Environmental Social Governance (ESG) has become an ever-present part of business operations tied, at least somewhat, to the fight against climate change. In June 2022, Europe took a big leap towards embedding ESG into corporate sustainability reporting thanks to a provisional agreement between the European Council and the European Parliament. Once adopted, the Corporate Sustainability Reporting Directive (CSRD) will be a reporting requirement that expands on existing European Union corporate sustainability disclosures to include value and supply chains to cover more than an estimated 49,000 companies operating throughout the EU.
Right now, the CSRD is in an approval process by the European Parliament and Council in Brussels before moving to formal acceptance and adoption. The CSRD will enter into force 20-days from formal acceptance. If everything goes as intended, the CSRD will be adopted in December 2022 and enter into force from January 1, 2023.
What is the Corporate Sustainability Reporting Directive and how is reporting done?
From 2023, the CSRD will expand on and revise the EU’s 2018 Non-Financial Reporting Directive (NFRD). It will require companies to create a sustainability report through the European Sustainability Reporting Standards (ESRS) annually, with electronically readable and searchable reports. The ESRS is an EU sustainability reporting standard that aims to shed light on a company's sustainability data and how sustainability issues impact company development, finances, and performance. These new requirements will help standardize sustainability metrics across the EU and increase transparency around corporate and sector-specific sustainability disclosures.
While the NFRD had voluntary reporting guidelines, the CSRD will have more specific and mandated disclosure requirements catered to different sectors, like banking, infrastructure, and manufacturing, after a further review post-adoption. The CSRD will also use mandatory EU sustainability reporting standards that align with the EU Taxonomy and Sustainable Finance Disclosure Regulation (SFDR).
What is the EU Taxonomy?
Created in June 2020 to help fortify the European Green Deal, the EU Taxonomy is a classification system that intends to clarify which investments are environmentally sustainable. The SFDR is an EU regulation intended to improve sustainable investment products, promote transparency, and prevent greenwashing by way of financial disclosure requirements that are centered on ESG criteria, in effect since 2018.
Who will be impacted by the Corporate Sustainability Reporting Directive?
While the NFRD covered 11,600 listed companies and banks with over 500 employees, the CSRD will cast a much wider net, covering all large public and private companies that meet at least two of the following criteria:
- 250+ employees
- €20 million or more in total assets
- €40 million or more in turnover
The CSRD will cover many small and medium enterprises (SMEs), all large companies, all companies on listed markets, and international companies (e.g., non-EU companies) with subsidiaries operating within the EU. Qualifying SMEs will get three years to comply.
This broad scope of compliance could dramatically transform ESG and corporate reporting requirements globally. The 49,000 companies covered by CSRD account for over 75% of all companies’ net turnover in the EU, that’s 75% of all European business revenue.
Non-Financial Reporting Directive and Corporate Sustainability Reporting Directive
Both NFRD and CSRD are non-financial reporting initiatives, this means corporate reporting that is not tethered to business finances but instead focuses on ESG reporting and other corporate social responsibility partnerships and CSR factors. While CSRD builds off of NFRD, some requirements, like a mandatory third-party review and a searchable CSRD reporting format, will help make assessments of sustainability targets more transparent and concrete. Companies currently under NFRD will have to submit reports through both mechanisms.
What is the difference between NFRD and CSRD?
Standards under the Corporate Sustainability Reporting Directive
The CSRD goes beyond existing EU corporate sustainability reporting standards and even beyond many other existing policies in this arena. It includes:
General standards: General sustainability standards that encompass the double materiality of risk and impact. This includes environmental factors, like biodiversity and climate impacts, and social factors, like human rights and human health as it relates to business strategies and operations.
Sector-specific standards: The European Financial Reporting Advisory Group (EFRAG) will develop sector-specific CSRD reporting criteria that aims to be equal to the scale of sustainability risks and effects on different sectors.
Targets and transition plans: Companies are not only required to share their transition plans and sustainability targets but must also demonstrate compatibility with:
- The transition toward a sustainable, green economy
- In line with the Paris Agreement’s 1.5°C goal
- Achieving net-zero emissions by 2050, in line with existing EU law
Value chains: Companies will have to disclose their due diligence processes for the value and supply chains they rely on.
Intangible resources: These are the non-material or physical resources companies rely on, like relationships with core stakeholders.
Forward-looking disclosures: In both qualitative and quantitative reporting, companies will have to show forward-looking and retrospective sustainability information.
Enforcement and penalties: Is the CSRD mandatory?
After the EU adopts the CSRD, individual member states will have 18 months to phase-in core CSRD criteria into their local laws. This means specific EU countries will set their own enforcement and penalty rules under the CSRD. Therefore, an EU company operating in Germany may pay more or less in penalties for non-reporting or non-compliance than a company in Spain, depending on their respective national CSRD-oriented laws.
The future of EU corporate sustainability
The CSRD raises the bar on corporate sustainability reporting in both context and scope. It will impact an overwhelming majority of capital flows within the EU and could affect the sustainable business strategies for international companies who have subsidiaries in the EU. It can also help Europe transition successfully toward 2050 net-zero goals while keeping just transition pathways alive.
In comparison to the new scope 1 and scope 2 disclosure requirements launched by the U.S. Securities and Exchange Commission (SEC), the CSRD and SEC sustainability disclosure requirements are very similar. Companies should expect more required sustainability reporting that aligns with their supply chains, emissions, and ESG; in Europe, the U.S., and elsewhere. ESG and emissions-focused business reporting will change the way companies consider sustainability in their supply chains and will undoubtedly make disclosure tools and sustainability software—like Sustain.Life—even more important.