The EU is set to introduce more rigorous legislation on ESG over the coming years, for both large companies and SMEs to report against. It’s crucial for your organisation to anticipate these regulations, and reduce any negative impact by implementing thorough monitoring, data collection and reporting strategies. Putting ESG at the top of your agenda provides you with an advantage over companies that have no reporting obligation yet when it comes to complying with existing and new frameworks as well as attracting sustainable finance and pleasing stakeholders.
The Corporate Sustainability Reporting Directive (CSRD) is the new EU legislation requiring companies to release regular reports on their ESG efforts. It is designed to encourage companies to develop more responsible approaches to business, and helps stakeholders evaluate their non-financial performance. For the first time, the European Commission is defining a unified reporting framework for non-financial data.
What Is The CSRD?
The Corporate Sustainability Reporting Directive (CSRD) requires companies to report on the impact of corporate activities on the environment and society. The goal is to improve and establish consistent regulations for companies reporting on sustainability in the EU.
The directive broadens the range of sustainability reporting, in order to establish a uniform method for reporting. It will affect approximately 50,000 companies across Europe.
By implementing a standardised reporting framework, the EU is addressing the issue of accurate reporting and quality assurance. The CSRD mandates that both private and public EU companies provide detailed information on sustainability-related issues. This also applies to any non-EU companies with a substantial presence in Europe.
The overall goals of the CSRD are to:
- Standardise and enhance the quality of data and disclosures
- Offer stakeholders and investors more accessible and comprehensive information
- Improve accountability and transparency among businesses
- Facilitate the shift towards a more sustainable economy
Besides implementing stricter reporting requirements, the CSRD also applies to a larger number of companies compared to the previous NFRD legislation. This benefits investors seeking a deeper comprehension of the market and supports the EU's progress towards the European green deal.
How Is It Different From The NFRD?
The main goals of both directives are to improve clarity and support the development of a more sustainable economy. However, the CSRD goes further by increasing the demands for reporting. This includes a wider range of companies, as well as establishing a common system for reporting.
Additionally, the CSRD emphasises the importance of audits on the sustainability information provided by companies. This will result in more dependable data and greater confidence from stakeholders.
Like the NFRD, the CSRD means that large companies have to publish information related to:
- Environmental security and protection
- Employee care and ethical conduct
- Upholding human rights
- Combating bribery and anti-corruption
- Diversity on corporate Boards
However, under the NFRD, businesses could report on sustainability issues using any reporting standard, as there was no common framework.
In comparison, the CSRD encompasses more companies and includes more stringent reporting requirements. The CSRD:
- Offers enhanced reporting obligations, including the specific details and extent of information required.
- Extends reporting requirements to all large companies, SMEs, and certain non-EU companies with branches or subsidiaries in the EU.
- Mandates reporting in line with the European Sustainability Reporting Standards (ESRS).
- Requires digital tagging for reports.
- Enforces the incorporation of disclosed data in company management reports.
- Necessitates audits of all reports by authorised third-party auditors and lenders.
- Defines and clarifies key principles like double materiality, sustainability measures, and intangibles.
When Will The CSRD Be Put Into Place?
EU Member states will be required to incorporate this new directive into their national legislation by the end of 2023.
From the beginning of 2024, companies within the scope of the CSRD and currently under the NFRD will begin reporting. This also includes any other large EU companies. Businesses will be obliged to report their 2024 end of year data in 2025.
By 2026, SMEs on a regulated market, meaning no micro-enterprises, will begin reporting on under the CSRD. These reports will be on the 2025 fiscal year. From 2028 all SMEs will start reporting on the financial year 2027. However, there will be a further possibility of voluntary opt-out until 2029.
Then, from 2029, any non-European companies that operate in the EU with a net turnover of 150 million euros will start reporting.
What Effect Will The CSRD Have On Companies?
When the EU Commission will begin to sanction businesses failing to comply isn’t known exactly. However, according to the Commissions’ requirements within the CSRD, the sanctions will be significant.
What it does mean is that companies must begin taking proactive steps, in order to comply with the CSRD. It is crucial to start preparing right away, as the deadline for compliance is quickly approaching.
The CSRD is applicable to three types of companies:
- Large EU companies
- Small & medium enterprises listed on EU-regulated markets.
- Non-EU companies that have substantial business in the EU.
All large EU companies must comply with the CSRD, whether they are public or private businesses. A company is considered large if it meets at least two of the following criteria: having over 250 employees, generating a net turnover exceeding 40 million euros, or having a balance sheet total exceeding 20 million euros.
Listed small and medium-sized EU enterprises (SMEs) must also comply with the CSRD. These listed SMEs are companies whose securities are traded on a regulated market in the EU. They do not qualify as large companies, according to the above definition.
For non-EU companies with business in the EU, it is expected that the reporting obligations will be alike to those imposed on EU companies.
The clear message of the development of the CSRD is this; regulations are coming, compliance is a necessity, and ESG is at the forefront of the company agenda.
How Can You Prepare for the CSRD?
The implementation of the CSRD will lead to significant changes in the way data is managed and reported. Consequently, numerous companies might encounter substantial initial investment requirements. This can cause teams to feel overwhelmed if they are not adequately supported.
Companies need to prepare today for CSRD compliance, and there are many ways to do this.
It is important for companies to provide training to team members involved in data collection. This can help ease the potential intimidation that can come from new and more strict requirements. Businesses should inform the necessary team members of the CSRD’s impact on the company. They should also look to define what aspects of the directive they are going to be responsible for.
All levels of the company should understand the timelines of the CSRD and any other legislation. This can help keep teams on track before the mandated reporting takes effect. It is essential to remain updated on information that might alter in the future.
Furthermore, organisations should consider leveraging reporting software. This kind of software can save companies resources they would have spent on manual data collection, input, and analysis. Businesses have the opportunity to enhance efficiency through the automation of traditionally labour-intensive processes.
Creating accurate ESG reports poses a significant hurdle for numerous organisations. The range of ESG measurements is extensive and differs depending on the industry, company scale, and level of complexity.
It’s why it’s important to have the right ESG reporting software for your company; to help navigate the developing landscape of ESG regulations.
Convene ESG allows you to do just this by providing an end-to-end platform to collect data, track progress, compare with peers, align with frameworks and produce ESG reports.
With Convene ESG, you can collect your data for all the necessary metrics in the upcoming CSRD legislation, ensuring that you are compliant with regulations. This will allow you to further explore your company's sustainability strategies. With various global and regional frameworks also built in to Convene ESG, you will easily comply and report against any other standards without the need to repeat the reporting process.
Convene ESG is designed to make the reporting process as easy as possible, meaning that you can anticipate changes in current ESG legislation, be ready to face the challenges of future regulations and fully integrate ESG considerations into your company culture.