Entered into force in January 2023, The European CSRD directive, or Corporate Sustainability Reporting Directive, is a directive who provides a methodology on how businesses should report their extra-financial performance. The aim of this directive is to create a standardized and common language in terms of extra-financial reporting to allow better understanding and better comparability of the non-financial performances of organizations.
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What is the context for the creation of the CSRD?
Non Financial Reporting Directive (NFRD) Update from 2014, its ambition is to avoid greenwashing, in harmonizing sustainability reporting, but alsobroaden its scope. Indeed, it is more than 50,000 European companies Who should be Affected by this directive, according to the audit and consulting firm Ernst Young, against 11,000 European companies with the NFRD, according to Entreprises Engaged.
This directive is part of the Green Deal (2019), which can be translated as Green Deal in French. This Green Deal is a waybill issued by the European Union and which aims to make Europe carbon neutral in 2050, with an intermediate objective of reducing greenhouse gas emissions by 55%, compared to the 90s, by 2030.
The investments linked to this Green Deal cannot be financed completely by The public authorities, private investments will be essential in achieving these goals.
For that, two other regulations Have a key role To play:
- La Social Finance Disclosure Regulation (SFDR) Impose a sustainability reporting for financial firms, since 2022. By creating more transparency, it should allow, like the CSRD, to create a reorienting private flows towards more sustainable choices.
- La European taxonomy, for its part, establishes a Classification of economic activities and determine if a activity is sustainable, according to technical criteria. The taxonomy requires the declaration of certain key performance indicators common to CSRD and SFDR.
CSRD, who is concerned?
La CSRD (Corporate Sustainability Reporting Directive) requires certain companies to publish detailed information on their environmental, social and governance (ESG) impact. It replaces and extends the obligations of the previous directive, the NFRD (Non-Financial Reporting Directive).
While the NFRD only applied to large companies with more than 500 employees, the CSRD broadens its scope of application to businesses that meet at least two of the following three criteria:
| Criteria | Threshold |
|---|---|
| Number of employees | More than 250 |
| Balance sheet | Greater than €25 million |
| Turnover | In excess of €50 million |
To put it simply, the companies concerned by the CSRD are:
| Type of company | Description |
|---|---|
| Large companies | All businesses with more than 250 employees, with a turnover greater than €40 million, or a balance sheet greater than €20 million |
| Companies listed on the stock exchange | Including listed small and medium-sized businesses, but they will benefit from additional time |
| Some subsidiaries of international groups | If a parent company is concerned by the CSRD, its European subsidiaries may also have to comply with reporting obligations |
The CSRD mainly concerns large companies, but it will also eventually include more companies than the NFRD, and will impose a stricter framework for the publication of non-financial information on CSR topics.
Businesses excluded from the CSRD
Some businesses are excluded from the CSRD, including:
| Type of business | Exclusion criteria |
|---|---|
| Small businesses | Those with fewer than 250 employees, a balance sheet of less than 25 million euros and a turnover of less than 50 million euros |
| Micro-businesses | Very small businesses with less than 10 employees, an annual turnover of less than 2 million euros or a balance sheet of less than 2 million euros |
| Non-listed companies | Companies that are not listed on the stock exchange and who do not meet the criteria mentioned (size, turnover, balance sheet) |
| Nonprofit businesses | Excluded from CSRD obligations |
| Public entities | Excluded from CSRD obligations |
However, listed SMEs will have to comply, but they will benefit from additional time to comply.
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The CSRD calendar
The CSRD calendar (Corporate Sustainability Reporting Directive) provides for gradual implementation, depending on the size and type of companies.
Larger businesses need to comply first, while listed SMEs have more time to prepare.
The cost of CSRD
Today, it is difficult to know exactly the cost of a CSRD project, what we do know is that it should include:
| Cost category | Description |
|---|---|
| Updating reporting systems | Businesses will need to adapt their internal systems to collect and process ESG (environmental, social and governance) data. This may require investments in new software or management tools. |
| Advice and expertise | Many businesses will need to use external consultants or compliance experts to help them understand and meet CSRD requirements, which is a cost. |
| Audit and verification | The CSRD requires an external audit of CSR reports. Using auditors to validate data may result in additional costs. |
| In-house training | Teams will need to be trained to understand and apply the new standards, which can result in time and human resources costs. |
| Human resources | Some businesses will need to recruit or train teams specialized in sustainable reporting to ensure long-term compliance. |
The cost of complying with the CSRD varies according to the size and structure of each organization. According to Court of Auditors, the costs of preparing for the directive could vary between €40,000 and €320,000, while annual audit costs could be between €67,000 and €540,000.
