A Valuable Guide to the Corporate Sustainability Reporting Directive

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May 28, 2024

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Corporate Sustainability Reporting Directive | Report Yak Blog

The Corporate Sustainability Reporting Directive (CSRD) is an important step by the EU to improve transparency in sustainability reporting. This directive builds on the non-financial reporting directive and sets clear sustainability standards for companies. It also aligns with the Sustainable Development Goals (SDGs) and uses established frameworks like the Sustainability Accounting Standards Board (SASB). The CSRD focuses on strong sustainability disclosures and aims to create a comprehensive reporting framework. This ensures companies disclose their impact on the environment and society accurately.

In this article, we will delve into why it’s important to comply with the CSRD and which companies must comply. We will also cover detailed disclosures required under the CSRD, and the timeline for its implementation. Additionally, we’ll explore the penalties for non-compliance and who will validate these reports. We’ll guide you on setting up a reporting process in line with the Corporate Sustainability Reporting Directive. Lastly, we’ll talk about the CSRD’s impact on Indian companies. Let's get started!

What is the Corporate Sustainability Reporting Directive (CSRD)?

The Corporate Sustainability Reporting Directive, or CSRD, is a big effort by the European Union to make sustainability reporting clearer. It updates the old Non-Financial Reporting Directive (NFRD) and sets new rules for companies in the EU. These rules help align with the Sustainable Development Goals (SDGs) and use frameworks like SASB to ensure companies give detailed sustainability disclosures.

The CSRD aims to create a strong reporting framework to handle various sustainability issues. Companies must share detailed information about their sustainability efforts, including environmental, social, and governance (ESG) factors. This helps investors and consumers understand a company's impact. The European Commission created the CSRD to meet the growing reporting needs of businesses and to make sure sustainability reporting is consistent across the EU.

The CSRD was adopted to improve the non-financial reporting directive. It requires companies to report on how their actions affect the economy and the environment. This directive is part of the European Commission's larger plan to promote sustainability and accountability in businesses. The first reports under the CSRD will be published in 2025, covering the 2024 financial year.

Why is it Important to Comply with the Corporate Sustainability Reporting Directive?

Complying with the Corporate Sustainability Reporting Directive (CSRD) is crucial for several reasons. Here's why it matters:

1. Enhanced Transparency

The CSRD aims to improve transparency by standardizing sustainability information. This allows stakeholders, including investors and consumers, to make better-informed decisions. Enhanced transparency also helps build trust and credibility for the companies involved.

2. Regulatory Compliance

Following the CSRD reporting requirements helps companies avoid penalties and legal issues. Non-compliance can result in significant fines and legal actions. Staying compliant ensures that businesses operate within the legal framework set by the EU.

3. Investor Confidence

Investors are increasingly assessing risks and opportunities through ESG (Environmental, Social, and Governance) performance. By complying with the Corporate Sustainability Reporting Directive, companies can provide the ESG reporting that investors need. This boosts investor confidence and potentially attracts more investment.

4. Alignment with Global Standards

The CSRD aligns with global sustainability standards, including those by the European Financial Reporting Advisory Group (EFRAG). This alignment helps companies meet international expectations. It also facilitates easier reporting across different jurisdictions.

5. Risk Management

CSRD reporting includes disclosing risks related to sustainability issues, like climate change and resource scarcity. By identifying and managing these risks, companies can protect themselves against future challenges and improve long-term resilience.

6. Competitive Advantage

Companies that adopt the new disclosure standards can gain a competitive edge. Demonstrating a commitment to sustainability can differentiate a company from its competitors and attract customers who focus on environmental and social responsibility .

7. Contribution to the European Green Deal

The CSRD supports the European Green Deal by ensuring that companies contribute to the EU's sustainability goals. By adhering to the new requirements, companies help drive the transition towards a sustainable economy.

8. Improved Decision-Making

Data collected through CSRD reporting provides valuable insights into a company's sustainability efforts. This information can inform better strategic decisions, helping businesses improve operations and reduce negative impacts on the environment and society.

