CSRD: Corporate Sustainability
Reporting (EU 2022/2464)

What is the Corporate Sustainability Reporting Directive?

The Corporate Sustainability Reporting Directive was approved by the European Commission on November 28, 2022 as a proposed amendment to the Non-Financial Reporting Directive issued in 2014. An integral part of the European Green Deal, its entry into force in January 2023 was an effective response to consumer, investor and institutional awareness with respect to climate change, the health of the planet, and social and humanitarian issues. And especially with respect to the positive role companies can play in triggering change. 

Unlike what Nobel laureate Milton Friedman theorized in 1970, profit maximization is not a company’s only responsibility. On the contrary, companies today are given social and environmental responsibility, so it is becoming increasingly necessary not to do “business as usual.”

Before approval

The change starts precisely with measurement and transparency. Prior to the approval of the NRFD and CSRD, however, the reporting of non-financial information was completely voluntary in the European Union, and consequently depended solely on the willingness and sensitivity of the individual company and its CDA. Moreover, the lack of clear and defined guidelines and framework meant that there were great differences among each company in terms of content, format, methodologies, performance measures, and quality of information shared. This made it difficult, if not impossible, to evaluate and compare companies in the same industry in terms of ESG performance, fostering greenwashing, limiting responsible investment decisions, and hindering progress toward sustainable development goals.

By filling gaps in non-financial information reporting legislation, the Corporate Sustainability Reporting Directive promotes transparency by allowing access to reliable, relevant and comparable ESG information.

The directive in detail

• Scope of application
  The CSRD currently applies to 49,000 companies that together account for about 92 percent of European GDP. These are all large public interest entities with more than 500 employees, large enterprises with more than 250 employees and €40 million in turnover, all companies listed on EU stock exchanges (except micro enterprises), and non-EU companies. Specifically, enterprises that have total net revenues greater than 40 million, or, total assets on the balance sheet greater than or equal to 20 million and, at the same time, a number of employees greater than or equal to 250 are subject to the requirement.

• Content
  The Corporate Sustainability Reporting Directive requires entities specified above to include a non-financial report within their annual financial statements, providing a comprehensive overview of their ESG performance. Specifically, it is mandatory to touch on 9 areas: Business model and strategy, sustainability targets and objectives, governance, sustainability policies and procedures, ESG due diligence, ESG risks and how they are managed, impacts, intangibles, and lastly, KPIs.
• CSRD also makes it mandatory for companies to audit the sustainability data they report; certification of the financial statements will have to be done by an external auditor, of the Accounting Provider type, to ensure the transparency, fairness and reliability of the reported data. It also provides for the digitization of such information.

• Framework
  In June 2023, the European Commission began submitting to member states and EU institutions a proposal on standards to be followed during non-financial reporting. These are called ESRS (European Sustainability Reporting Standards) developed by EFRAG (European Financial Reporting Advisory Group). These will be intended for all companies subject to CSRD to provide them with criteria for measuring and monitoring environmental performance. Each standard will be reviewed every three years to allow for any necessary changes due to technological developments in the field, just as with the Taxonomy criteria, which is why they will be adopted as delegated acts.

The obligations imposed by the Corporate Sustainability Reporting Directive should not be seen as obstacles, but rather as opportunities on the part of companies. For by adopting a more sustainable strategy, it not only creates opportunities to reduce costs (such as those related to energy) or accelerates the process of production innovation. Greater transparency also enables all stakeholders-from consumers to investors-to make more informed decisions. Indeed, companies that effectively communicate their ESG performance tend to attract responsible investors, enabling them to mitigate some of the financial risks associated with their investments. Similarly, by demonstrating a strong commitment to their sustainability goals, companies can achieve better market positioning. It can also improve their reputation thereby attracting consumers, talent, and partnerships: being sustainable is thus a real competitive advantage.

What is the importance of CSRD in the context of the Circular Economy?

A sustainability report with more detailed and transparent information increases companies’ awareness and understanding of the impacts of their operations. This can encourage them to adopt Circular Economy practices to achieve improved environmental performance. The information to be included within the sustainability report must meet the dual materiality: financial and environmental. Data on how business activities impact the environment and society, and how the environment and society may impact business activities, will have to be included.

The main innovation introduced by the directive is the integration of a mandatory standard, ESRS E5. This is focused on a company’s resource consumption and Circular Economy performance. As the Circle Economy carticle points out, the decision is perfectly consistent with European policies for the transition to a more sustainable economy. In fact, it shows that 77 percent of European sustainability reports include the Circular Economy, while in North America only 49 percent and in South and East Asia only 40 percent.

The standard requires the company to report circular performance based on inflows (inputs) and outflows (outputs) of resources, waste management following the waste hierarchy (defined in Directive 2008/98/EC) and overall contribution to circularity through recovery and recycling of products and materials according to the 9Rs model.

Consequently, in order to maintain its reputation and meet the demands of stakeholders and investors, a company will need to minimize the use of virgin raw materials and rethink the design of its products and services from a circular perspective as well.