FAQs about CSRD Compliance

The Corporate Sustainability Reporting Directive (CSRD) has garnered significant attention and raised many questions among businesses and other stakeholders. In this blog post, we will delve into some of the FAQs surrounding the legislation, providing clarity and guidance for organizations navigating the new reporting landscape.

What is the Corporate Sustainability Reporting Directive (CSRD)? 

The Corporate Sustainability Reporting Directive is a proposed directive by the European Union (EU) aimed at enhancing sustainability reporting requirements for companies operating within the EU. It seeks to address the shortcomings of the existing Non-Financial Reporting Directive (NFRD) by expanding the scope, harmonizing reporting standards, and improving the quality, comparability, and reliability of sustainability information. The CSRD aligns with the EU’s commitment to sustainability, promoting transparency, accountability, sustainable investment, and the integration of environmental, social, and governance (ESG) factors into business practices.

Who does the CSRD apply to? 

The CSRD encompasses a wide range of companies, including more than 50 thousand entities, which collectively represent approximately 75% of business activity in the European Economic Area (EEA). To determine whether a company falls under the scope of the CSRD, the directive establishes criteria for classifying large companies. According to these criteria, a large company is defined as one that meets at least two of the following requirements: total assets of over €20 million, net turnover exceeding €40 million, or having more than 250 employees.

Companies listed on the stock exchange and international/non-EU companies generating more than €150 million in annual revenue within the EU are also subject to mandatory reporting under the CSRD.

When it comes to small and medium enterprises (SMEs), the CSRD does not impose additional reporting obligations, except for those small businesses and non complex credit institutions listed on regulated markets. For listed SMEs, simplified reporting standards are available to facilitate the reporting process. It’s worth noting that non-listed SMEs are not directly subject to the CSRD new sustainability reporting requirements. However, the European Commission has proposed developing specific reporting standards for non-listed SMEs, offering them the opportunity to voluntarily adopt these standards. These tailored standards would take into account the capacities of SMEs and simplify reporting requirements, making it easier for them to provide sustainability information to investors, clients, and banks. Additionally, micro enterprises are exempt from the CSRD’s regulatory obligations.

Will the CSRD apply to non EU companies?

Non-EU companies may also be indirectly affected by the same CSRD requirements if they have at least one subsidiary within the EU or if they have business relationships with EU-based companies. The CSRD also extends its sustainability reporting requirements to issuers with debt or equity securities listed on an EU regulated market, including undertakings domiciled outside the EU.

Moreover, given the global nature of supply chains and the increasing emphasis on various sustainability issues, it is plausible that similar reporting requirements and standards could be adopted by non-EU jurisdictions in the future. Therefore, while the CSRD’s direct application is limited to EU companies, its influence and potential impact may extend beyond EU borders, encouraging non-EU companies to proactively align with sustainable reporting practices.

What are the key changes introduced by the CSRD? 

The Corporate Sustainability Reporting Directive introduces several significant changes compared to the existing NFRD. These include expanding the scope to more companies, introducing standardized reporting requirements aligned with global reporting frameworks, mandating the use of digital reporting formats, enhancing assurance requirements, and introducing a “double materiality” concept that considers both the impact of organizations on society and the environment, as well as the financial impact of external factors on the organization.

What are the ESRS? 

The European Sustainability Reporting Standards (ESRS) are closely related to the Corporate Sustainability Reporting Directive (CSRD). The CSRD, proposed by the European Commission, aims to enhance and standardize sustainability reporting requirements for companies operating in the EU. As part of the CSRD, the European Financial Reporting Advisory Group (EFRAG) has been mandated to develop the ESRS. These standards will serve as the foundation for sustainability reporting under the CSRD framework, providing a common set of guidelines and requirements for companies to follow when disclosing their financial and ESG information and performance. By aligning with the EU sustainability reporting standards, companies can ensure that their sustainability reports are consistent, reliable, and comparable, facilitating transparency and enabling stakeholders to make informed decisions. The ESRS play a crucial role in harmonizing sustainability reporting practices across the EU, supporting the overarching objectives of the CSRD to promote sustainable and responsible business practices.

What is the “double materiality” concept? 

