In this article you will learn more about CSRD, who is covered and how to achieve compliance.
What is CSRD?
CSRD stands for "Corporate Sustainability Reporting Directive." It is a European regulatory framework that aims to strengthen and standardize corporate reporting on sustainability and non-financial performance. The CSRD aims to expand and improve corporate reporting on topics such as environmental, social and governance (ESG ) issues as well as aspects of corporate activities that have an impact on society and the environment. This directive change is designed to create more transparency and comparability between companies' sustainability reporting and their financial performance.
Who is covered by CSRD?
The application of the new CSRD directive follows a phased implementation:
- Listed companies: The CSRD will come into force from the financial year beginning January 1, 2024 or later in 2024 for those companies already subject to the Non-Financial Reporting Directive. This means that from 2025, reporting must follow the guidelines of the directive.
- Other large companies: For large companies that meet two out of three criteria in terms of revenue (> EUR 40 million), balance sheet total (> EUR 20 million) and number of employees (> 250 employees), the rules will come into force from the financial year beginning on January 1, 2025 or later in 2025. Reporting from 2026 must follow the requirements of the CSRD Directive.
- Listed SMEs, small credit institutions and captive insurance companies: These companies will only be subject to the CSRD in the financial year beginning 1 January 2026. This means that reports published from 2027 must comply with the guidelines of the directive.
These phases are designed to gradually implement CSRD for different types of companies and create a structured approach to sustainability reporting.
Why are there new requirements?
The previous requirements of the NFRD Directive were not subject to standardization. This meant that it was difficult for stakeholders to gain credible insight and compare companies' sustainability performance. The lack of a comparable basis was problematic for the sustainable investment market, among other things. The growing awareness of sustainability has also been reflected in the investment market, but there was a lack of a comparable basis for investment decisions to enable investments to actually go to companies that prioritize sustainability. The CSRD aims to ensure this comparable basis by subjecting companies to more requirements for their sustainability reporting and by giving them more detailed guidelines. The basis for investment decisions will be improved by, among other things, requiring companies to assess both their impact on their surroundings and how they are affected financially by sustainability-related circumstances. This will ensure that investors are well informed about both the financial and sustainability aspects of their investment decisions.
CSRD is linked to a wide range of standards and disclosure requirements. These are called European Sustainability Reporting Standards (ESRS ) and were developed by the EFRAG working group set up by the European Commission. The new and more comparable basis creates more transparency and ensures that companies are accountable for their actions across all sustainability topics of ESG.
The specific ESRS guidelines for how companies should report are built around ESG, with sub-topics within each of the letter categories. Thus, there are disclosure requirements within three topics: Environment and climate (E), social issues (S) and governance, which is about corporate governance (G).
What can you expect as a small business that is part of the value chain of a CSRD-obligated company?
It's important to know that there is a three-year transition phase to ease the transition to the new CSRD requirements and give companies time to adapt to the new requirements. As a small business supplying a CSRD-obligated company, this means that it won't have much of an impact for a while. During the transition period, CSRD obligated companies can simply explain how they have tried to get information from their value chains and how they plan to get better access to value chain information in the future. This means that CSRD-obligated companies should try their best to get information from their value chains, but that there is an understanding that this can be difficult. For example, companies must estimate value chain information with sector averages.
Especially for environmental metrics (the E in ESG), the company may be able to comply with the reporting requirements without collecting data from the actors in the value chain, for example when calculating the company's GHG Scope 3 emissions. If estimates are used, the information must still meet some qualitative requirements. A company can demonstrate its efforts by helping actors in its value chain to collect data. As a value chain company, you can ask for help if the CSRD-obligated company asks for data or information.
If your company is part of the value chain of a CSRD-obligated company and must report accordingly, you can achieve compliance by preparing a climate report via Climaider.
How do you become compliant with CSRD and ESRS?
To become compliant, your company must fulfill a wide range of reporting requirements. Here you can find a detailed guide on how to become compliant: Your guide to CSRD and ESRS.
If you need help with sustainability reporting, climate accounting, compliance, or anything else, you are always welcome to contact us.
