What is the CSRD?
Approved by the European Council in November 2022 and effective from January 1, 2024, the CSRD replaces the previous Non-Financial Reporting Directive (NFRD) and imposes stricter requirements on sustainability reporting. Companies must now disclose not only their financial performance but also their contributions to environmental, social, and governance (ESG) issues. From 2024, businesses will need to collect ESG data for reporting on the 2024 fiscal year, with submissions due in 2025.
Double Materiality Principle
A key element of the CSRD is the double materiality principle, which requires companies to report on both the risks posed by sustainability issues (like rising energy costs or resource scarcity) and the impacts their operations have on the environment and society (such as CO2 emissions and biodiversity). By addressing both dimensions, businesses can gain a more comprehensive understanding of their operations, enabling them to mitigate risks and seize opportunities.
Which Companies Must Comply with CSRD?
The CSRD applies to large companies currently under the NFRD. In 2025, other large firms will be included, and by 2026, listed SMEs will also be affected. A company is considered large if it meets at least two of the following criteria:
- More than 250 employees
- Annual revenue exceeding €50 million
- Total assets exceeding €25 million
When assessing these criteria, companies must also include employees and financial data from affiliated and partner firms, both domestically and internationally, to determine their classification as a large company.
Indirect Impact on SMEs
While non-listed SMEs are not yet required to report, they will be indirectly impacted by the CSRD, as large companies must disclose sustainability performance across their entire supply chain. Consequently, SMEs supplying to larger firms may receive inquiries about their sustainability practices, making it crucial for them to understand their supply chain and prepare for such questions.
European Sustainability Reporting Standards (ESRS)
The CSRD mandates that companies report under the European Sustainability Reporting Standards (ESRS), which outline the sustainability information to be included in reports, such as CO2 emissions, biodiversity, and human rights. These uniform standards facilitate better comparison of performance across companies. Separate, simplified voluntary standards for SMEs will be announced by the end of 2024.
Additionally, the CSRD requires external auditors to verify sustainability reports through a ‘limited assurance’ procedure, ensuring the reliability of the reported data.
Preparing for CSRD
For companies that have not previously reported on sustainability, the CSRD’s introduction may pose challenges. It is advisable to start early in gathering the necessary data and establishing a clear reporting structure. Adopting best practices, such as implementing recognized reporting standards like GRI (Global Reporting Initiative) or SASB (Sustainability Accounting Standards Board), can enhance consistency and efficiency. External experts can assist in identifying relevant ESG indicators for the organization and guide measurement and reporting
Benefits of CSRD Reporting
While the CSRD introduces additional obligations, it also offers numerous benefits. Transparency regarding sustainability performance can enhance reputation, increase investor trust, and create new business opportunities.
Moreover, the CSRD opens access to improved financing options, such as green bonds and sustainable loans. Increasingly, investors, including sustainable investment funds and banks, value companies with strong ESG performance. Investments in sustainability are viewed as risk-averse and future-oriented, making companies more attractive to capital providers focused on sustainability.
In summary, by complying with the CSRD and reducing CO2 emissions (for instance, by using green electricity), companies not only play an active role in the energy transition but also enhance their market position.