What is the EU Corporate Sustainability Reporting Directive or CSRD?
CSRD is proposed as the new non-financial reporting regime for EU-based and EU-listed companies. It will replace the existing regime (the Non-Financial Reporting Directive or NFRD) and is slated to come into effect for reporting periods starting on or after 1 January 2023. The CSRD proposal, first published in April 2021, is currently proceeding through the EU legislative process and is expected to be adopted early this year.
Why the need for a new reporting regime?
In short, the EU needs private capital markets to help bridge the funding gap for energy-related investments. The EU estimates that annual investment to 2030 will need to increase by €350bn to achieve climate neutrality and by providing private investors with reliable non-financial information, it expects to stimulate sustainable investing in support of EU climate and energy targets.
As well as supplying customers/investors with comprehensive and reliable sustainability information, CSRD will also ensure the availability of information necessary for the financial sector (asset managers, banks, insurers etc) to comply with their non-financial reporting obligations under other EU sustainability-related rules. For example, recently introduced EU rules for the financial sector require investor disclosure of the sustainability impact of investment decisions; disclosures which would not be possible without data on the sustainability impact of investee companies' economic activities.
Why has 'Non-Financial' been replaced with 'Sustainability'?
Use of the term 'non-financial' to refer to information relating to environmental, social and governance or ESG matters under the existing NFRD regime was considered to incorrectly imply that ESG information has no financial relevance. Under CSRD, companies must quantitatively, as well as qualitatively, assess and report on the ESG risks which impact companies' financial returns.
How does CSRD compare to the existing regime for non-financial reporting?
By comparison to the existing NFRD regime, CSRD extends both the level and scope of sustainability reporting. Under current proposals, mandatory reporting would be extended to an additional 37,500 companies through the removal of the 500-employee reporting threshold and extending the scope beyond public interest companies to include all large EU-based companies and EU listed companies. Draft CSRD sustainability reporting standards, which will provide further clarity on the enhanced level of reporting required under the CSRD, are expected to be published in June this year before being finalised ahead of the anticipated deadline of October 2022.
What are the key requirements under CSRD?
CSRD will mandate machine-readable reporting against new, directly effective, EU standards by all large EU companies (including parent companies of large groups) and EU listed companies. The EU standards will require companies to identify and report on their most significant sustainability risks, dependencies and impacts and how they manage them including qualitative and quantitative, forward-looking and retrospective information about their strategy, targets, risk governance structures, supply and whole value chains, and intangibles (R&D, intellectual/human/social and relationship capital). Sustainability information will initially need limited assurance but CSRD makes provision for moving to reasonable assurance at a later date.
What are the key impacts of CSRD?
As its principal objective is for a broader spectrum of companies to provide more detailed, harmonised sustainability reporting, the first and obvious impact of CSRD will be on companies' reporting processes and procedure. In particular, given the much-publicised dearth of accurate and reliable sustainability data, companies may need to establish new data sourcing, accumulation and monitoring processes in order to comply with the enhanced reporting rules. However, as with many EU sustainability initiatives, CSRD is also likely to drive more fundamental change by reporting entities seeking to avoid the myriad of risks associated with disclosing sustainability risk exposures and/or a negative impact on ESG factors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.