Since January 1, 2024, the Corporate Sustainability Reporting Directive (CSRD) came into force. It replaces the Non Financial Reporting Directive (NFRD) and will progressively require more than 50000 companies in Europe to establish extra-financial reporting on their CSR implications, i.e. environmental, social and societal implications.
In addition to extending this requirement to a greater number of companies, CSRD allows for the collection of more complete and accurate information. What are the new obligations of this European directive ? How do you prepare for it? Which businesses are affected? Overview of the CSRD, its evolutions and its implementation.
To find out if your company will have to meet the standards imposed by the directive and when, discover our summary table now (section 2.3).
1. From NFRD to CSRD: understanding the changes
The CSRD replaces the NFRD!
The Corporate Sustainability Reporting Directive is a European directive signed on June 21, 2022, then voted on in Parliament in November 2022.
It came into force on January 1st 2024 and requires the companies concerned to communicate annually on their information relating to CSR issues.
1.1 What will change with CSRD
The fixed CSRD standards and obligations that companies must insert every year in extra-financial reporting. More specifically, it requires them to monitor and publish, in addition to their financial statements, an ESG balance sheet (environmental, social and governance), thus giving as much importance to the sustainable dimension as to the economic dimension of their activities!
More accurate and complete information
As for the NFRD, this reporting is therefore called “extra-financial” because it concerns monitoring non-monetary information, in particular the impacts and risks on the environment, society, human beings and the entire business ecosystem. But the purpose of the new directive is to improve precision and reliability information that was previously collected by the NFRD, and to standardize it in a report published according to a European standard.
Introduction of the concept of double materiality
Double materiality is the key point of CSRD. All ESG criteria (climate change, biodiversity, social issues, governance, etc.) will be subject to a double materiality assessment:
- financial materiality: taking into account the positive and negative impacts of sustainability issues on the financial performance of the company.
- impact materiality: taking into account the positive and negative impacts of the company on its economic, social and natural environment.
This double materiality analysis should thus enable the company to identify the main themes on which the external environment or its activities represent impacts, risks or opportunities in terms of ESG sustainability. If this is significant, these impacts, risks or opportunities should be included in the company's extra-financial reporting. Clearly, the double materiality analysis is the starting point for the reporting provided by the CSRD.
1.2 Who is concerned?
While the NFRD only concerned large companies with more than 500 employees, the CSRD concerned companies who meet at least 2 of the following 3 criteria:
- more than 250 employees
- 25 million euros in balance sheet
- 50 million euros in turnover.
But also the following structures:
- Small and medium-sized enterprises (SMEs) listed on the stock exchange (excluding micro-enterprises with less than 10 employees);
- Non-European companies with an annual turnover of more than 150 million euros, on the EU market. This also applies to the subsidiaries of these groups, which will have to communicate about the CSR approach of their parent company.
Note: for a group with subsidiaries, the thresholds mentioned above should be considered at the group level if the group publishes consolidated financial statements. Reporting must therefore be done at the consolidated level of the parent company. In this case, subsidiaries benefit from an exemption from reporting.
However, they must indicate certain information: exemption statement, name and seat of the parent company that publishes the sustainability report and the link to the consolidated group management report. This same exemption applies to European subsidiaries of parent companies established outside the EU and which publish a sustainability report in accordance with sustainability standards equivalent to those requested by the European Commission.
Please note, however, this exemption does not apply to subsidiaries that are large listed companies.
1.3 Good news for the climate!
By encouraging many companies to write more detailed reports on their ecological impacts, the CSRD encourages them above all to adopt a sustainable development approach.
It also encourages all stakeholders to recognize successful companies on this point and not only on the financial dimension, and helps them better equipped to deal with climate risks coming soon.
The transparency, accuracy and accessibility of information related to their sustainability should also help them create a relationship of trust with their consumers. One of the purposes of the CSRD is in fact to fight against greenwashing and to observe the real progress made by companies in terms of sustainable development.