By complying with the Corporate Sustainability Reporting Directive, companies fulfill regulatory obligations, enhance their reputation, attract investment, and contribute to a sustainable future.

Which companies have to comply with the CSRD?

The Corporate Sustainability Reporting Directive (CSRD) affects many companies, in and outside the EU. Here’s a simple breakdown of which companies need to comply:

Large EU Companies

The CSRD requires large companies in the EU to follow new sustainability reporting requirements. These companies must meet at least two of the following criteria. They should have over 250 employees. Their turnover should be over €40 million and total assets should also be over €20 million.

Listed SMEs

Small and medium-sized enterprises (SMEs) that are publicly listed on EU-regulated markets also need to comply. These SMEs can use simplified reporting standards. They can opt-out until 2028 if needed.

Non-EU Companies

Companies based outside the EU but with significant operations or revenue within the EU must also comply. Specifically, non-EU companies with a net turnover of over €150 million in the EU must comply. Those with subsidiaries or branches generating significant revenue need to follow the CSRD's sustainability reporting requirements.

Companies with Over 500 Employees

Large public-interest companies with over 500 employees must follow the new CSRD standards. These companies were already under the Non-Financial Reporting Directive (NFRD). The new CSRD standards start from the 2024 financial year. The first reports are due in 2025.

The CSRD aims to improve transparency by standardizing sustainability disclosures. It makes sustainability data comparable across companies. It requires companies to report detailed information on their sustainability efforts. This includes covering environmental, social, and governance (ESG) factors in their management reports. This directive is part of the European Commission's larger plan to promote sustainability and accountability in corporate practices.

Timeline of Implementation for the CSRD

The Corporate Sustainability Reporting Directive (CSRD) sets a detailed timeline for implementation. Here is a breakdown of the key dates and phases for compliance:

January 1, 2024

Large public-interest companies in the EU, with over 500 employees already subject to the Non-Financial Reporting Directive (NFRD), must begin reporting according to the new CSRD standards. These reports will be published in 2025.

January 1, 2025

Large companies not previously subject to the NFRD, including EU-based parent companies of large groups and large non-EU companies listed on EU markets, must start their reporting for financial periods beginning on or after this date. The publishing year for this first set of reports is 2026 .

January 1, 2026

Small and medium-sized enterprises (SMEs) listed on EU-regulated markets and other entities not covered in the earlier phases must follow the CSRD for financial periods starting on or after this date. These reports will be published in 2027. SMEs have the option to opt-out until 2028 if needed.

January 1, 2028

Non-EU companies with significant EU operations, specifically those with over €150 million in net turnover within the EU, must start reporting for financial periods starting on or after this date. Their first reports are due in 2029.

The CSRD, part of the European Green Deal, aims to enhance transparency and standardize sustainability disclosures across reporting entities. This mandatory sustainability reporting ensures that companies report detailed information on their sustainability efforts, covering environmental, social, and governance (ESG) factors, following the new disclosure standards.

These steps reflect the EU's commitment towards sustainability, setting clear reporting principles and integrating sustainability into corporate accountability practices.

Detailed Disclosures under the Corporate Sustainability Reporting Directive (CSRD)

The Corporate Sustainability Reporting Directive (CSRD) requires companies to disclose detailed information about their sustainability efforts. Here’s a comprehensive list of the required disclosures under the CSRD:

1. Sustainability Policies, Goals, and Performance

Companies must report their sustainability policies, set clear goals, and measure performance against these goals. This includes detailing their overall strategy for sustainability and how they plan to achieve their objectives.

2. Greenhouse Gas Emissions and Targets

Firms need to disclose their greenhouse gas emissions, including scope 1, 2, and 3 emissions. They must also set and report on targets for reducing these emissions to align with global climate goals.

3. Social Responsibility and Employee Treatment

This involves reporting on how companies treat their employees, including working conditions, equality, and diversity. Social responsibility also covers community engagement and social impact initiatives.

