The Significance of the CSRD for Companies
The European corporate landscape is undergoing a profound transformation, driven by the introduction of the Corporate Sustainability Reporting Directive (CSRD). This directive is a key component of the European Green Deal, which aims to make Europe climate-neutral by 2050 and shift the economy towards a more sustainable foundation. With the CSRD, the European Union is increasing the transparency and comparability of sustainability information disclosed by companies. This enables investors, consumers, authorities, and the public to make more informed decisions and better assess companies' contributions to sustainability. In this blog post, you will learn more about the requirements of the CSRD and what it means for your company.
What is the CSRD?
The Corporate Sustainability Reporting Directive (CSRD) is a significant new EU directive that requires companies to create detailed sustainability reports as an integral part of their management reports. This directive replaces the previous Non-Financial Reporting Directive (NFRD) and introduces substantial changes. The CSRD significantly expands reporting obligations and demands that companies provide comprehensive and detailed disclosures of their strategy, goals, and actions related to key sustainability issues, if such exist. Additionally, companies must disclose their sustainability performance based on predefined metrics, which are mandatory if deemed material.
The specifics of the reporting content are defined by the so-called European Sustainability Reporting Standards (ESRS), which set clear guidelines and standards for reporting. While this presents new challenges for companies, it also promotes transparency and raises awareness of sustainable corporate governance. The goal of the CSRD is to advance sustainable development within the EU and ensure that companies take significantly greater responsibility for their environmental and social impact and document it thoroughly.
For an overview of the CSRD, the ESRS, and their differences, as well as other relevant terms, visit our previous blog post.
Objectives of the CSRD:
- Increase Transparency: Companies are required to report more comprehensively and in greater detail about their sustainability performance.
- Enhance Comparability: Standardized reporting requirements aim to make it easier for investors and other stakeholders to compare companies' sustainability performance.
- Promote Sustainable Investments: Clearer and more comprehensive reports are intended to encourage investments in sustainable companies.
- Expand Scope: Compared to the NFRD, the CSRD includes not only large companies but also many publicly listed companies and certain medium-sized enterprises (SMEs), significantly broadening the scope and impact of reporting obligations.
- Integrate ESG Factors into Corporate Strategy: The CSRD seeks to incorporate sustainability aspects more strongly into corporate strategy, pushing companies to focus on environmental and social factors in the long term.
- Strengthen Corporate Responsibility: Through the CSRD, companies are expected to take greater responsibility for their impact on the environment and society and to communicate this responsibility more transparently.
What does the CSRD include?
The CSRD requires companies to disclose information that goes beyond purely financial aspects. The focus is on three main pillars: Environmental, Social, and Governance, known as ESG criteria.
- Environmental: Information on the environmental impact of business activities, measures to reduce emissions, resource efficiency, climate risks, and adaptation strategies.
- Social: Information on working conditions, equality, diversity, human rights, and the social impact of corporate activities.
- Governance: Reports on corporate ethics, anti-corruption efforts, transparency in corporate governance, and internal control systems.
Who is affected and when?
The Implementation of the CSRD
The implementation of the CSRD is being carried out in stages, affecting different groups of companies at various times. It is important for companies to be aware of the timeline and prepare for the new requirements in advance.
- Companies & Parent Companies of Large Corporations (500+ Employees):
Companies that already fall under the current Non-Financial Reporting Directive (NFRD) will need to comply with the new CSRD requirements starting from the 2024 fiscal year. The first report meeting these requirements is due in 2025, covering the 2024 fiscal year. - Other Large Companies:
This applies to companies that were not previously covered by the NFRD but meet two of the following criteria: at least 250 employees, a turnover of at least 50 million euros, or a balance sheet total of at least 25 million euros. These companies must adjust their reporting starting from the 2025 fiscal year. It is important to note that the threshold values have been raised as of 2024: the balance sheet total has increased from 20 to 25 million euros, and turnover has increased from 40 to 50 million euros. As a result, fewer companies fall into this reporting category. The first report for these companies is due in 2026, covering the 2025 fiscal year. - Publicly Listed Small and Medium-Sized Enterprises (SMEs), Captive Insurance Companies, and Small Non-Complex Credit Institutions:
Publicly listed companies must begin reporting under the CSRD starting from the 2026 fiscal year. The first report will be submitted in 2027, covering the 2026 fiscal year. Publicly listed SMEs have the option to defer their reporting obligations until 2028 if they wish. - Non-EU Companies with Significant Business Activities in the EU:
Companies with net sales in the EU exceeding 150 million euros and at least one subsidiary or branch in the EU are subject to the CSRD requirements from January 1, 2028. The first report meeting these requirements must be submitted in 2029 for the 2028 fiscal year.
Challenges for Companies
The introduction of the CSRD presents various challenges for companies, affecting both internal structures and required resources.
Increased Data Management Requirements
Companies will need to expand their data management systems to capture and process all the necessary sustainability information. This often requires new IT solutions and the integration of sustainability criteria into existing systems.
Internal Processes and Structures
The CSRD demands greater collaboration between various departments, particularly sustainability, finance, and legal. Companies may need to introduce new governance structures to ensure compliance with the directive.
Resource Requirements
Implementing the CSRD may require significant personnel and financial resources. Companies might need to hire new specialists or provide further training to existing staff to meet the new requirements.
Opportunities Through the CSRD
Despite the challenges, the CSRD also offers numerous opportunities for companies to strengthen their market position and optimize their sustainability strategies.
- Strategic Advantage through Transparency: Companies that meet the CSRD requirements can communicate their sustainability performance transparently and credibly. This can strengthen investor and customer trust and open new business opportunities.
- Improved Competitiveness: Compliance with the CSRD can help companies position themselves as leaders in sustainability, providing a competitive edge, especially in markets where sustainability is gaining importance.
- Promotion of Innovation: The need to report on sustainability aspects can encourage companies to develop innovative approaches and make their business models more sustainable. This can not only reduce environmental impact but also increase long-term profitability.
Practical Steps for Preparing for the CSRD
To successfully implement the CSRD requirements, companies should begin preparing early. Here are some practical steps that can help:
- Analyze the Current Situation: Companies should take stock of their current reporting and data management systems to identify gaps that need to be addressed.
- Training and Awareness: It is essential that all relevant employees are informed about the CSRD requirements and properly trained. This fosters a shared understanding and smooth implementation.
- Optimize Data Management: Companies should ensure that their IT systems are capable of capturing and processing all required data. This may include implementing new software solutions.
- Adjust Processes: Internal processes and structures should be adjusted to foster collaboration between various departments and ensure compliance with the CSRD.
- Practice Early Reporting: Companies can voluntarily produce reports before the official deadline to identify weaknesses and make necessary corrections.
Conclusion: CSRD as a Driver for Sustainable Development
The CSRD presents new challenges but also offers opportunities for sustainable growth and enhanced competitiveness. Companies that act early and implement the new standards effectively can not only meet regulatory requirements but also strengthen their market position and unlock innovation potential. Strategic planning is crucial for a successful start on the path to CSRD compliance. Seize this opportunity to turn the requirements into tangible benefits.