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Dec 05 2023

CSRD Simplified | Why, What and How of the CSRD?

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CSRD Simplified | Why, What and How of the CSRD?

Sustainability has become a key focus for businesses, investors and regulators worldwide. In response, the European Union (EU) is introducing new rules to enhance corporate sustainability disclosures. The Corporate Sustainability Reporting Directive (CSRD) is set to significantly expand the scope and standardize the content of mandatory ESG reporting across Europe.

Why the CSRD is Needed

The CSRD builds upon the existing Non-Financial Reporting Directive (NFRD), which has been in place since 2018. However, the NFRD has faced criticism for its limited scope, covering only large public-interest entities, and the lack of specificity in its reporting requirements.

The CSRD seeks to address these shortcomings by:

  • Expanding the number of companies required to report
  • Mandating assurance of sustainability information
  • Specifying reporting standards to ensure consistency and comparability

By strengthening sustainability disclosure rules, the EU aims to direct more capital flows towards environmentally sustainable activities and prevent "greenwashing" by companies overstating their ESG credentials.

What Companies are Impacted

The CSRD will apply to a much broader universe of companies compared to the NFRD:

  • All EU large companies, listed or not, meeting 2 out of 3 criteria: >250 employees, >€40M turnover, or >€20M total assets
  • All companies listed on EU regulated markets, except micro-enterprises
  • Non-EU companies with substantial activity in the EU (turnover >€150 million in the EU)

Exempted from the CSRD are listed micro-enterprises and non-EU companies with securities only listed on EU markets.

The CSRD requirements will be phased in gradually:

  • January 2024 for companies already subject to the NFRD
  • January 2025 for large companies that are not presently subject to the NFRD
  • January 2026 for listed SMEs, small and non-complex credit institutions and captive insurance undertakings

How to Comply with the CSRD

Under the CSRD, in-scope companies will have to report on sustainability matters as defined by the EU, covering environmental, social and governance issues. The reported information must undergo independent assurance and be included in companies' management reports.

The sustainability reporting standards will be developed by the European Financial Reporting Advisory Group (EFRAG). An initial set of standards is expected to be adopted by October 2023.

To prepare for the CSRD, companies should:

  • Determine if and when they will be subject to the new requirements
  • Assess gaps between their current sustainability reporting and the ESRS standards
  • Implement processes to collect, verify and disclose the required data
  • Engage an external auditor to provide assurance over the reported information

The CSRD is a major step towards mainstreaming sustainability reporting and making it as robust as financial reporting. While compliance will require significant effort, it also presents an opportunity for companies to showcase their sustainability commitments and differentiate themselves in the market.

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