The double materiality concept recognizes that sustainability reporting should consider both the impacts of organizations on society and the environment (impact materiality), as well as the impact of these external factors on the organization’s financial value (financial materiality). It signifies a shift from solely considering financial performance to recognizing the significance of broader societal, human rights and environmental impacts, plus governance factors. This holistic approach ensures that organizations assess and disclose sustainability matters that are financially material to their own business model and also material to the wider environment and society at large.

How will the CSRD affect companies’ reporting obligations? 

The Corporate Sustainability Reporting Directive will significantly impact companies’ reporting obligations. It will require organizations to provide more comprehensive and detailed sustainability information, covering a broader range of topics. The directive introduces mandatory reporting on specific sustainability indicators, such as greenhouse gas emissions, water use, and social aspects. Companies will need to adopt digital reporting formats, ensure the accuracy and reliability of reported sustainability data through assurance processes, and disclose information in a timely manner.

How can companies prepare for the CSRD? 

To prepare for the CSRD, companies should start by assessing their current sustainability reporting practices and identifying any gaps compared to the new requirements. It is essential to establish robust data collection and management systems, enhance internal processes, and develop a clear sustainability strategy aligned with the CSRD’s objectives. Collaborating with stakeholders, leveraging sustainability reporting frameworks, and seeking external expertise can also help organizations navigate the complexities of the CSRD effectively.

What are the potential benefits of complying with the CSRD? 

Complying with the CSRD offers several potential benefits for organizations. Firstly, it enhances transparency and accountability in business conduct, demonstrating a commitment to environmentally sustainable practices and responsible corporate citizenship. Secondly, it fosters stakeholder trust and engagement by providing reliable and comparable sustainability information. Additionally, compliance with the CSRD can drive operational efficiencies, risk management, and innovation, positioning companies for long-term success in an evolving business landscape.

How does the CSRD relate to other ESG standards?

The CSRD is designed to complement and align with other existing ESG standards and frameworks. While the CSRD sets specific requirements for sustainability reporting, it recognizes the importance of harmonizing with established standards to avoid duplication and provide clarity for companies and investors. The CSRD acknowledges the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) as relevant and recognized standards. It also takes into account the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which focuses on climate change-related risks and opportunities. By building on these established frameworks, the CSRD aims to ensure consistency and comparability in ESG reporting, allowing investors and stakeholders to make meaningful assessments and decisions. This alignment with other ESG standards helps create a more comprehensive and cohesive reporting landscape, enhancing transparency and promoting sustainable practices across the EU.

What are the key differences between the CSRD and the SFDR? 

The CSRD and the Sustainable Finance Disclosure Regulation (SFDR) are both important regulatory frameworks in the realm of sustainability reporting, but they have distinct focuses and objectives. The key differences between the two lie in their scope and applicability. The CSRD primarily targets corporate sustainability reporting and aims to enhance the disclosure requirements for a wide range of companies operating within the European Union (EU).

On the other hand, the SFDR is more specific to the financial sector. It addresses the disclosure obligations of financial market participants, such as asset managers, investment firms, and insurance companies, with regards to sustainability-related information. The SFDR seeks to promote transparency and consistency in disclosing the environmental, social, and governance (ESG) aspects of financial products and services.

What are the main CSRD reporting requirements? 

To comply with the CSRD, companies should consider several key aspects. First, they need to identify the relevant sustainability information to be disclosed, including environmental, social, and governance (ESG) factors. Companies should assess the materiality of these factors and ensure that the information disclosed is accurate, reliable, and transparent. It is essential to follow the European Sustainability Reporting Standards (ESRS), which will provide a harmonized framework for reporting. Companies should also consider the principle of double materiality, which recognizes the impacts of organizations on society and the environment, as well as the impact of external factors on their financial value. Companies are expected to include sustainability information in their management report (annual report), providing a comprehensive view of their sustainability performance and progress. Additionally, companies should engage with stakeholders to understand their concerns and expectations, and integrate these insights into their reporting process.

To summarize

The CSRD represents a significant milestone in sustainability reporting, aiming to improve the quality and comparability of information disclosed by companies operating within the EU. By addressing common FAQs related to the CSRD, this blog post has shed light on the directive’s key aspects, its implications for organizations, and how businesses can effectively prepare for this new reporting framework. Embracing the CSRD not only aligns companies with evolving sustainability goals but also strengthens their reputation, stakeholder relationships, and long-term resilience in an increasingly sustainability-focused world.