed under the Corporate Sustainability Reporting Directive can be significant, as per the requirements set by the European Commission. The specific nature and amount of fines will vary across Member States.
For instance, in Germany, companies that fail to report compliance with the Non-Financial Reporting Directive (amended by the CSRD) may face fines up to the highest of the following: €10 million, 5% of the company's total annual turnover, or twice the profits gained or losses avoided due to the breach.
In contrast, French businesses are not subject to fines if they do not report in accordance with the NFRD, unless a concerned party requests the disclosure of non-financial information. If the information is not provided subsequently, a judge may impose financial penalties.
To be fully prepared, businesses should start collecting data now. It is not easy to stay on top of the requirements and understand which data must be collected and when. We're here to help.
How CoolPlanet Can Help
There's little doubt that sustainability reporting requirements are going to become increasingly stringent. Public accountability is here for large and medium businesses, bringing with it potentially negative impacts for those that aren't clued in.
So where do businesses start with the Corporate Sustainability Reporting Directive?
CoolPlanet is a leading decarbonisation partner that specialises in assessing whether your company collects and analyses the appropriate data, evaluates your existing technology, provides recommendations and helps you deliver new implementations and strategies.
By partnering with us, you can ensure compliance with CSRD and all your ESG strategy and reporting obligations, meet other legal requirements, and uncover potential opportunities for energy savings and efficiency.
Conclusion
In conclusion, the CSRD stands as a transformative force, reshaping the landscape of corporate accountability by emphasising climate-related financial disclosure, sector-specific standards, and the integration of non-financial indicators.
As businesses, especially public interest entities, recalibrate their reporting practices, the CSRD serves as a beacon for aligning with the European sustainability reporting standard.
This directive not only underscores the importance of financial materiality but also propels a collective commitment towards more sustainable business practices and a circular economy.
As we contemplate the implications of this shift in reporting standards, we invite you to download our comprehensive guide on the CSRD, providing practical steps to prepare for and navigate through this evolution in corporate sustainability reporting.
How can your organisation leverage the CSRD to not only meet regulatory requirements but also contribute meaningfully to the broader goals of sustainable development?
Explore the guide and embark on this transformative journey.
