The CSRD directive, or Corporate Sustainability Reporting Directive, is a new rule adopted by the European Union this summer which brings together a set of ambitious and comprehensive measures aimed at improving financial flows in favor of sustainable activities in the European Union.
What is it?
A bit of context: European legislation requires certain large companies to disclose information on how they operate and respond to the social and environmental challenges of our society.
These extra-financial reports are governed by the Non-Financial Reporting Directive (NFRD).
This helps investors, consumers, policymakers and other stakeholders to assess the extra-financial performance of large companies and encourages them to develop a strategy that is more respectful of sustainable development issues.
Up to this point, the information communicated by the companies has not been sufficient to respond to current issues. Extra-financial reports often omit information that investors and other stakeholders consider important. The information provided can be difficult to compare from one company to another, and users of this information, mostly consumers and investors, are often not sure that they can trust it.
It is therefore to fill these gaps that on April 21, 2021, the European Commission adopted a new proposal for a directive on the extra-financial reports of companies in connection with sustainable development, also known as ESG reporting.
This new text also ensures that reporting complies with mandatory EU standards. It also plans to impose digital access to information related to sustainable development. The result could be a massive amount of information in the public domain.
The new reporting standards
Companies must publish information relating to the following elements:
- Environmental Protection
- Social responsibility, i.e. CSR, ESG standards and the treatment of employees
- Respect for human rights
- Anti-corruption measures
- Diversity on company executive boards
Also the CSRD also requires additional information on climate change risk management.
Companies will therefore have to indicate how the risks linked to global warming can affect their performance and how they choose to respond to them.
When will the CSRD be applied?
The European Commission should be able to adopt the first set of financial reporting standards under the new legislation by the end of 2022.
This means that companies will apply these standards for the first time in their extra-financial report to be published in 2024 and which will cover the 2023 financial year.
An extended field of application
For now, EU reporting rules only apply to large companies with more than 500 employees. This represents approximately 11,700 large companies and groups in the EU.
It includes in particular:
- listed companies
- insurance companies
- other companies designated by national authorities as public interest entities
However, the new directive aims to broaden its scope.
The CSRD plans to affect all large companies and all companies listed on regulated markets. That is almost all companies.
Small and medium-sized enterprises are also concerned, even if the workload that will be required of them will be less important.
New categories subject to the drafting of the sustainability report:
- large companies, which exceed two of the following three thresholds: balance sheet total greater than 20,000,000 euros, net turnover greater than 40,000,000 euros and an average number of employees greater than 250. Contrary to the texts currently in force , it is not required that these large companies be entities of public interest, that is to say singularly listed companies;
- small and medium enterprises which are public interest entities. This would be a great innovation in European Union law, as small and medium-sized enterprises – even listed ones – have so far been spared from any non-financial publication. However, it would be possible for these listed SMEs to limit the communication of information relating to sustainability, on a transitional basis, and only if they so request, according to an opt out procedure.
The proposed directive provides for an application of this new sustainability reporting obligation in three stages:
- From January 1, 2024 for companies already subject to the disclosure of non-financial information, i.e. large companies qualifying as public interest entities;
- From 1 January 2025 for other large companies
- From 1 January 2026 for listed SMEs.
Why should SMEs prepare for this?
Sustainability is above all present intuitively among SMEs, meaning that when they communicate on it, they do so in a qualitative and not sufficiently way.
The CSRD and its new obligations should be a game-changer and translate the maturity of the companies concerned into real figures.
ESG data will become a criterion when applying for a loan, with many banks launching impact loans, the interest rate of which will drop according to the ESG objectives achieved by the companies. In a nutshell: the most active companies in terms of ESG are better valued by investors.
With this European regulation, we are in the process of switching from a voluntary approach to a standardized system with a framework.
Failure to take this step could backfire, as no ESG rating means no visibility.
To familiarize companies with the approach, ESG Bay launched a self assessment platform that enables companies to measure their impact on the environment and society and above all, be ready to report when it becomes an obligation.
The platform helps you identify which ESG priorities should fall within your business’ mission and produce clear, easy to read ESG assessments and engage with customers, communities, stakeholders and the wider public.