CSRD explained: the EU directive for corporate sustainability

As of January 5, 2023, the directive expanding the scope of SMEs required to prepare a sustainability report officially came into effect. Let’s find out what it’s all about
The Corporate Sustainability Reporting Directive (CSRD) is the European Union’s directive mandating specific sized or listed companies to report on their sustainability through appropriate tools such as sustainability reporting.
The EU Commission published a blueprint for the CSRD in 2021, and as of January 5, 2023 it became final being effective. After its release in the Official Journal of the European Union (on December 16, 2022), Italy is given 18 months to incorporate the directive into its domestic legislation, and as of 2024 it will be effective. The directive incorporates a number of measures to increase corporate responsibility and improve the capital flow towards sustainable activities throughout the European Union.
CSRD pursues several aims summarized as follows:

• improving the data reported by companies in terms of impact on both the environment and people
• moving toward sustainable finance, following ESG criteria to direct investments toward long-term sustainable activities and projects
• working towards a climate neutrality (European Green Deal)

CSRD explained: what it means and why it’s so relevant

Corporate Sustainability Reporting Directive requires companies to publish detailed information on sustainability issues: corporate accountability increases, with common sustainability standards and easier transition to a sustainable economy. Another aspect relates to financial markets: access to reliable and comparable environmental information will be critical to investing private capital toward an economy pursuing this logic, as outlined in the Green Deal.

CSRD for companies: what is required

First and foremost, CSRD requires specific companies – henceforth, which ones – to publish a document, drawn up according to approved standards, reporting a set of non-financial data unveiling its environment and social impact together with the activities put in place to improve the latter.
Reports will need to include information on the impact a company’s business model can have on its sustainability and how external drivers – climate change or human rights issues o name but a few – affect its activities (double materiality principle). Indicators will, for example, cover gas emissions, water consumption and waste output, along with equal treatment for all employees, fair working conditions and respect for human rights. Data on environment and social footprints will be available to the public: anyone interested in such information can access it; the new requirements and the logic of transparency would hold an increasing number of companies accountable for their impact on the community, leading them toward people- and eco-friendly economy.

Toward a transition engaging everyone (or nearly so)

The directive will have a far-reaching impact on companies, investors, and community as a whole; accordingly, understanding what it entails and how it will affect different groups is crucial. The previous 2014 Non-Financial Reporting Directive (NFRD) has long been deemed inadequate, therefore the new CSRD modifies and expands the sustainability reporting requirements as well as broadens the same to some 50,000 potentially interested companies, three times as many as the current ones.

Which companies are addressed by CSRD

Large companies of course, yet likewise any listed SMEs (with an exemption for requirement until 2026); microenterprises under 10 employees or less than €20 million in turnover are excluded even when listed. The requirements are, however, designed to fit the size of any entities, while providing a sufficient transitional period to get ready for.

CSRD currently applies to joint stock companies, limited liability companies, and public interest entities (banks, insurance companies, listed companies, exceeding 500 employees; regardless their legal form). Other kind of business organizations and legal entities (such as cooperatives, foundations, associations, pension funds, municipalities, etc.) may be required to produce sustainability reporting by the national legislature, which as mentioned above will be expected to adopt the European directive.
The main issues to be addressed by any organizations are two, at least:

• the relevance of the directive to each company
• how to comply with it.
  This entails setting up the tools to monitor and measure the required environmental, social and governance (ESG) factors. While having to “be obliged” can turn out to be a nuisance, the purpose would be to gain a competitive advantage towards a sustainable transition: the sooner you move, the better you can get ahead and meet the needs of the market and investors, including asset managers, social partners and other stakeholders.

CSRD timeline (from now until 2030)

CSRD is to be effective step-by-step: the initial group of companies will be required to implement the new regulations starting from the 2024 fiscal year, with their reports to be published in 2025. The following details the deadlines set by the CSRD, including the specific categories of enterprises affected.

• As of January 1, 2025 (referring to the fiscal year 2024), the obligation arises for large enterprises already subject to the NFRD; Public Interest Entities (PIEs, i.e., issuers of securities admitted to trading on regulated markets in Italy and the Union, as well as banking and insurance companies) that exceed the following at the balance sheet date, even on a consolidated basis:
  a. an average number of 500 employees;
  b. at least one of the following thresholds:
  c. total balance sheet assets > €20 million;
  d. net revenue > €40 million.

• As of January 1, 2026 (referring to the fiscal year 2025), there will be a requirement for large, non-listed companies (regardless of whether they are issuers, thus previously not subject to the NFRD), which at the balance sheet closure date, even on a consolidated basis, have exceeded at least two of the following size criteria:
  a. an average of 250 employees;
  b. total balance sheet assets > €20 million;
  c. net revenue > €40 million.

• As of January 1, 2027 (referring to the fiscal year 2026), the obligation will apply to small and medium-sized enterprises (SMEs) that are listed (excluding micro-enterprises) and meet at least two of the following size criteria at the balance sheet closure date:
  a. an average number of employees between 10 and 250;
  b. total balance sheet assets: €350,000-20 million;
  c. net revenue: €700,000-40 million.
  Additionally included are small, non-complex banking institutions and insurance companies that are part of a group. SMEs may also opt for a grace period, not fulfilling the obligation for up to two years, thus until 2028 (known as the opt-out option).

• As of January 1, 2029 (referring to the fiscal year 2028), the obligation will apply to enterprises not belonging to the Union with specific thresholds and/or branches or subsidiaries within the Union. Specifically:
  a. Non-Union companies:
  a.1) with a turnover exceeding €150 million within the Union for two consecutive years;
  a.2) with a subsidiary that qualifies as a listed SME and/or a branch with a net turnover exceeding €40 million for the previous fiscal year;
  b. Listed SMEs that have opted out based on the aforementioned opt-out option.

Data are to be disclosed on the basis of common reporting standards, developed by the European Financial Reporting Advisory Group (EFRAG): specific recommendations for each economic sector are expected to be provided by October 31, 2023. Every three years the standards will be overhauled to be kept in line with market developments.
The reliability and accuracy of the data provided by companies will be monitored and certified by independent external entities: digital access to sustainability information must therefore be guaranteed. Such reporting will be equated with financial one, resulting in comparable and reliable data for investors.
This new Directive is embedded in the EU strategy to shift toward a sustainable economy: the incentives given to companies will help them improve their sustainability performance, being held directly accountable for their environment and social impact.