Introducing the Corporate Sustainability Reporting Directive (CSRD)
In a step to promote greater transparency and consistency around ESG disclosures, the European Parliament passed the Corporate Sustainability Reporting Directive (CSRD) on November 10, 2022. Under the directive, which takes effect in January 2024, impacted companies will need to have their sustainability reports independently audited each year.
About the CSRD
The CSRD supports the European Green Deal, a set of policy measures intended to transform and sustain a competitive, efficient and modern EU economy while achieving the goal of carbon neutrality by 2050. The directive seeks to put sustainability reporting on par with financial reporting and improve the flow of money toward sustainable activities. The CSRD is also meant to increase the transparency, relevance, consistency and comparability of corporate sustainability information, helping investors, civil society organizations, consumers, policymakers and other stakeholders evaluate non-financial performance and encourage responsible approaches to business.
Published CSRD reports — which should begin appearing in 2025 — will inform investment, public opinion and other legislation, as well as future amendments and updates to the directive itself. Sustainability reports will abide by standards developed by the European Financial Reporting Advisory Group (EFRAG) and be consistent with EU regulations — including the EU taxonomy classification system that lists environmentally sustainable economic activities. CSRD standards are to be reviewed every three years to account for new developments and evolving international standards.
At UL Solutions, we offer a suite of sustainability and CSRD-related services to help smooth the regulatory transition for EU companies obliged to comply, including those that exceed the definitions of small and medium-sized enterprises (SMEs) as well as SMEs and non-EU subsidiaries that fit specific categories. The regulatory experts at UL Solutions — which must also comply with the CSRD — will help your company understand the new regulation and show you how CSRD reporting can work to your advantage.
NFRD to CSRD: What changes?
The CSRD updates, improves and expands the environmental, social and governance (ESG) reporting called for in the NFRD. The new directive requires an audit (assurance) of reported information as well as the digitalization of reports for easier comparison, processing and recording. A fundamental shift in sustainability measuring and reporting in the CSRD is the concept of “double materiality,” meaning companies must report how sustainability issues affect their own business and how their business affects society and the environment.
Since 2014, listed EU companies with 500 or more employees have had to comply with the NFRD (about 11,700 companies in total). The CSRD expands compliance obligations to all companies (listed or not) with assets of at least 20 million euros, a 40-million-euro turnover, and/or more than the 200 to 250 employees that define SMEs in countries throughout the EU (an estimated 49,000 companies). Unlike the NFRD, the CSRD includes non-EU companies with subsidiaries or a significant presence in the EU and those with securities listed on an EU-regulated market.
Companies that fell under the scope of the NFRD will be the first to begin CSRD reporting in January 2024. Large companies new to such sustainability reporting will start complying in January 2025. Many SMEs are exempt from the CSRD, but those with securities listed on regulated markets must comply beginning January 2026 — but with simpler and less rigorous reporting standards than those faced by larger companies. An opt-out clause allows SMEs to push that compliance date back to January 2028, when non-EU companies within the scope of the CSRD must also begin to comply.
How CSRD compliance works for you
CSRD compliance — and in particular, double materiality — helps give credibility to a company’s green activity and investments by providing a reliable and thorough overview of sustainability-related risks. Investors can match financial reports with CSRD reports to steer funds toward profitable companies that are also genuinely environmentally friendly. CSRD reports also help investors meet their own disclosure requirements under the Sustainable Finance Disclosure Regulation (SFDR). Reliable, high-quality CSRD reporting works for you by exhibiting valuable transparency, identifiable green efforts and a culture of greater public accountability.
Companies not obligated to comply with the CSRD may benefit from voluntarily reporting, providing sustainability information to banks, larger company clients and other stakeholders that value such information. Companies that do not report sustainability information may find themselves excluded from investment portfolios. This risk of exclusion will increase along with the growth in the importance of sustainability information throughout the financial system.
The CSRD implies additional short-term costs for companies subject to its requirements, but most companies face an increase in costs because of the growing demand from investors and other stakeholders for corporate sustainability information. However, the CSRD creates a consensus around the information that companies disclose. This eliminates or reduces existing overlapping standards and frameworks, and inconsistent information requests, ultimately reducing reporting costs for companies over time.
How UL Solutions can help
At UL solutions, we can help you prepare for and execute CSRD reporting through a range of pragmatic and standards-driven solutions. For example, our advisory services team can help you perform a double materiality study and establish methods for all the relevant ESRS KPIs. Our Software team can help you gather CSRD data from across your organization in an efficient and accurate way. And if your CSRD reporting capabilities are already established, our assurance team can provide limited assurance of your CSRD disclosure.
Editorial note: This article was updated November 2022 to reflect CSRD passage by the European Union.
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