What is the EU CSRD?
The EU is introducing legislation that will require companies to report on their non-financial sustainability information.
The Corporate Sustainability Reporting Directive (CSRD) is considered to be a building block to achieve global agreements to counter climate change in the Paris Agreement and the EU wide ‘The Green Deal’ strategy.
Both of these ambitious but necessary international initiatives have goals to limit the global average temperature rise to 2 degrees celsius, with efforts to limit it at 1.5. The CSRD is a means to an end when it comes to achieving these goals.
The directive will be rolled out in a phased approach where large companies are affected first. Under CSRD legislation, the sustainability performance of EU businesses will be subject to reporting standards that can be compared to current financial reporting.
This new regulation will allow others to objectively assess the state and behavior of a company, compare it with others, and counter greenwashing. The EU CSRD is therefore expected to become a value driver for forward-looking businesses.
CSRD is a more ambitious update of the Non-Financial Reporting Directive (NFRD) already in place. With these requirements, the EU will become the global frontrunner in sustainability reporting as the continent is setting an example.
This affects companies because their impact on the environment will be made visible and openly accessible to everyone.
What are the goals?
The EU came out with the European Green deal with the ambitious goal of becoming the first “Net-Zero” continent by 2050. Meaning that individual states and companies will need to become leaders in the transition towards a sustainable European economy.
The first sub-goal set on the road towards “Net-Zero” is stopping the increase of CO2 emissions by 2025 and reducing emissions by 55% until 2030. The main strategy to achieve this is to reorient capital flow towards sustainable development and investment.
Meaning that the EU wants investments to flow towards those initiatives and businesses that will provide sustainable solutions and contribute to the halt and reduction of CO2 equivalent emissions.
How do you change the direction of capital flow? - Through reliable and available information.
The EU has been trying to make non-financial information more readily available and consistently reliable with several initiatives:
- Disclosure agreements - for the investor community which requires reporting on how sustainability risk is included in the decision making process in regards to where capital should be invested and in giving financial advice.
- EU-Taxonomy - a classification system for determining the extent to which business activities are sustainable or not. This is based on 4 conditions that need to be met before a business activity is classified as sustainable.
- NFRD - a requirement for large businesses (500+ employees, €40 million turnover, €20 million assets) to report on their non-financial information.
With this first international goal approaching fast it is becoming more important every day to create substantial change. However, current initiatives are falling short in efforts to achieve that change.
Why is the EU implementing new regulations?
Originally, the NFRD had the purpose of promoting openness about the corporate social responsibility (CSR) of a business. However, many stakeholders (including investors) found this level of reporting standards to be incomplete and missing vital information.
It was indicated that the current initiatives have several shortcomings that have led to disappointing results:
- Some businesses report no information
- Some businesses leave out relevant information
- The compatibility of provided information is low
- The reliability of provided information is low
- The findability and usability of provided information is low
As a result of these shortcomings, users of non-financial information are not able to accurately predict sustainability performance and related risks of their investments. This effect was specifically noticeable between different member states of the Union.
Subsequently, it has been impossible for the capital to consistently flow towards sustainable and inclusive growth and development which slowed down the process of reducing GHG emissions.
The EU is upgrading the regulation that is currently in place (NFRD) with the new, ambitious and stricter CSRD because the transition towards a sustainable economy is happening at a pace that is too slow.
By tightening the ropes the EU is attempting to now not only incentivize, but also force companies to be transparent about their sustainability performance.
The biggest changes from NFRD to CSRD are:
- Digital tagging
With the new CSRD regulation the EU is attempting to decrease discrepancies, increase transparency and promote sustainable behavior throughout the entire continent.
The EU has highlighted the following benefits for businesses of increased requirements in the CSRD:
- Ιncreased awareness
- Understanding climate risks and opportunities
- Creating a more diverse investor base
- Lower cost of capital influx
- Improving relationship with stakeholders
- Diversity of the board
The European Union is backing this up by dedicating 30% of its expenditure to climate-related projects for the coming years. Subsequently, they are now implementing the CSRD regulation to get individual companies to make similar commitments.
