Read this blog to learn why getting this technological foundation in place now should be a top priority in corporate management.
The Corporate Sustainability Reporting Directive (CSRD) was published in the Official Journal of the European Union on December 16th, 2022 and must be transposed into national law in the EU member states within a period of 18 months. In November of the same year, the directive was adopted by the European Parliament after a political compromise was reached during trialogue negotiations between representatives of the European Council and the European Parliament in June.
The directive can be described as a fundamental extension of the NFRD (Non-Financial Reporting Directive), as it increases the requirements for corporate sustainability reports. Compared to the NFRD, which was implemented in Germany with the CSR Directive Implementation Act (CSR-RUG), the CSRD requires more comprehensive disclosure of environmental, social and corporate governance (ESG) information as well as greater transparency regarding companies' sustainability practices and performance. This is intended to enable better monitoring and accountability of companies for the social and environmental impacts of their operations. European sustainability reporting will be further aligned here with the requirements stemming from the EU Green Deal.
Is the CSRD mandatory?
The new directive greatly expands the previous regulations on non-financial reporting.
All large, non-capital market-oriented companies are covered by the scope of the CSRD. A "large company" in this sense is defined as one that meets at least two of the following criteria:
+40 million net sales
+20 million Balance sheet total
The CSRD also covers all capital market-oriented companies, large insurance companies and banks. Micro-enterprises are excluded. This will affect a total of around 50,000 companies in the EU (15,000 already in Germany).
Non-capital market-oriented SMEs can apply the standards voluntarily - for some companies, there will be indirect confrontation with the CSRD regulations, such as suppliers to large companies.
From when do the new regulations apply?
The Corporate Sustainability Reporting Directive (CSRD) is applied in four successive phases. The phases depend on the respective size and form of the company.
- Companies already covered by the current sustainability reporting obligation must report for the first time in 2025 on the 2024 financial year.
- Companies not previously subject to the requirements of the NFRD, but now covered by the expanded scope of the CSRD, must report for the first time in 2026 on fiscal year 2025.
- Listed SMEs, small and non-complex financial institutions, and captive insurance companies must report on fiscal year 2026 for the first time in 2027.
- Companies outside the EU that generate sales of more than €150 million in the EU and have at least one subsidiary or branch within the EU must report on the 2028 financial year in accordance with the CSRD requirements for the first time in 2029.
What are the CSRD reporting requirements?
Reporting in accordance with the CSRD will take place exclusively in the management report. In the future, the relevant ESG data will therefore be published mandatorily in the annual financial statements. These new requirements will mean extensive changes for many companies in terms of their reporting and business tactics. The new CSRD requirements will thus lead to significant changes in the reporting and strategic practices of many companies.
What is the difference between NFRD and CSRD?
While the NFRD requires companies to report on environmental protection, board diversity, social responsibility, employee relations and anti-corruption, the scope of the CSRD expands the scope of reporting obligations. A central extension is the so-called double materiality, according to which a double materiality analysis must be carried out. Sustainability aspects are considered from two different perspectives, which form the basis for identifying strategic sustainability topics and reporting obligations. A distinction must be made between the outside-in and inside-out perspectives. In the former, everything that influences the value of the company is of importance. In the inside-out perspective, on the other hand, companies must consider the effects of their actions on others, such as society or the environment. In addition, the expansion through the CSRD includes, for example, reporting obligations that relate to information on intangible assets. The extension also includes reporting in accordance with the Sustainable Finance Disclosure Regulation and the EU Taxonomy Regulation.
The CSRD is designed to help companies provide standardized and reliable information on ESG issues and focus on strategically addressing ESG criteria to identify opportunities and risks and measure their success against KPIs.
Through the CSRD, sustainability reporting is to take its place alongside financial reporting.
Companies must set the course now
The entire reporting process needs to be rethought, because the new legal requirements for corporate reporting include a great opportunity to implement an integrated process for strategic corporate management. A process that involves all areas of the company from human resources to supply chain, risk management, PR, finance, marketing and operations.
This is because ESG non-financial data impacts financial results and operational performance, as we outlined in a previous article. Thus, ESG reporting becomes an ongoing performance management process that requires the right technological foundation for growing finance and non-finance data volumes, progressing, KPI monitoring and strategic steering. Getting this technological foundation in place now should be a top priority in corporate management.