The European Union’s CSRD marks a profound transformation in the scope and nature of corporate sustainability reporting, promoting transparency, comparability, and accountability. In this article from the consultants at CSI, we look at details such as who is affected and by when. Becoming and staying compliant is no small feat, enlisting the services of a law firm is advisable.
Timeline of Development: The CSRD, proposed by the European Commission in April 2021, underwent negotiations among the Commission, Council, and European Parliament, culminating in a compromise on June 21, 2022. Formally accepted by the European Parliament and the Council, it was published in the Official Journal of the European Union on December 16, 2022, and came into effect on January 5, 2023. Member states are required to implement the new regulation 18 months after the directive's entry into force.
Affected Entities: The CSRD marks a significant evolution from its predecessor, the NFRD (Non-Financial Reporting Directive), particularly in its expanded scope and coverage. While the NFRD initially placed reporting obligations on certain EU companies of public interest, the CSRD broadens its reach to encompass all companies listed on an EU-regulated market, with the exception of micro-enterprises. Under the CSRD, not only do large entities (500 or more persons employed) face reporting obligations, but non-listed entities meeting specific criteria are also brought into the fold. This includes companies that meet two of, the following criteria: a balance sheet exceeding 20 million euros, net turnover surpassing 40 million euros, or those employing more than 250 individuals. This extension is estimated to impact around 50,000 companies in the EU, with Germany alone accounting for 15,000 of them.
Implementation Phases: The CSRD introduces a phased approach to implementation:
2024: Companies of public interest with over 500 employees.
2025: All other large entities that meet two of these criteria: > €40 million net turnover, > €20 million on the balance sheet, > 250 employees.
2026: Capital market-oriented small and medium-sized entities (SMEs) that are listed on an EU regulated market.
2028: Companies whose ultimate parent company is outside the EU but that have a significant presence in the EU must report on the whole global group, including non-EU group companies.
The ESRS (European Sustainability Reporting Standards): Still Under Development
In effect, the ESRS is a component or disclosure tool within the CSRD. The CSRD is the law that requires companies to issue sustainability reports, and the ESRS describes all the information those reports need to contain. While the CSRD is effectively final and is being passed into European law, the ESRS is still being developed, and it is likely to continue to evolve and change based on the EFRAG´s (European Financial Reporting Advisory Group) ongoing work, as well as feedback from companies, regulators, and industry associations.
ISSA 5000: Providing a Framework for Sustainability Reporting
ISSA 5000 is a proposed standard developed by the IAASB (International Auditing and Assurance Standards Board). It aims to enhance confidence in sustainability reporting and responds to recommendations from the IOSCO (International Organization of Securities Commissions) and other standard setters. Therefore, ISSA 5000 fits into the picture of CSRD by providing a framework for assuring the sustainability information that companies are required to report under the CSRD.
Key Changes Introduced by the CSRD
Expanded, Standardised Reporting: Companies must report more comprehensively and using more standardised criteria. Quantification through key performance indicators aims to enhance measurability and comparability. Draft standards are currently being developed by the EFRAG, involving stakeholders and experts.
New Understanding of Materiality: The CSRD introduces the concept of "Double Materiality," requiring companies to report on both the impacts of their business operations on people and the environment and the impacts of sustainability aspects on the company.
On the one hand, organisations exert influence on both people and the environment, considering the internal perspective (inside-out view). This encompasses potential harm to nature or infringements on human rights. On the other hand, sustainability-related advancements and occurrences introduce (new) prospects and risks for organisations, considering the external standpoint (outside-in view). Examples of this include the risk to reputation in the event of corruption incidents, the implementation of new carbon taxes, or opportunities for the creation of innovative circular and sustainable products.
External Assurance: Sustainability reporting will now undergo external verification, akin to financial reporting. The EU Commission will establish audit standards, starting with limited assurance and progressing to reasonable assurance, mirroring the depth of financial reporting audits.
Integration into the Management Report: To enhance accessibility, sustainability information will become a mandatory part of the Management Report, emphasising the growing significance of sustainability reporting, gradually equating it with traditional financial reporting.
Unified Electronic Reporting Format: Building on the existing ESEF (European Single Electronic Format) for financial disclosures, the CSRD extends this requirement to sustainability reporting. The European Commission plans to release a dedicated XBRL (XML based Financial Report Mark-up Language) taxonomy for this purpose.
Therefore, the CSRD represents a pivotal moment in corporate sustainability reporting, promoting transparency, comparability, and accountability. Companies, especially those falling within the specified criteria, must prepare for the paradigm shift in reporting practices to align with the evolving landscape of sustainability reporting in the EU.
Become and stay compliant
In the complex landscape of CSRD compliance, a partnership with a law firm can provide valued support. Ravenscroft & Schmierer, with our proven track-record in cases where attention to regulatory nuances made all the difference to our clients, can guide companies already doing business in the EU or looking to do business there, through the intricacies of the CSRD reporting standards.
Our partnership approach allows us to gain proper understanding of our clients’ businesses and through that assist in establishing compliance mechanisms, ensuring accuracy in disclosures, and mitigating legal risks. This proactive approach allows businesses to focus on their core operations, confident in their compliance status.
Once compliance is reached, we can stay on retainer to ensure our client maintains it. In this way, compliance becomes less of a hurdle and more of a standard operating procedure, integral to the business’s growth and success. This collaboration can be instrumental in a company’s journey towards sustainable growth, turning CSRD compliance from a challenge into an opportunity.
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
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