On November 28, 2022, the Council of the European Union gave its final approval to the new CSRD legislation (EU) 2022/2464, also known as the Corporate Sustainability Reporting Directive.
Designed to guide investors, consumers, and other stakeholders in their decisions, this new European legislation will give them access to more information on the non-financial performance of large companies. Indeed, the CSRD commits them to publish regular reports on their environmental and social impacts. A gain in transparency that may push them to reduce the impact of their activities and develop more responsible approaches.
Created on the foundation of the NFRD, a legislation already designed to codify corporate sustainability reporting, this new regulation seeks to fill its gaps by increasing the information provided and the number of organizations targeted.
With these changes and a first report due in 2025, companies will face a major challenge: adapting to this new reporting and preparing the data collection. An arduous process, costly in both time and resources if an audit becomes necessary.
What is this new legislation and who will be affected? Carbonapp will explain.
The NFRD, an initial and incomplete reporting mechanism:
Adopted in 2014, the Non-Financial Reporting Directive (Directive 2014/95/EU, NFRD) marked the introduction of the first rules on reporting by large companies as well as its main operating principles. It introduced the obligation to report on the impact of targeted companies' sustainability issues on their performance, as well as the principle of "double materiality" - in other words, the impact of their activities on both people and the environment.
But after several years of reporting, the European Commission said that "reports often omitted information that investors and other stakeholders deemed important" and called for the revision of the directive. Those reports, in addition to lacking transparency for investors, are not only difficult to compare across companies but also difficult to obtain due to the lack of a digital format.
Another weakness is the scope. The NFRD applies to a variety of companies, but only if they have more than a certain number of employees. For example, for large public interest entities (e.g., listed companies), the average number of employees must be above 500. This threshold excludes small and medium-sized enterprises, which represent a significant part of the European economy and together have a significant environmental footprint. Approximately 11,700 companies are said to be covered by the NFRD reporting requirements, a number too low for the growing need for information, environmental awareness and the adoption of new regulations.
In response to this lack of clarity in the NFRD's requirements and the regular creation of new private standards and frameworks, the CSRD was created to replace and address the gaps in the NFRD.
What is the CSRD?
As previously stated, the CSRD, also known as the Corporate Sustainability Reporting Directive, is a new directive aimed at improving and expanding the NFRD. It is part of an ambitious set of standards adopted by the European Commission under the European Green Deal and the Sustainable Finance Strategy which aim to enhance the flow of finance within the European Union towards sustainable activities.
As environmental, social, and governance (ESG) reporting gains in relevance, the CSRD expands the scope and reporting requirements of the already existing non-financial reporting directive. This will compel large public interest entities to report on their sustainability performance as of 2018.
Through its new requirements and reporting information, the European Union seeks to address their lack of quality and establish for the first time a common reporting framework for non-financial data. It also seeks to provide a reliable means of communicating data, facilitate comparisons and redirect investments towards more responsible companies and technologies, in support of the EU's transition to a sustainable economy.
What information will be required?
Large companies will have to disclose information on environmental protection, anti-corruption and bribery, human rights, board diversity, and social responsibility and treatment of employees.
These initial requirements are the same as the NFRD, but the CSRD includes new requirements on:
Reporting in accordance with the Sustainability Disclosure Regulation (SFDR) and the EU Environmental Policy.
The dual concept of materiality
The process of selecting topics of importance for stakeholders
The increase in forecast information, e.g. targets and progress
Disclosure of intangible assets (social, human and intellectual capital)
Through this new scope of information, companies will now be required to disclose how their performance could be affected by sustainability risks. A more important place will be given to the climate trajectory and new indicators will be established by EFRAG, consistent with the European taxonomy.
Among the information that could be requested from companies:
- A greenhouse gas (GHG) emissions balance sheet
- Monitoring of direct, indirect and other GHG emissions (scopes 1, 2 and 3)
- The economic intensity of GHG, expressed in tons of CO2 equivalent per million euros (tCO2eq/M€)
- The strategy to reduce the impact on global warming
While NFRD reporting lacked guidance and caused wide disparities between companies, CSRD reporting will be standardized on detailed requirements. As the priority is transparency, the preferred format will be digital, and the reports will be available on a single platform at the European level.
Who will it apply to?
Among the shortcomings of the NFRD addressed by the CSRD, the regulation will extend its scope of application. It will now apply to any European company meeting two of the following requirements:
- Companies with more than 250 employees
- Generating a minimum turnover of 40 million euros
- With total assets of more than 20 million euros.
This reporting will also apply to all listed companies except for microenterprises with less than 10 employees or with a turnover of less than 20 million euros.
With this extension of the scope, almost 50,000 companies in the EU would become eligible for reporting, 15,000 in Germany alone.
By which deadlines?
On November 28, 2022, the Corporate Sustainability Reporting Directive (CSRD) received final approval from the Council of the European Union. After being signed by the President of the European Parliament and the President of the Council, this new text became effective 20 days later. In other words, since January 5, 2023, all companies meeting the criteria mentioned above are now required to comply with the CSRD.
The implementation will be gradual and will take place in 3 stages:
2025: For companies already subject to the NFRD, they will have to report on the 2024 fiscal year
2026: For large companies that are not currently subject to the NFRD, they will have to report for the year 2025
2027: Small and medium-sized listed companies will have to report for the year 2026 - with an option to opt out until 2028
EFRAG published the first draft CSRD standards in mid-2022 and these are now open for consultation.
Article written by Axelle Rimpot