Since January 1st, 2024, the Corporate Sustainability Reporting Directive (CSRD) has come into effect. This new regulation mandates companies to publish clear and comprehensive information on their environmental and societal impacts. The CSRD aims to enhance the quality, comparability, and consistency of non-financial information provided by companies, broadening the scope of affected businesses and introducing mandatory sustainability reporting requirements.
More than just a mere obligation, the CSRD will encourage companies to rethink their development models and embrace a genuine culture of sustainability.
Non-financial reporting, NFRD, CSRD: An Overview
Non-financial reporting, also known as non-financial reporting, refers to the practice of disclosing information about a company's social, environmental, and ethical performance. This type of reporting is becoming increasingly important as consumers, investors, and other stakeholders demand greater transparency and accountability from companies.
Since 2014, European companies are required to include a non-financial statement in their annual management reports. This reporting obligation, the NFRD (Non Financial Reporting Directive), aims to inform the public and various stakeholders about the impact of the company's activities on the environment, the fight against corruption and the respect of human rights. French law transposed this European directive in 2017, with the introduction of the DPEF. However, the non-financial reporting provided as a result of these measures has revealed the shortcomings of the first directives: unreliable and difficult to compare, they do not meet Europe's ambitions in terms of environmental and social responsibility. The CSRD (Corporate Sustainability Reporting Directive), is a new reporting tool that will replace the NFRD, extending its scope and strengthening its requirements.
What is the Corporate Sustainability Reporting Directive (CSRD)?
The Corporate Sustainability Reporting Directive (CSRD) establishes new transparency standards for companies regarding their environmental and societal impact. This directive, part of the European Green Deal, aims to achieve carbon neutrality in the European Union by 2050 and limit global warming to 1.5°C, in line with the Paris Agreement.
The CSRD requires companies to publish detailed sustainability reports on environmental, social, and governance (ESG) performance. These reports must include information on greenhouse gas emissions, energy consumption, working conditions, diversity and inclusion, as well as risk management.
By standardizing reporting criteria, the directive aims to combat greenwashing and enable easier comparison of companies' sustainability performance. The goal is to encourage economic actors to place as much importance on their ethical and environmental impact as on their financial results, thus promoting a transition towards a more sustainable economy.
Regulations and application of the CSRD: where do we stand?
The Corporate Sustainability Reporting Directive (CSRD) officially came into effect on January 1, 2024, representing a pivotal advancement in corporate sustainability reporting. The new non-financial standards were developed by the European Financial Reporting Advisory Group (EFRAG), which has been advising the European Commission on financial reporting for the past 20 years.
On November 10, 2022, the European Parliament adopted the CSRD text with significant support, and the EU Council granted its final approval shortly thereafter. The directive has since been published in the Official Journal, establishing a comprehensive framework for enhanced transparency in corporate sustainability practices across the EU.
The implementation of the CSRD follows a phased approach. Large companies already subject to the NFRD are the first to apply the new rules, with their initial reports due in 2025 for the 2024 financial year. The directive's scope will gradually expand to include more companies in subsequent years.
Which companies will be subject to the CSRD?
The CSRD extends the obligation of non-financial reporting to new companies: the new requirements will thus apply to large companies, whether listed or not, that meet two of the following three conditions:
More than 250 employees
Net turnover total exceeding 50 million euros
Total balance sheet exceeding 25 million euros
Listed SMEs - Small and medium-sized enterprises - (excluding micro-companies with less than 10 employees) are also concerned by the publication of sustainability information, as long as they meet two of the following three conditions:
More than 10 employees
Net turnover total exceeding 900,000 euros
Total balance sheet exceeding 450,000 euros
However, the European Commission is considering a simplified reporting obligation for listed SMEs.
In addition, the reporting rules set by the new directive will also apply to non-EU companies operating within the EU. If a non-European company has a subsidiary or a branch in the EU with an annual turnover of more than 150 million euros, the company will have to provide information on its socio-environmental impacts.
What sanctions are imposed for non-compliance with the CSRD?
It's crucial to understand that the CSRD is a European directive, requiring each member country of the European Union to integrate it into their national legislation. Sanctions for non-compliance with the CSRD vary among EU member states, they may include financial penalties, administrative sanctions, and legal proceedings.
