CSRD in short
- The Corporate Sustainable Reporting Directive (CSRD) is regulation from the European Union that requires corporate companies operating in the EU to report on sustainability in their annual report.
- The sustainability report will ensure that investors and stakeholders have access to information needed to assess the company’s impact on people and the environment and the financial risks and opportunities arising from climate change and other sustainability issues.
- The CSRD aims to promote a more responsible and sustainable business practices by making the sustainability reporting more detailed, reliable, and accessible.
What is CSRD, the Corporate Sustainability Reporting Directive?
The Corporate Sustainability Reporting Directive (CSRD) is an EU legislation that requires large companies to report on sustainability in their annual reports. Where sustainability includes aspects covering environmental impact, social issues and governance practice (ESG).
It applies to large companies, including non-EU companies operating within the EU. Companies must follow the European Sustainability Reporting Standards (ESRS) which outline specific metrics and disclosures on ESG.
Companies need limited assurance on their sustainability, with the aim of eventually moving toward reasonable assurance, similar to financial audits.
The CSRD entered into force on January 5th, 2023. It replaces the previous Non-Financial Reporting Directive (NFRD).
What is the objective of the CSRD?
As part of the objective of the EU to become “The first climate-neutral continent” and the subsequent European Green Deal, the EU Commission has adopted the CSRD. The obligation to report on sustainability in a transparent and coherent manner should help companies in their transition to a more sustainable business. This will also help channel financial flows toward companies with positive sustainable impacts, by providing stakeholders and investors with comparable and relevant information.
To which companies does it apply?
CSRD is applicable to:
- Large entities
- Listed entities
- Entities from outside the EU, operating in the EU
Large entities are defined as meeting two out of three criteria for two consecutive years:
- Exceeding a balance total of EUR 25Mln.
- Exceeding net revenue of EUR 50Mln.
- Number of employees meeting or exceeding 250.
What are the requirements of the CSRD?
The Corporate Sustainability Reporting Directive (CSRD) sets several requirements to improve and standardize sustainability reporting for large companies.
1. Broader scope of companies
- The CSRD applies to large companies with more than 250 employees or those that meet certain financial thresholds (like a turnover of €40 million or more).
- It also includes non-EU companies if they have significant operations in the EU, meaning it affects a broader range of businesses compared to previous rules.
2. More detailed and comprehensive reporting
Companies must report on a wide range of environmental, social, and governance (ESG) factors. This includes areas like:
- Climate change: how the company is addressing environmental impacts (e.g. reducing carbon emissions).
- Social issues: employee rights, diversity, and community impacts.
- Governance: ethical business practices, transparency, and risk management.
3. Standardized reporting framework
Companies must follow specific EU-approved reporting standards (the European Financial Reporting Advisory Group, or EFRAG, is creating these standards). This aims to make reports more consistent, so stakeholders can easily compare companies’ sustainability performance.
4. Audited information
Reports must be audited or verified by a third party, ensuring the information is accurate and reliable, similar to how financial statements are audited.
5. Digital reporting
Companies must digitally tag their sustainability data, making it easier for investors and other stakeholders to access and analyze the information.
6. Forward-looking information
Companies are required to provide future-focused disclosures, explaining how they plan to meet sustainability targets, like reducing greenhouse gas emissions or improving social practices.
Double Materiality
Companies need to report on both:
- How sustainability issues affect the company (financial impact).
- How the company’s activities affect society and the environment (external impact).
Read more in Understanding Double Materiality
8. Annual reporting
Companies must report on sustainability performance every year, alongside their financial reporting.
All these requirements aim to provide stakeholders with a more complete and transparent picture of a company’s sustainability efforts and risks. The idea is to align sustainability goals with business strategy to support a more sustainable economy.