4. Anti-Corruption and Bribery

Companies must disclose measures taken to prevent corruption and bribery. This includes policies, training programs, and any incidents or investigations related to corruption within the organization.

5. Diversity of Company Boards

Reports should include information on the diversity of company boards in terms of age, gender, educational background, and professional experience. This ensures transparency in governance practices.

6. Human Rights Issues

Companies need to report on how they address human rights issues within their operations and supply chains. This includes policies, due diligence processes, and any human rights incidents.

7. Environmental, Social, and Governance (ESG) Targets and Progress

Firms must set ESG targets and report on their progress towards achieving these targets. This helps in assessing their overall sustainability performance and future commitments.

8. Double Materiality

The concept of double materiality requires companies to report both how sustainability issues affect their business and how their operations impact the environment and society. This dual approach ensures a comprehensive understanding of sustainability risks and opportunities.

9. Retrospective and Forward-Looking Sustainability Data

Reports should include both historical data and forward-looking information. Companies must share their short-, medium-, and long-term sustainability goals, providing a clear roadmap for their future sustainability efforts.

10. Third-Party Audit

To ensure accuracy and completeness, companies are required to have their sustainability data audited by a third party. This adds credibility to the reported information and helps stakeholders trust the disclosures.

These detailed disclosures are part of the CSRD's new requirements to improve transparency and standardize sustainability reporting across the EU. They are designed to align with the European Commission's broader goals of promoting sustainability and accountability in corporate practices (Finance) (Grant Thornton International Ltd. Home).

Who will Validate Reports under the CSRD?

Under the Corporate Sustainability Reporting Directive (CSRD), reports must be validated through a strict process to ensure accuracy and reliability. Companies subject to the CSRD must have their sustainability information reviewed by an independent third party. This requirement covers both financial and sustainability data reported by companies listed on regulated markets.

The European Financial Reporting Advisory Group (EFRAG) develops the European Sustainability Reporting Standards (ESRS). These standards set specific rules for companies to follow. They make sure that the reporting by companies is consistent, comparable, and transparent.

Initially, the CSRD mandates limited assurance. This means auditors will check the data for obvious errors and ensure it meets the required standards. Over time, the assurance level will increase to reasonable assurance. This involves a more detailed verification process. This step is important to build trust in ESG reporting and to ensure compliance with the sustainable finance disclosure regulation.

In summary, the CSRD requires thorough validation of sustainability reports by independent auditors. This enhances the credibility and reliability of the sustainability information disclosed by companies. This process helps improve transparency and promotes sustainable business practices across the EU.

What are the Penalties for Non-compliance?

The Corporate Sustainability Reporting Directive (CSRD) enforces strict penalties for non-compliance. This is to ensure that companies follow its detailed reporting requirements. Here are the main consequences:

1. Legal Consequences

Not following the CSRD can lead to legal actions, including fines and limits on business operations. Each EU member state sets its penalties. These may include public denunciations, cease-and-desist orders, and administrative fines. For instance, fines can reach up to €10 million or 5% of total annual turnover, depending on the infraction's severity.

2. Financial Repercussions

Failing to follow the CSRD can increase costs and decrease revenue. Investors and clients are focusing more on ESG reporting. Non-compliance can scare away investors and business opportunities. This will cause financial losses and higher insurance premiums.

3. Reputational Damage

Companies not meeting the CSRD's sustainability information requirements risk damaging their reputation. This can lead to loss of stakeholder trust, lower customer loyalty, and trouble attracting and keeping talent. Today, transparency and accountability are highly valued by consumers, investors, and employees.

4. Operational Challenges

Ignoring the CSRD's ESG reporting standards can lead to inefficiencies. Following the directive helps companies innovate and improve efficiency. Non-compliant businesses may lag behind competitors who embrace sustainability practices.

5. Missed Business Opportunities

Compliance with the CSRD is becoming necessary for business partnerships and government contracts. Non-compliance can limit a company’s ability to engage in profitable contracts and partnerships, hindering growth prospects.

By following the Corporate Sustainability Reporting Directive, companies avoid these penalties, enhance their reputation, attract investments, and contribute to a sustainable future.

