What Is It and When Does It Come Into Effect?
The CSRD stands for the Corporate Sustainability Reporting Directive. It is a new EU legislation amending the existing reporting requirements of the Non-Financial Reporting Directive (NFRD). The CSRD forms a part of the sustainable finance package, which aims to aid the transition to a climate-neutral economy.
What is the Non-Financial Reporting Directive?
The NFRD applies to public-interest companies with more than 500 employers in the EU, which accounts for approximately 6,000 companies and groups. These include listed companies, banks, insurance companies, and other public-interest entities.
The NFRD currently requires these ~6,000 companies to include non-financial statements in their annual reports or in a separate filing including information on:
· environmental protection,
· social responsibility and treatment of employees,
· respect for human rights,
· anti-corruption and bribery,
· diversity on company boards.
The proposal by the European Commission states that the CRSD would amend the existing reporting requirements of the NFRD. The CSRD would mandate all large companies to publish regular reports on their environmental and social impact activities.
What are the proposed changes under the CSRD?
The European Commission submitted its CSRD proposal on the 21st of April 2021. The proposal:
- extends the scope to all large companies and all companies listed on regulated markets (micro-enterprises are exempt but can apply the provisions on a voluntary basis),
- requires the audit of reported information under limited assurance,
- requires companies to digitally tag the reported information,
- requires more detailed and standardised information to be published by companies,
- requires publication of information in a dedicated section of company management reports to improve the accessibility of the reported information.
Who is affected by the CSRD?
The reporting requirements will apply to all large EU companies and all listed companies, including listed small and medium-sized enterprises (SMEs) which encompasses roughly 49,000 companies across the EU. SMEs will be allocated sufficient time to adapt to the new rules. They will have until the 1st of January 2026 to comply with the reporting requirements.
Companies affected are those who meet two of the following three criteria:
- more than 250 employees on average during the financial year
- a balance sheet total in excess of 20 million euros
- a net turnover in excess of 40 million euros
Timeframe of the CSRD Implementation
The European Parliament and Council agreed its position on the European Commission proposal for the CSRD on February 24th 2022. It is expected to be finalised and adopted by December 1st 2022. The 27 EU member states will be expected to transpose the new directive into national law by this date.
This means that large companies will be required to start reporting under the CSRD from January 1st 2023. Companies will be required to submit their report aligning with the CSRD on 1 January 2024, for the 2023 financial year.
It is the first time that the European Commission has defined a common reporting framework for non-financial data. The more stringent requirements ensure that non-financial data is of higher quality and therefore comparable, this will make certain that sustainability data is valid to be taken into account by investors.
The CSRD will play a major role in transitioning to a fully sustainable economic and financial system in accordance with the European Green Deal and the UN Sustainable Development Goals. The affected companies in the EU will need to make significant changes to how they disclose sustainability information to ensure high quality reporting. The quality and comparability of sustainability information within the EU will thus have a significant impact on the EU’s path to net-zero emissions.