The upcoming EU CSRD regulation explained

February 21, 2023
The upcoming EU CSRD regulation explained
Table of contents

What is the EU CSRD?

The EU is introducing legislation that will require companies to report on their sustainability performance over 2025. The Corporate Sustainability Reporting Directive (CSRD) 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, at its core, 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 reducing CO2 emissions by 55% by 2030. With this first goal approaching fast, businesses have started acting and investing in various tools and solutions to get to net zero, fast. 

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. 

Why is the EU implementing new regulations?

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. Additionally, more companies will now fall under the scope of the regulation which will extend its reach and subsequently its impact.

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. Additionally, because there was a lack of strict and consistent reporting standards, discrepancies started to arise between the sustainability reporting of different EU members resulting in misunderstandings. 

With the new CSRD regulation the EU is attempting to decrease discrepancies, increase transparency and promote sustainable behavior throughout the entire continent.

Who does it affect? And when?

All companies who do business in the EU, regardless of where their headquarters are located, will be subject to this legislation. The question of when they have to be compliant is influenced by three company characteristics: 

  1. Net turnover
  2. Value of total assets and 
  3. Number of employees. 

Two out of the three characteristics have to be met or exceeded before the organization will be required to report.

Financial year 2024

Financial year 2025

  • Net turnover of €40 million;Total assets of €20 million;
  • ≥250 employees.

Financial year 2026

  • Separate standards will be published at a later time.

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. However, what we do know is the following:

Companies will need to …

  • Report sustainability information (including their quantified carbon footprint);
  • Introduce an audit requirement;
  • Promote the digitalization of sustainability information;
  • and, make EU reporting standards mandatory. 

In short, companies need to have insights into their sustainability impact and be able to report on it digitally, meaning that it has to be reported in an XHTML format and tagged according to the upcoming standard. These reporting standards are to be defined at a later stage.

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.

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