A study of C3D reveals that in terms of human resources, 40% of businesses interviewees believe that the workload generated by CSRD is equivalent to 1 full-time equivalent (FTE), while 26% consider that this would represent 2 FTES.
Finally, 75% of businesses quantify their budget for setting up the CSRD between 1 and 200,000€, but 11% declare a budget greater than 600,000€, which highlights the disparities depending on the complexity of the organization and its needs.
Penalties in case of non-compliance
In case of non-compliance with the CSRD, companies are exposed to several types of sanctions, which vary from one country in the European Union to another, as each Member State applies its own rules and penalties. Here are the main possible sanctions:
| Type of sanction | Description |
|---|---|
| Financial sanctions | Businesses can be fined. The amount of these fines depends on the severity of the non-compliance and may be proportionate to the size of the business. |
| Administrative sanctions | This may include official warnings or immediate compliance orders. |
| Reputational damage | Not complying with the CSRD can damage a company's image. Stakeholders (investors, customers, partners) could lose confidence, especially in a context where sustainability is becoming a major decision-making criterion. |
| Restrictions on access to financial markets | More and more investors are demanding transparent and reliable sustainability information before making investment decisions. |
In France, the sanctions provided for in case of non-compliance with the directive are as follows:
| Type of non-compliance | Sanction in France |
|---|---|
| Failure to publish the report or publication of incomplete/incorrect information | Fine of €3,750 |
| Extra-financial report not audited | Fine of €30,000 and up to 2 years of imprisonment |
| Impediment to verifications or checks by auditors | Fine of €75,000 and up to 5 years of imprisonment |
The sustainability report must be verified by:
- One auditor,
- Or a independent third party organization (OTI), accredited by the COFRAC (French Accreditation Committee).
What content must be declared for the CSRD?
Full reporting
The full report should include all of the information below.
1. One short description of the business model and the company's strategy, including:
- The resilience level Of these last two in relation to risks related to sustainability issues
- Les opportunities related to sustainability issues For the company
- Les plans to ensure the compatibility of its business model and strategy with the transition to a sustainable economy in accordance with the Paris Agreement (including the objective of climate neutrality by 2050)
- The way the business model And the corporate strategy take into account the interests of stakeholders And the impacts of the business on sustainability issues
- How the company implemented its strategy with respect to sustainability issues
2. One description of the role of the administrative bodies, Of direction and Supervisory Concerning the sustainability issues As well as a description of their expertise and of their skills in terms of exercising this role or the opportunities available to them to acquire this expertise or skills.
3. One description of company policies With regard to the questions of sustainability.
4. Of information on the existence of incentive systems related to sustainability issues which are offered to members of administrative, management and supervisory bodies.
5. One description of the due diligence procedure implemented by the company regarding sustainability issues and, where appropriate, in accordance with Union requirements requiring companies to conduct such a procedure
6. One description of the main negative impacts, real or potential, linked to the company's own activities and to its value chain, including its products and services, its business relationships and its supply chain, measures taken to identify and monitor these impacts, and other negative impacts that the company is required to identify under other Union requirements requiring businesses to conduct a due diligence procedure.
7. One description Of all readout socket to prevent, mitigate, correct, or eliminate negative impacts, real or potential, and the result obtained in this respect.
8. One description of the main risks related to sustainability issues, including a description of the main dependencies in this area and a description of how the company manages these risks.
9. Of metrics concerning the previous points.
- These plans also include the actions implemented and the investment and financial plans.
Simplified reporting
Simplified reporting should contain:
- One brief description of the business model And of the company strategy.
- One description of policies with respect to sustainability issues.
- Les main negative impacts, real or potential, on sustainability issues, and any action taken to identify, monitor, prevent, mitigate or correct them.
- Les main risks that are related to sustainability issues And the how the company manages these risks.
- Les key indicators necessary for the information to be published referred to in points.
Conclusion
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In conclusion, CSRD is an important step in helping companies to be more transparent and to have standardized extra-financial reporting in Europe.
It aims to harmonize sustainability practices and avoid the risks of greenwashing, while contributing to the goals of the European Green Deal.
Although its implementation involves significant costs and efforts for businesses, it will allow for better comparability of ESG performances, thus promoting a transition to a more sustainable economy.
