The European Union recently passed the Corporate Sustainability Reporting Directive (CSRD), an updated version of the Non-Financial Reporting Directive (NFRD). This new regulation is set to impact all EU companies, as well as non-EU companies that have a significant presence in member countries. The directive is just one of a varied and complex slew of initiatives that companies will need to know about that will impact their sustainability, compliance, and governance efforts and reporting requirements.
The CSRD is a new EU regulation that aims to align business reporting with the EU Green Deal and the 2030 Agenda for Sustainable Development.
Here is what you need to know:
- The legislation requires companies to disclose information on their environmental, social, and governance (ESG) performance in their annual reports.
- The directive also includes guidelines on how this information should be reported, including detailed metrics, standards, and assurance.
- The sustainability reporting standards companies will be subject to under the CSRD are still being developed.
- Companies must apply the new rules in the 2024 financial year for reports published in 2025, according to the European Commission.
So, what does this mean for companies? First and foremost, the timeline here is essential to understand. New rules will apply to reports published in 2025 reflective of the 2024 financial year. While many company’s financial years follow the calendar, some will have started their 2024 fiscal year in April 2023. This means they are already subject to tracking performance targets required for reporting under their first CSDR report. Small and medium enterprises (SMEs) will begin reporting for 2026 using the CSRD’s SME guidelines.
Second, it is important to recognize the potential far reaching impact of this legislation. If a company – regardless of headquarters – has a significant presence in the EU, it will be subject to the new rules. This is defined by the directive as companies that have over 500 employees or meet certain turnover and balance sheet thresholds. However, even if a non-EU or U.S. company doesn’t fit into these criteria, the new rules may still make an impact. As the EU continues to raise the bar for corporate sustainability, companies around the world are likely to face similar demands from investors and stakeholders.
What CSRD means for companies with large value chains
The new regulation aims to increase transparency and accountability, creating greater trust between companies and their stakeholders. This increased transparency is likely to lead to a greater focus on ESG issues for non-EU companies as well and involve the broader value chain. In the current climate, customers, investors, and employees are all interested in a company’s ESG practices. By disclosing this information, the EU hopes to create greater awareness and transparency of the issues and drive companies to improve their activities and that of their suppliers that impact people and the environment.
This is another notable aspect of the EU’s CSRD. Companies are required to report information on “the material impacts, risks, and opportunities connected to the in-scope entity through its direct and indirect business relationships in the upstream and/or downstream value chain”. It remains to be seen if this will be complementary or potentially inconsistent with the EU’s upcoming Corporate Sustainability Due Diligence Directive.
The new rules also come with detailed guidance on the standards and metrics for ESG reporting. This information, based upon the European Sustainability Reporting Standards (ESRS), provides a framework to help companies assess their sustainability performance and improve their reporting practices. The standards are tailored to EU policies while taking into account other international standardization initiatives. By adopting these standards and metrics, companies can better report on their sustainability performance and benchmark themselves.
What CSRD means for U.S. companies
In addition to the requirements of the CSRD, U.S. companies should be aware that the directive also encourages other measures to support environmental, social and governance (ESG) objectives. To this end, companies are encouraged to set comprehensive ESG goals, establish an oversight mechanism for achieving these goals and improve their reporting practices. By taking the initiative and raising the bar ahead of the compliance deadline, U.S. companies can demonstrate their commitment to sustainability goals and create a more sustainable future for all stakeholders.
Lastly, U.S. companies must also be aware of potential legal and financial repercussions. Failure to comply with the new regulation can result in penalties and reputational damage. As companies become more accountable for their ESG performance, noncompliance could lead to regulatory fines, legal action, or criticism from investors and stakeholders. The new European CSRD rules will likely have a significant impact on U.S. companies, as will other regulations in the works.
More regulation on the horizon
CSRD isn’t the only new regulation companies should have on their radar. Earlier this month, the EU lawmakers endorsed a Corporate Sustainability Due Diligence Directive, or CSDDD, that establishes a corporate due diligence duty for companies to take responsibility for mitigating and preventing negative human rights and environmental impacts across their supply chains.
As the EU pushes for greater transparency and accountability, ESG issues will become more important for companies around the world. However, the new rules also provide an opportunity for companies to improve their sustainability practices and demonstrate their commitment to stakeholders. By adopting the standards and metrics provided by the regulation, companies can better report on their performance and benchmark themselves for improvement. U.S. companies can stay ahead of the curve and avoid potential legal and financial repercussions by remaining vigilant in their sustainability, compliance, and governance efforts. Find out how Ethixbase360 can help.