Scope - Who does the CSRD affect? And when?
The CSRD has sharpened the scope for which companies will be included under this legislation in order to create a significantly larger effect. This will result in an increase of total number of companies that are required to be compliant from 11.000 to more than 50.000.
The question of who and when they have to be compliant is influenced by three company characteristics:
- Net turnover
- Value of total assets
- Number of employees
Two out of three characteristics have to be met or exceeded before the organization will be required to report.
Financial year 2024
All organizations already within the existing scope of NFRD.
Financial year 2025
All organizations that have a net turnover of €50 million, total assets of €25 million and more than 250 employees.
Financial year 2026
All listed small and medium-sized enterprises (SMEs).
Non-EU undertakings: businesses that have a revenue of €150 million and have a subsidiary company within the EU have to adhere to the same standards.
Standard - How do you become compliant?
The EU is going to require companies to adhere to several standards. It must be noted here that some standards have not fully been made available just yet. The European Sustainability Reporting Standard have published the following final draft for reporting standards:
1. Overall requirements
- For the first time non-financial information is required to be in the annual report
- For the first time non-financial information will be subject to mandatory auditing with an external party - initially only limited assurance will be implemented to give the market time to mature
- Reporting standards for non-financial information will be made available
- For the first time reporting will have to happen in a digital format
2. General disclosure
Businesses are required to report on the governance structure of the organization. Think for example about transparency, CEO to average employee wage gap.
Business model, strategy and policies
Businesses are asked to elaborate on the company business model, strategy and policies in relation to sustainability.
KPI’s and targets - retrospective- & forward looking disclosures
Businesses are asked to describe key performance indicators and targets in relation to sustainability.
Company and sustainability governance
Companies are asked to elaborate on the role of sustainability governance within the organization. Think for example about questions in regards to the integration of sustainability professionals in the management team.
Double materiality assessment
Companies are required to report on the concept of how the business impacts the environment and how the environment impacts the business. (E.g. a fishing company impacts fish stock in the ocean, lower fish stock in the ocean impacts profitability of the fishing company).
Risk and opportunity management
Businesses have to describe the risks and opportunities in relation to sustainability. This includes climate- and financial risk and opportunities.
3. Topic-specific disclosures
The Taxonomy Regulation establishes six environmental objectives
- Climate change adaptation
- Climate change mitigation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems
- Climate change
- Water & marine resources
- Biodiversity & ecosystems
- Resource use & circular economy
- Own workforce
- Workers in the value chain
- Affected communities
- Consumer & end-users
- Sector specific standards (43 sectors have been identified, the specific standards per sector will be specified at a later stage)
- Governance, risk management & control
- Business conduct
Audit and digital tagging
- Audit by third party
- Involvement key audit partner
- Digital format (XHTML)
Why act now?
To prepare for the coming legislation, many businesses have kicked off their net zero journeys to achieve sustainability leadership today.
This consideration is often made over two axes: to gain a competitive advantage in their own markets, and to generate long-term value as a forward-looking business. In other words: achieving a future-proof license to operate. Businesses that haven’t acted yet are recommended to prepare as soon as possible.
Not only do these businesses want to be prepared to meet the minimum requirements, avoid fines and reduce risk from regulatory consequences, but they also want to get ahead of the curve. Businesses that act too late will face the fact that becoming sustainable is a long-term investment where change does not happen overnight.
By taking steps now, the results will show before the first deadlines set by the EU. Once those deadlines pass, the companies that were too rigid and complacent in their decision-making will be exposed as unsustainable entities.
Contrary, companies that act now will be leaps ahead of the competition, reap the benefits of their efforts, and create a competitive advantage.
Read more about how becoming sustainable can benefit the planet, as well as your business, here.