On 5 January 2023, the CSRD entered into force. This new directive modernizes and strengthens the rules concerning the social and environmental information that companies have to report. According to the new rule, a broader set of large companies, as well as listed SMEs, will now be required to report on sustainability. This means that they will have to publish regular reports on the social and environmental risks they face, and on how their activities impact people and the environment.
The new rules will ensure that investors and other stakeholders have access to the information they need to assess the impact of companies on people and the environment and for investors to assess financial risks and opportunities arising from climate change and other sustainability issues.
The essence of this directive is to get large and listed companies to disclose information on what they see as the risks and opportunities arising from social and environmental issues, and on the impact of their activities on people and the environment.
This helps, civil society organisations, consumers and other stakeholders to evaluate the sustainability performance of companies, as part of the European Green Deal, which is supposed to achieve a zero net emission of greenhouse gas by 2050 and an economic growth decoupled from resource use etc,.
NFRD metamorphosis to CSRD
The EU adopted CSRD because the Non-Financial Reporting Directive (NFRD) which was in place failed to address the concern of the EU consumers and investors, who they think deserve to know the sustainability impact of the businesses they’re patronizing and investing in.
To reinforce the confidence of EU investors on the market for green investments, investors need a clear picture of their investment portfolio’s sustainability impacts, with double materiality disclosure which means that businesses will have to disclose not only the risks they face from a changing climate, but also the impacts they may cause to the climate and to society – in other words the “Green disincentives”. This directive is supposed to be a self-reflection on businesses who have historically analysed risk posed to them by climate change without considering their own involvement in climate change. Even investors who aren’t particularly motivated to invest in green companies still need to meet the disclosure requirements of the Sustainable Finance Disclosure Regulation (SFDR).
CSRD applies to EU & Non-EU listed companies
This EU directive will affect about 50,000 large, small and medium sized companies, even some based outside the EU, especially when they meet two of the following three conditions:
1. €50 million in net turnover
2. €25 million in assets
3. 250 or more employees
It’s important to know that CSRD doesn’t place any new reporting requirements on SMEs not listed in securities and exchange regulated markets. However, there is a proposal to develop a simplified standard of reporting that SMEs could voluntarily use to report information to banks, clients, and investors which will facilitate their role in the transition to a sustainable economy.
Highlights of CSRD
Companies’ management reports will need to disclose financial and sustainability information. The sustainability data will be submitted in a digitally standardized format to facilitate verification at the European single access point database by an auditor. The third-party assurance of auditor highlights it authenticity.
European Sustainability Reporting Standards (ESRS) has been specifically adopted by the EU to report on sustainability impacts, opportunities and risks which are the basis for CSRD. However, a bit of emphasis is placed on indirect emission under value chain sustainability accountability, as scope 3 emission is becoming increasingly troublesome in measuring.
Kick off timelines for CSRD
The European Commission adopted the CSRD in late 2022. The rules will start applying between 2024 and 2028:
• From 1 January 2024 for large public-interest companies (with over 500 employees) already subject to the Non-Financial Reporting Directive (NFRD), with reports due in 2025;
• From 1 January 2025 for large companies that are not presently subject to the NFRD (with more than 250 employees and/or €40 million in turnover and/or €20 million in total assets), with reports due in 2026;
• From 1 January 2026 for listed SMEs and other undertakings, with reports due in 2027. SMEs can opt-out until 2028.