CSRD – EU Corporate Sustainability Reporting Directive

EU legislation requires certain businesses to regularly publish ESG reporting on how they manage the social and environmental impacts of their products and activities. In June 2022, the European Parliament and Council agreed on a Corporate Sustainability Reporting Directive (CSRD). In essence, the CSRD mandates more detailed ESG reporting from a broader number of corporations than any previous EU law.

What is ESG Reporting?

An ESG report, also known as a sustainability report, is a document published by an organization that discusses the Environmental, Social, and Governance (ESG) impacts of the company’s products and activities. Accordingly, ESG reporting allows the organization to be more transparent about the risks and opportunities it confronts. Additionally, an ESG report outlines the quantitative and qualitative outcomes of a company’s ESG initiatives. As a result, investors can evaluate a corporate’s investment opportunities based on its ESG report and avoid enterprises with the risk of environmental harm, social blunders, or corruption. To improve its ESG score, a company can implement various Environmental Management Systems (EMS), including ISO 14001. Particularly, establishing an EMS can help your business to gain credibility by demonstrating that your products and services satisfy the environmental protection expectations of all stakeholders, including consumers, partners, employees, investors, etc.

Here we discuss two EU directives requiring organizations to disclose non-financial information through ESG reporting.

What is NFRD ESG Reporting?

In 2018, all EU member states implemented Directive 2014/95/EU, known as Non-Financial Reporting Directive (NFRD), and incorporated it into national legislation. Consequently, businesses must comply with this directive if they fulfill certain conditions. Under the NFRD, certain big companies must publish information on the environmental and social impacts of their products and activities across the supply chain. This ESG reporting pertains to the following concerns:

Environmental-related matters
Social issues and treatment of employees
Human rights respect
Anti-bribery and corruption
Diversified board of directors in terms of gender, age, professional and educational background, etc.

This reporting guideline applies to large EU Public-Interest Entities (PIEs) with an annual average of more than 500 employees. Hence, this applies to around 11,700 EU big companies and groupings, including listed businesses, banks, and insurance firms.

What is CSRD ESG Reporting?

On November 2022, the European Union approved the Directive (EU) 2022/2464, known as Corporate Sustainability Reporting Directive (CSRD), the world’s most comprehensive mandatory ESG reporting framework. Correspondingly, the CSRD modifies and replaces reporting obligations under NFRD. To fix NFRD flaws, the CSRD updates and reinforces the standards governing the social and environmental information that organizations must publish. Moreover, per CSRD, an authorized independent auditor or certifier must verify the ESG reporting. Notably, the NFRD rule remains in effect until replacement by CSRD requirements.

What are the Purposes of CSRD?

According to CSRD, companies must report how their business strategy impacts sustainability factors, such as climate change and human rights issues. On the other hand, the report also includes how external sustainability considerations influence business operations. The followings are some of the primary goals of CSRD:

Ensuring readability and clarity in the information businesses provide on sustainability
Imposing more detailed reporting and independent auditing obligations
Enhancing corporate accountability regarding non-financial reporting
Avoiding inconsistent sustainability requirements by developing uniform ESG reporting standards that satisfy the interests of all stakeholders
Facilitating the transition to a more sustainable economy
Assisting in the elimination of greenwashing by equalizing financial and sustainability reporting
Empowering stakeholders, including investors, to make better decisions on sustainability-related problems

Which Companies are Affected by CSRD?

According to CSRD, approximately 50,000 organizations listed or doing business in the EU must report on sustainability, including a larger group of major corporations and listed Small and Medium-sized Enterprises (SMEs).

Impacted large companies or groups must meet at least two of the following three criteria:

More than 250 employees (annual average)
A net turnover of more than EUR 40 million
More than EUR 20 million in total assets

Affected listed SMEs must have at least two of the three conditions below:

More than ten employees (annual average)
A net turnover of more than EUR 700k
More than EUR 350k in total assets

The Timetable of CSRD Implementation

The CSRD goes into effect in 2024 for a group of large EU corporations and progressively expands to include different groups of companies over the following four years. The initial group of enterprises must publish their report in 2025 for the fiscal year 2024.

The table below summarizes the timeline for the CSRD implementation for different affected companies:

Type of company	Descriptions	First CSRD ESG Reporting Date
Large EU PIEs	Large companies already subject to the NFRD	2025 on the financial year 2024
Large companies/groups	Large companies that are not currently subject to the NFRD	2026 on the financial year 2025
Listed SMEs	Listed small and medium-sized enterprises (except micro undertakings)	2027 on the financial year 2026 (can opt-out until 2028)
Non-EU parent company having at least one division or branch in the EU	Third-country undertakings with a net turnover of more than 150 million in the EU	2029 on the financial year 2028

CSRD VS. CS3D: Demystifying the Differences

The European Union is at the forefront of promoting corporate sustainability and accountability through various legislative initiatives. Two prominent directives in this realm are the CSRD, discussed above, and the Corporate Sustainability Due Diligence Directive (CS3D). Although both aim to enhance corporate sustainability, they serve distinct purposes and have different scopes.

CS3D (Corporate Sustainability Due Diligence Directive)

The CS3D’s target is to ensure companies take responsibility for human rights and environmental impacts throughout their value chains. The directive mandates that large companies operating within the EU, including non-EU companies with significant EU operations, conduct thorough due diligence. It means they must:

identify,
prevent,
mitigate, and
account for adverse impacts on human rights and the environment.

The requirements under CS3D include:

integrating due diligence into corporate policies,
identifying potential and actual adverse impacts,
taking measures to address these impacts,
establishing complaints procedures,
monitoring the effectiveness of due diligence efforts,
publicly communicating the results.

V.S. CSRD

On the other hand, CSRD focuses on standardizing and improving sustainability reporting by companies.

Under CSRD, companies must report on several sustainability issues, including:

environmental,
social,
employee,
human rights,
anti-corruption, and bribery.

These reports must adhere to the European Sustainability Reporting Standards (ESRS) and provide detailed information on business models, strategies, risks, sustainability targets, and governance of sustainability matters. It is important to note that an independent third party must audit these reports to ensure accuracy and reliability.

Key Differences between CSRD and CS3D

While both CS3D and CSRD aim to promote sustainable and responsible business practices, their focuses and obligations differ significantly.

CSRD Emphasis	CS3D Emphasis
Transparency and accountability through enhanced sustainability reporting, requiring companies to disclose sustainability-related information.	Due diligence to manage and mitigate adverse impacts on human rights and the environment, requiring companies to act responsibly throughout their value chains.

In summary, CS3D and CSRD are crucial components of the EU strategy to foster corporate sustainability. CS3D ensures companies prevent harm through diligent practices, while CSRD enhances transparency by standardizing sustainability reporting. Together, these directives help create a more sustainable and accountable corporate environment in the EU.

Contact Enviropass to learn more about ESG reporting, including CSRD, and your company’s obligations toward it!