Understanding the Corporate Sustainability Reporting Directive

27 February 2024

What is the CSRD?

The Corporate Sustainability Reporting Directive marks a pivotal legislative advancement, aimed at fostering ethical corporate conduct. It mandates comprehensive reporting on environmental, social, and governance (ESG) impacts, transcending mere financial metrics. By widening the scope of information disclosure to encompass areas like supply chain management and social responsibility policies, the CSRD promotes transparency and accountability in business operations. This directive aligns sustainable practices with core business strategies, compelling companies to adopt a more transparent and comprehensive approach, thereby nurturing a sustainable and ethical economy.

Delays Announced

Recently, the European Parliament announced a two-year delay for several key elements of the CSRD. This postponement includes the adoption of sector-specific standards and general sustainability reporting standards for non-EU companies, now postponed until 2026. The decision responds to concerns raised by companies regarding the complexity and burden associated with the initial sector-agnostic European Sustainability Reporting Standards (ESRS).

The delay brings with it some positive outcomes. Firstly, it provides companies additional time to become familiar with the European Sustainability Reporting Standards, fostering better understanding and compliance. Secondly, the delay acknowledges the level of effort required to implement existing ESRS, allowing organisations to allocate resources effectively. Lastly, by proposing an iterative approach rather than overwhelming companies with all ESRS at once, the delay offers a more manageable transition to sustainability reporting standards. This iterative process ensures that companies can adapt gradually, promoting more robust and accurate reporting practices in the long run.

CSRD Key Points:

Compulsory Reporting:Large EU and EU-listed companies are mandated to disclose sustainability information under the CSRD.

Timeline of Implementation:Phased implementation spans from 2024 to 2028, with deadlines contingent upon company size and member state regulations. Compliance for all companies within the directive’s scope becomes obligatory by 2028.

Digital Tagging and Auditing: Reported information must undergo digital tagging and auditing to ensure accuracy and compliance.

Penalties and Benefits:Non-compliance may result in penalties, while adherence presents benefits such as increased green investment and streamlined reporting processes.

CSRD Adoption and Timeline:

  • 2023:The CSRD takes effect for eligible entities, requiring the implementation of ESG reporting capabilities and infrastructure to prepare for CSRD reporting the following year.
  • 2024:Qualifying large businesses must disclose a CSRD report according to the initial set of sustainability reporting standards for their 2024 financial year. All EU Member States must comply with the CSRD by July 6, 2024. CSRD Article 4 of the Directive shall apply from January 1, 2024, for financial years starting on or after January 1, 2024.
  • 2025:Companies will repeat the ESG reporting cycle for fiscal year 2025, adhering to CSRD requirements.
  • 2026:EU small and medium enterprises (SMEs) commence CSRD reporting using the streamlined reporting system designed for small businesses. Sector-specific ESRS reporting standards will be introduced by June 2026.
  • 2028:International companies generating more than €150 million in annual revenue within the EU, with at least one subsidiary or branch in the EU exceeding certain thresholds, must commence reporting under the ESRS (CSRD) at a consolidated group level, including non-EU activity.

Who is Affected?

The CSRD casts a wide net, encompassing all large EU and EU-listed companies. Even non-EU companies with significant business interests in the EU market are subject to the CSRD, though SMEs are exempt unless they have securities listed on regulated markets.

Reporting Requirements and Communication

Under the CSRD, companies are obligated to furnish comprehensive sustainability information covering human rights, environmental impact, and governance practices. This reporting mandate aligns with the ESRS and requires a dual perspective: companies must detail both the external effects of sustainability issues on their operations (the ‘outside-in’ perspective) and the internal impact of their activities on people and the environment (the ‘inside-out’ perspective).

This sustainability information must be seamlessly integrated into annual management reports, presented in electronic XHTML format with digital tags. This facilitates machine readability and integration into the European Single Access Point, ensuring accessibility and transparency in reporting practices.

Importance of Compliance and Preparation

Compliance with the CSRD is imperative, not only to avoid potential sanctions and exclusion from investment portfolios but also to leverage opportunities for standardised reporting, monetisation of sustainability efforts, and the promotion of innovative practices.

To prepare for CSRD reporting obligations, companies are advised to collaborate extensively across their supply chains, engage auditing agencies for validation, carefully select digital mediums for information storage and reporting, and remain informed about evolving legislative developments. This proactive approach ensures a smooth transition and alignment with the directive’s requirements.

In conclusion, the CSRD signifies a significant stride toward transparency, accountability, and sustainability in corporate practices. Despite delays, its implementation heralds a new era of responsible business conduct, prompting companies to prioritise societal and environmental well-being alongside financial performance.

If you would like to find out more about how we can help you deliver on your sustainability goals, please reach out to a member of the COzPro team.