What is the Corporate Sustainability Reporting Directive (CSRD)?

Serving as an amendment to the Non-Financial Reporting Directive (NFRD), the newly proposed and accepted CSRD¹ initiative aims to increase reporting requirements for businesses in EU-regulated markets.

Several KPIs and business policies will be mandatory for companies to state alongside their Annual Reports. The CSRD requires companies to report on their activities in line with the double materiality concept: not only should they monitor the impact of their operation, but also, they should also consider climate and environmental impact on their organization. Moreover, sustainability reports should serve as the key source of information on the business’ ESG goals and through what steps will they achieve the goals.  

To adhere to the NFRD’s requirements, businesses in the EU were not tied to involve third-party assurance. This is a key point that the policymakers strengthen as with the CSRD taking effect, the involvement of a third-party assurance is also mandatory in the form of an Auditor’s Report from the company’s key audit partner. In accordance with the European Single Electronic Format (ESEF) Regulation, CSRD subject entities are required to prepare their statements in XHTML format.

Environmental, social, and governance (ESG) criteria play an essential role in adhering to CSRD standards, in which intangible assets such as human, social, and intellectual capital are essential for monitoring.  

The amended NFRD regulation affected nearly 11,000 businesses so far, but the new CSRD legislative raises the stakes: nearly 50,000 firms are called to act to comply. ‍

Which companies are affected and why is it important to discuss the CSRD?

On the first week of 2023 on the 5^th of January, the Corporate Sustainability Reporting Directive came into effect. For most companies operating in the European Union’s markets, this sets new standards and requirements that these businesses must comply with.

In addition, non-EU companies that have a turnover of above €150 million in the EU will also have to meet the CSRD’s requirement set.

The legislative reflects the EU’s initiatives to monitor the sustainability impact of key market players and increase transparency: from 2024, listed large companies are required to report on their ESG impact, included in their Annual Reports. In 2025 and 2026, even listed and non-listed SMEs will fall under the effect of the Directive. In total, around 49,000 businesses are affected which makes up 75% of total turnover on EU markets.

‍What is the expected timeline of the CSRD incentive?

1. January 2024

CSRD requirements come to life for the companies in the scope of NFRD.

2. June 2024

Specific standards are set by the EU for SMEs and non-EU entities.

3. January 2025

The circle of involved companies widens based on the following criteria:

Large undertakings that exceed at least two of the following metrics on two consecutive annual balance sheet dates:

- €20 million or more in total assets

- €40 million or more in net turnover

- 250 or more employees on average

4. January 2026

Certain SMEs are required to report:

Entities listed on a regulated market are expected to have the ability to postpone the first-time application by two years and keep the basis of their own reporting standards.

5. January 2028

Non-EU companies are required to report if their EU-market-related revenue exceeds €150 million with 1 or more subsidiaries or branches.

What does it really mean for businesses in the EU?

Most of the Green Deal’s initiatives focus on incentivizing economic stakeholders to change their attitude toward sustainability for the better. Recently, the proposal for Regulation on Ecodesign² has been discussed by policymakers which would require manufacturing companies to shift toward a more circular way of creating and selling their products. The importance of design shows in the fact that product design affects nearly 80% of the product lifecycle’s environmental impact.

The European Union is trying to cover all ends of business operations as not only the design and manufacturing fall under heavy regulation but the reporting activity also. It’s not wrong to expect that more and more sustainability legislatures will step into effect as the EU strives to reduce its greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels.³

One thing is certain, there is little time to prepare for the upcoming regulatory changes to become the new norm for companies. The situation is even more worrying as according to the World Benchmarking Alliance’s 2022 Assessment dataset⁴, a mere 5% of European companies track how their operations affect the environment. While some companies already report on their ESG activities, only 22% of them include one or more indicators that fit CSRD standards.  

EU businesses are left with few choices but to start and develop their own ESG strategy and roadmap, in which meeting CSRD reporting criteria will be one of the key points to prioritize.