Corporate Sustainability Reporting Directive (CSRD)
The European Union (EU) has implemented new regulations to enhance corporate sustainability reporting and promote transparency in companies' social and environmental impact. Large and listed companies, excluding micro-enterprises, are now required by EU law to disclose information about the risks, opportunities, and impact of their activities on people and the environment. This piece of quite important legislation known as the Corporate Sustainability Reporting Directive (CSRD), aims to facilitate the evaluation of companies' sustainability performance for investors, civil society organizations, consumers, and other stakeholders.
The CSRD, which came into effect on 5 January 2023, modernizes and strengthens the reporting rules for social and environmental information. It expands the scope of reporting requirements to include a broader set of large companies and listed small and medium-sized enterprises (SMEs). We're talking about a whopping 50,000 companies here!
So, who does the CSRD apply to?
The CSRD will apply to companies that meet the following criteria:
· Over 250 employees
· More than €40 million in annual revenue
· More than €20 million in total assets
· Publicly-listed equities with more than 10 employees or €20 million in revenue
These new rules are all about giving investors and stakeholders the lowdown on sustainability so they can better gauge the risks associated with climate change and other sustainability issues. Plus, they're encouraging companies to be open about their impact on society and the environment. It's all about building a culture of transparency, folks! And hey, over time, these rules will actually help companies cut down on reporting costs by making the info more standardized.
To get on board with the CSRD, companies that fit the criteria need to follow a few compliance steps each year starting in 2024. Here's what they have to do:
· Prepare and submit a CSRD report: Large companies must submit their first CSRD report in early 2025, based on their environmental performance during the 2024 fiscal year. SMEs will begin reporting for 2026 using the CSRD's streamlined SME guidelines.
· Track and disclose the required information: CSRD reports should include management commentary and data within a dedicated management report section, covering various aspects such as materiality process, sustainability and ESG performance, transition to a sustainable economy, sustainability risks and impacts, business model resilience, and more.
· Digital data and tagging: Companies must prepare their financial and management statements in an electronic format following the European Single Electronic Format (ESEF) regulations and the EU sustainability taxonomy. Sustainability information should be digitally tagged according to specified categorization systems outlined in the CSRD Regulation, or companies can utilize ESG software for automated data tagging.
· Third-party assurance: Organizations reporting under the CSRD will need to seek "limited" assurance for the sustainability information they disclose. This involves engaging a neutral, trusted, and experienced third party to review the data, ensuring independent scrutiny of the sustainability reporting.
How should the companies report?
The European Financial Reporting Advisory Group (EFRAG) was given the task by the European Commission to develop initial European Sustainability Reporting Standards (ESRSs). The draft ESRSs were prepared by EFRAG's Project Task Force between June 2021 and April 2022 and were made available for public consultation from April 30 to August 8, 2022. Following this consultation, EFRAG has now presented a preliminary set of draft ESRSs in this report for adoption by the European Commission.
The purpose of these standards is to outline the general requirements that companies must adhere to when preparing and presenting sustainability-related information under the CSRD.
The ESRS will serve as the standard for sustainability reporting that companies will need to adopt in the coming years, with specific deadlines set for different categories of companies.
Deadline 1: Kicking off on January 1, 2024
Companies in the spotlight: Larger companies with over 500 employees that are already familiar with the Non-Financial Reporting Directive (NFDR). They'll need to roll up their sleeves and get ready to report in line with the CSRD requirements for the fiscal year 2024. The published report is expected to hit the scene in 2025.
Deadline 2: Unveiling on January 1, 2025
Companies stepping in the spotlight: Now, it's time for the first set of companies that weren't previously subject to the NFDR to start reporting according to the requirements of the CSRD. We're talking about those larger companies that meet at least two out of three specified requirements:
- Over 250 employees and/or
- Reeling in 40 million EUR in turnover and/or
- Flaunting a total asset value of 20 million EUR. These companies will need to buckle down and start reporting according to the CSRD requirements in 2025.
The reports of these companies should be hitting the scene in 2026.
Deadline 3: Hitting the ground running on January 1, 2026
Companies taking center stage: It's finally showtime for small and medium-sized enterprises (SMEs) listed on EU-regulated markets that surpass at least two of these thresholds:
- Rocking over 10 employees
- Raking in more than 700,000 EUR in net turnover
- Boasting total assets above 350,000 EUR. The CSRD will be making its grand entrance into its financial year 2026. But here's the deal: SMEs and other small and non-complex institutions can choose to opt out of the reporting rules until January 1, 2028. They've got some flexibility, folks.
Deadline 4: Making waves on January 1, 2028
Companies stealing the spotlight: Time for non-EU-country companies that meet the following criteria to join the CSRD party:
- Net turnover of a whopping 150 million EUR within the EU
- At least one subsidiary or branch waving the company flag within the EU. They'll need to align with the CSRD requirements and show off their reporting prowess.
So, get ready for these different phases of the CSRD rollout, as companies of various sizes and backgrounds gear up to disclose their sustainability efforts. It's all about transparency, accountability, and taking those steps toward a more sustainable future.
The overall goal is to have all of the various shapes and sizes of companies follow the European Sustainability Reporting Standards (ESRS) to make sure they cover all the material information. This info should help everyone understand how the company's actions affect the environment, its growth, performance, and overall position.
These regulations under the CSRD aim to strengthen sustainability reporting practices, promote transparency, and provide investors and stakeholders with the necessary information to assess companies' sustainability performance. By fostering accountability and harmonizing reporting standards, the EU is taking significant steps toward achieving its sustainability goals outlined in the European Green Deal. So, let's keep it green!