In France, the directive has been adopted into French law and was officially published on December 7, 2023. This mandates a fine of €3,750 in cases of non-publication of the sustainability report or dissemination of partial or erroneous information, potentially leading to exclusion from public procurement processes.
Additionally, other financial penalties include:
For failure to conduct an audit of the report: fines of up to €30,000 and a maximum of 2 years imprisonment.
In cases of obstructing the audit process: fines of up to €75,000 and a maximum of 5 years imprisonment.
Furthermore, French law stipulates that sustainability reporting must undergo verification by either a statutory auditor or an independent third-party organization.
What are the ESRS (European Sustainability Reporting Standards)?
The CSRD directive envisions the establishment of European standards, known as the European Sustainability Reporting Standards (ESRS), which constitute a set of 12 standards that companies will use to report their sustainability-related information. Developed by the European Financial Reporting Advisory Group (EFRAG), with a long history of advising the European Commission on financial reporting standards, the ESRS ensure that sustainability information complies with the CSRD.
The standardized format of the ESRS is crucial for investors and other stakeholders to compare companies' performance across various sectors. These standards encompass all information relevant to companies, regardless of their industry. Additionally, the ESRS take a "double materiality" perspective, requiring companies to report on the impact of sustainability issues on their business and their impact on people and the environment.
The EFRAG website provides all the necessary information, including explanatory videos for each of the 12 disclosure requirements. It's important to note that the first set of ESRS was adopted in late 2023, with additional standards expected in the future.
What impact will the CSRD have on companies?
In the long term, approximately 50,000 companies will be required to inform the public and stakeholders (shareholders, partners, and consumers) about the impact of their activities on the planet and human rights (compared to 11,700 with the current European legislation). The development of common standards will enhance the reliability and evaluation of non-financial information. Increased transparency can be demanded from subsidiaries that implement different processes from others, particularly in the case of high carbon emitters or companies with a risky raw materials procurement policy. More precise data may be necessary for certification in such cases. The concept of "double materiality", which encompasses both the company's impacts on the environment and society and the external risks and opportunities related to sustainability, will be a key aspect of reporting.
The systematization of independent auditing is one of the most notable changes for companies, as they will be compelled to demonstrate greater rigour in their reporting and a higher level of sincerity in their CSR commitments.
What does the principle of "double materiality" mean in the context of the CSRD?
The concept of double materiality is an approach aimed at expanding the scope of non-financial reporting by considering both the impacts of a company's activities on sustainable development issues and the repercussions of these issues on the company itself.
Double materiality requires a comprehensive assessment of the impact of deteriorating societal and environmental conditions on a company's operations, while also measuring the company's impact on these same conditions. This involves a cause-and-effect relationship, where companies need to account for not only the impact of their activities on sustainable development issues (the "outside-in" perspective) but also the negative and positive impacts on society and the environment (the "inside-out" perspective).
By emphasizing double materiality, the CSRD encourages companies to consider both their internal interests and the external issues surrounding them. This enables them to gain a more comprehensive understanding of their organization, activities, and role in a broader context. By holistically evaluating environmental, social, and financial risks, opportunities, and impacts, companies can better manage their sustainable performance and enhance their legitimacy with stakeholders.
Strengthened obligations and new directives to come
Following the adoption of the Corporate Sustainability Reporting Directive (CSRD), which mandates more detailed non-financial reporting, the European Union is now developing the Corporate Sustainability Due Diligence Directive (CSDDD). This forthcoming legislation aims to require large European companies to implement concrete measures to identify, prevent, and mitigate the negative impacts of their activities on human rights and the environment. The CSDDD aligns with the CSRD’s emphasis on transparency and responsible business practices, further reinforcing the EU's commitment to sustainable development and ethical corporate behavior.
Conclusion
The Corporate Sustainability Reporting Directive marks a transformative step in enhancing corporate accountability and transparency in sustainability practices. By expanding upon the NFRD, the directive establishes more stringent requirements for companies to disclose comprehensive information on their ESG performance.
This directive not only aligns with the European Union's ambitious sustainability goals but also presents significant opportunities for businesses to innovate and improve their practices. As organizations prepare for compliance, they should view the CSRD as a strategic advantage—one that can enhance their reputation, attract sustainable investments, and contribute meaningfully to a more sustainable global economy.
コメント