Setting Up a CSRD Reporting Process - What are the Steps?

Setting up a reporting process in line with the Corporate Sustainability Reporting Directive (CSRD) involves several steps. Here's a simple guide to help you through the process.

1. Understand the Scope of the CSRD

First, determine if your company falls under the scope of the CSRD. This includes large EU companies, listed SMEs, and non-EU companies with significant EU operations. Knowing your company's obligations is crucial for compliance with the directive.

2. Identify and Engage Stakeholders

Engaging stakeholders is essential in the CSRD process. Identify all relevant stakeholders, such as employees, investors, customers, and suppliers. Engaging them helps you do two things. You gather valuable feedback and ensure that the reporting process meets their expectations and needs.

3. Conduct a Double Materiality Assessment

The CSRD requires a double materiality assessment. This means evaluating how sustainability issues affect your business and how your business impacts the environment and society. This helps identify the most important topics to report on on your sustainability journey.

4. Develop a Common Reporting Framework

Use the European Sustainability Reporting Standards (ESRS) developed by the European Financial Reporting Advisory Group (EFRAG) as your reporting framework. This ensures consistency, comparability, and transparency in your sustainability reporting.

5. Collect Sustainability Data

Gather quantitative and qualitative sustainability information across various aspects. This includes environmental, social, and governance (ESG) factors. Make sure the data is accurate and comprehensive to meet the CSRD's detailed reporting requirements.

6. Ensure Third-Party Assurance

All reported sustainability information needs assurance by an independent third party. The CSRD mandates this. This step is vital for ensuring the credibility and reliability of your sustainability reports. Over time, the assurance level will increase to reasonable assurance.

7. Digitally Tag Reported Information

Ensure that all reported sustainability information is digitally tagged per the CSRD requirements. This makes the data accessible and comparable across the European Union. In turn, it promotes better transparency and decision-making.

By following these steps, companies can set up a reporting process that complies with the Corporate Sustainability Reporting Directive. This contributes to a more transparent and sustainable business environment across the EU.

What Impact does the Corporate Sustainability Reporting Directive (CSRD) have on Indian Companies?

The Corporate Sustainability Reporting Directive (CSRD) has a big impact on Indian companies, especially those with business ties to the European Union (EU). Here's how the CSRD affects them:

Subsidiaries and Operations in the EU

Indian companies with subsidiaries or major operations in the EU must follow the CSRD. They need to align their sustainability reporting with the European Sustainability Reporting Standards (ESRS). This helps them stay competitive, attract investments, and meet what stakeholders expect.

Listed on EU-Regulated Markets

If an Indian company is listed on an EU-regulated market, it must meet the same strict reporting standards as EU companies. This includes detailed reports on environmental, social, and governance (ESG) factors. It ensures that their sustainability information is reliable and comparable.

Impact on Non-EU Companies

The CSRD also affects non-EU companies with significant EU operations. This includes those generating substantial revenue or having large subsidiaries in the EU. These companies must prepare sustainability reports according to the ESRS and may need third-party assurance for their data.

Preparation and Compliance

Indian companies should start preparing by understanding the CSRD's scope. They need to align their reporting processes with the new standards. This involves conducting double materiality assessments, engaging stakeholders, and setting up strong data collection and reporting systems.

By complying with the Corporate Sustainability Reporting Directive, Indian companies can improve their transparency and accountability, helping create a more sustainable global business environment.

Contact Report Yak for Sustainability Report Design as per the CSRD

The Corporate Sustainability Reporting Directive (CSRD) represents a significant advancement in the EU's effort to enhance transparency in sustainability reporting. By setting clear standards and aligning with global frameworks like the Sustainable Development Goals (SDGs) and Sustainability Accounting Standards Board (SASB), the CSRD ensures companies provide detailed disclosures about their environmental, social, and governance (ESG) practices. This directive not only helps companies meet regulatory obligations but also builds investor confidence, improves decision-making, and promotes a sustainable future.

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