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Introduction

The European Union’s Corporate Sustainability Reporting Directive (CSRD) marks a significant milestone in the pursuit of a sustainable future. Introduced as part of the European Green Deal, the CSRD aims to drive greater transparency and accountability in corporate sustainability practices. By requiring publicly-listed companies to disclose essential climate-related and environmental, social, and governance (ESG) information, the directive empowers investors, civil society organizations, consumers, and other stakeholders to assess companies’ sustainability performance.

Aligned with the EU’s ambitious goal of becoming the world’s first climate-neutral continent by 2050, the CSRD plays a pivotal role in accelerating efforts to combat climate change and transition towards a greener and more resilient economy. This blog explores the key elements of the CSRD, its scoping criteria, eligibility definitions, and the opportunities it presents for early adopters, emphasizing its role in paving the path to a sustainable and prosperous future for all.

What is CSRD?

The Corporate Sustainability Reporting Directive (CSRD) is a transformative initiative by the European Union (EU) aimed at evaluating and enhancing the sustainability performance of companies. Part of the European Green Deal, the CSRD aligns with the EU’s ambitious goal of becoming the world’s first climate-neutral continent by 2050, in line with the Paris Agreement’s objectives. To take decisive action, the EU introduced the ‘Fit for 55’ package, targeting a significant reduction of net emissions by at least 55% by 2030. The CSRD plays a pivotal role in this mission by encouraging greater transparency and accountability in corporate sustainability practices.

Scoping Criteria

The CSRD applies to:

• Large EU companies
• Listed EU companies (excluding micro companies)
• Non-EU companies listed in the EU (except micro companies)
• Non-EU parent companies that meet specific criteria

To determine the size of reporting entities, the CSRD employs the three size criteria defined in the Accounting Directive, which include the balance sheet total, net turnover, and average number of employees during the financial year.

Definitions to Determine Eligibility

• The word ‘companies’ on this page refers to companies on a stand-alone basis or to parent companies with their group (including EU and non-EU subsidiaries) on a consolidated basis.
  
• Large companies are companies that exceed two of the following three criteria: 250 employees, net revenue of €40M, and total assets of €20M.
  
• Micro companies are companies that do not exceed two of the following three criteria: 10 employees, net revenue of €700,000, and total assets of €350,000.
  
• Separate standards will be developed for SMEs and non-EU parent companies (to be adopted by the European Commission by June 30, 2024).
  
• Small and non-complex institutions and captive insurers as specified in Article 5 of the CSRD are treated like listed SMEs (the opt-out option until 2028 does not apply for those entities, unless they also meet the definition of SME).

Non-US Parent Company Requirements

The CSRD also encompasses non-EU companies with debt or equity securities listed on an EU-regulated market. These companies will fall under the scope of the CSRD earlier than FY28, depending on their size criteria. For instance, large non-EU companies with more than 500 employees will be subject to CSRD reporting from FY24, while other large companies will follow in FY25. Small-sized companies (except micro companies) will join the reporting requirements in FY26, with an option to opt out for two years. Ultimate non-EU parent companies will become subject to CSRD reporting from FY28 onwards.

Opportunities for Early Reporters

Embracing early compliance with the CSRD presents numerous advantages for companies. By reporting on non-financial indicators ahead of regulatory mandates, businesses can gain valuable insights into their sustainability performance, leading to cost savings and innovative production processes. Additionally, anticipating and strategizing for forthcoming stricter ESG legislation in the EU enhances a company’s agility and resilience, positioning it as a leader in sustainable practices.

Early ESG reporting also fosters long-term sustainability by streamlining production and supply chains, enabling strategic partnerships, and identifying potential bottlenecks to ensure supply chain continuity. By proactively addressing sustainability challenges, companies can gain a competitive edge over non-reporting counterparts, foster sustainable growth, and contribute to the EU’s vision of a climate-neutral future.

Conclusion

The CSRD is a crucial step towards building a sustainable future for the EU and the global community. By mandating comprehensive sustainability reporting for a wide range of companies, the directive promotes transparency, accountability, and responsible business practices. Early adopters of the CSRD stand to gain a host of benefits, from cost savings and innovation to long-term resilience and competitive advantage. Embracing the CSRD not only demonstrates a commitment to sustainability but also empowers companies to lead the charge towards a greener and more prosperous future. As businesses align with the CSRD’s objectives, they play an essential role in building a sustainable world for generations to come.

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