The CSRD is being introduced to standardise corporate sustainability reporting across the EU in a comparable way to which financial reporting is. The new directive, which will be implemented on a national level across the whole EU, will cover a wider range of companies than the legislation it is replacing. Currently the NFRD covers just over 11,500 companies and the new legislation is expected to cover close to 50,000 firms operating across the block.
The directive will cover companies that meet two out of the following three criteria:
Those companies that are listed on a regulated market within the EU and have over 10 employees or over €20 million in turnover will also be required to follow the CSRD.
The directive will also cover non-European companies who generate a net turnover of €150 million in the EU and have at least one subsidiary or branch in the EU. These companies are required to provide a report on their ESG impacts as defined in the directive.
The new directive will be phased in with:
There will also be a possible opt-out for SME’s during a transitional period until 2028.
Organisations, especially those presently not under NFRD, should start preparing now — in particular, with regard to the collection of non-financial data. These shall be reported in a mandatory format to ensure consistency and comparability across all countries and must be certified by an accredited independent auditor or certifier.
Failure to comply with the new regulations could lead to fines in excess of €100,000. Each country will set their own level of fines. If you are a multinational company operating across the EU, you could face fines in each country, resulting with a significant bill for non-compliance.
The scope of those reporting and what has to be reported has been expanded. The NFRD wasn’t far reaching enough to have the broad impact the EU wanted to reach its goal on climate change and taxonomy.
Under the current NFRD , also known as Directive 2014/95/EU, companies with over 500 employees, listed companies, banks, and financial institutions are required to publish information on the company’s approach to:
The new directive takes a more standardised approach. On the environmental side, the CSRD covers the six environmental objectives foreseen by the EU Taxonomy:
The CSRD will require disclosure of information relating to the EU taxonomy, equal opportunities, fundamental freedoms, roles of governing bodies, also with respect to sustainability, political affiliations and lobbying, transparency in commercial relationships, internal controls, and risk management. All information shall be addressed and reported with a double materiality approach (sustainability risk affecting the company and the company’s impact on society and the environment) and should be prioritised based on the relative importance for stakeholders — including forward looking information, future targets, and progress being made by the company. All of this will be included in the Management Report, which must be submitted in a XHTML format in accordance with European Single Electronic Format regulation.
The CSRD regulations are not only concerned with aspects of climate change and pollution. They are just one element of the new regulations. Even the NFRD focused on additional social aspects, including bribery and corruption, diversity, human rights, and the treatment of employees.
How the directive will be introduced into national legislation will have a major impact on the companies that must report on their work in these areas. The additions of reporting around social, human, and intellectual capital, and the process of selecting relevant topics for stakeholders, will be difficult areas for companies to get right.
The best thing a company can do to prepare for this change is to seek out a trusted and experienced adviser that operates across the region, utilising their international network and combining it with an in depth national knowledge, to give each company the specific insights that apply to them.
Understanding the methodologies of all aspects required in the reporting takes a team of specialists, working across disciplines, with a deep knowledge of the interconnectedness and how it relates to a company’s operations.
Marsh has recently produced a detailed ESG rating tool, giving companies a better understanding of their risks and opportunities. The assessment can be a preliminary analysis of the current positioning of the company, to identify the most significant areas to concentrate on to get ready for the disclosure requirements of the CSRD.
Understanding the requirements will not only keep you in good stead, but will also build resilience within your company. Reach out to your advisers for further support on protecting your company’s future.