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A New Era of Sustainability Reporting for Companies Operating in the EU

The Corporate Sustainability Reporting Directive (CSRD) is a pivotal EU legislative measure designed to enhance the transparency, consistency, and quality of sustainability information disclosed by companies. Introduced as part of the EU’s Green Deal, the CSRD aims to help align capital flows with sustainable growth objectives, especially by directing investments toward environmentally and socially responsible businesses.

Expanded Scope and Coverage of the CSRD

The CSRD expands upon the previous Non-Financial Reporting Directive (NFRD), encompassing approximately 50,000 companies compared to the previous 11,000. The CSRD applies to all large EU companies and listed companies on regulated EU markets, except micro-enterprises. Notably, non-EU companies generating significant revenue in the EU and meeting specific criteria will also be required to comply.

Key Reporting Criteria:

  • Listed Companies in the EU: Covers EU-listed companies, including non-EU companies on EU stock exchanges, except micro companies.

  • Large Companies: Covers companies exceeding two of three criteria for two consecutive years: €25 million balance sheet total, €50 million net turnover, or 250 employees.

  • Non-EU Companies: Covers companies with net EU sales over €150 million, having either an EU-listed subsidiary, a significant EU branch, or a large EU subsidiary.

Reporting Obligations and Standards

The CSRD mandates companies to disclose comprehensive information regarding their sustainability practices, focusing on environmental impact, social responsibility, and governance (ESG). Reporting will follow the European Sustainability Reporting Standards (ESRS), ensuring that the disclosures are detailed, comparable, and aligned with EU goals. Businesses must report on their sustainability strategies, governance structures, risk management processes, and climate resilience, among other ESG factors.

Compliance Timeline

The CSRD establishes a phased approach for compliance:

  • 2025: Reporting for large listed companies with over 500 employees for fiscal year 2024.

  • 2026: Reporting for large non-listed companies with over 500 employees for fiscal year 2025.

  • 2027: Reporting for EU-listed SMEs for fiscal year 2026.

  • 2029: Reporting for subsidiaries or branches of non-listed, non-EU companies for fiscal year 2028.

Assurance and Accountability

Under the CSRD, reported sustainability data will require independent audit assurance, signaling a commitment to higher accountability. The directive mandates that companies undergo an assurance audit by qualified auditors or assurance providers, bolstering data reliability and integrity.

Integration and Next Steps

The CSRD integrates with the EU Taxonomy Regulation and Sustainable Finance Disclosure Regulation (SFDR), forming a cohesive framework that facilitates harmonized sustainability reporting across the EU. Companies are urged to build robust ESG data management systems to navigate compliance requirements effectively, minimize non-compliance risks, and align with the EU’s sustainable finance agenda.

Penalties for Non-Compliance

Failure to comply with CSRD standards may result in penalties determined by each EU member state, reinforcing the necessity for timely compliance. Companies should begin preparing by enhancing their ESG reporting frameworks, prioritizing both internal and external sustainability audits, and ensuring compliance with EU-specific reporting standards.

Gayatri Gupta