In short, we can only welcome Sami to see companies thus led to participate in the ecological transition, and that certain aspects - often reserved for large companies with more than 500 employees, such as the carbon footprint - are now a matter for everyone.
2. Criteria for applying the CSRD
2.1 The ESRS
The ESRS, these are the European Sustainability Reporting Standards, in other words the European reporting criteria. These are one of the major pillars of this text and its application. They should make it possible to “dictate” the reporting method for all companies and thus to harmonize publications to make them more transparent and more easily comparable.
There are 12 ESRS, covering the 3 ESG themes: environmental, social and governance. Here they are:
While EFRAG initially recommended exhaustive extra-financial reporting, with the mandatory consideration of standards related to climate change (ESRS E1) and company employees (ESRS S1), the European Commission chose to simplify the text. As a result, climate change and social issues are no longer mandatory in this version. But they remain subject, just like most criteria, to a double materiality assessment. This analysis and the results will decide whether the company should incorporate these criteria into its reporting.
Only the “General Disclosures” included in ESRS 2 will be mandatory for all companies.
2.2 Carbon indicators in ESG reporting!
As you have seen, in the 12 reporting standards, 5 are devoted to the environmental theme, including one on climate change (ESRS E1).
The objectives of this standard include:
- To understand how a company's activity has a positive or negative impact on climate change.
- To understand the company's past, current, and future mitigation efforts to meet the Paris Climate Agreement and the goal of limiting global warming to 1.5 degrees.
- To understand the nature, type and extent of risks and opportunities resulting from the impacts and dependencies of the company on global warming
- To understand the short, medium and long-term financial effects resulting from the impacts and dependencies of the company on climate change.
Like all ESRS standards, the one on climate change is based on information requirements, qualitative or quantitative. In other words, data to be collected in order to then analyze and potentially publish them. This is what the European Commission calls Disclosure Requirements (DR).
The climate change standard has 9 DRs, here are some of them:
- Obligation to disclose company greenhouse gas emissions, scopes 1, 2 and 3.
- Obligation to disclose the company transition plan for climate change mitigation
- Obligation to disclose the mitigation and adaptation actions implemented by the company and the resources allocated to them.
- Obligation to disclose the climate goals taken by the company
- Obligation to disclose the potential financial effects of physical climate risks and transition risks
For each DR, data points are to be collected and presented. It can be narrative, semi-narrative, or even monetary data. Some are voluntary. For the ESRS E1 Climate Change, the European Commission has listed 220 data points. You will find them in this table, as well as all those associated with other ESRS.
Companies can therefore anticipate them now, and prepare for CSRD by carrying out their carbon footprint and implementing a strategy to reduce greenhouse gas emissions and adapt to climate change.
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2.3 When should you establish your company's extra-financial reporting?
Here is a summary of the years during which you will have to produce and report your reports according to the size and type of your company.
Please note: your reporting is based on the year of your activities last year. For example, if you have to report in 2025, you will have to refer to your fiscal year 2024. And so on...
However, the European Commission has introduced several transitional measures and progressiveness in the application of certain standards or global reporting for certain companies. Here are a few examples:
- Companies with less than 750 employees can postpone the publication of their Scope 3 greenhouse gas emissions by one year.
- These same companies may delay the application of the biodiversity standard by two years as well as the application of the standard on biodiversity as well as that on social issues covering workers in the value chain.
- Will all companies be able to postpone taking into account the anticipated financial effects of physical and transition climate risks by one year.
To find all of these reliefs and the timetable for the gradual application of certain standards, you can refer to the table prepared by the European Commission, section 10 in the ESRS 1 standard, Appendix C (page 30 of the Annex document)
2.4 Consequences of a bad application of the CSRD
Penalties for infringements are defined by each Member State.
France thus plans to:
- a fine of 3750 euros in the event of non-publication of the report or the publication of partial or erroneous information
- a fine of 30,000 euros and up to 2 years in prison in case of non-audit of the extra-financial report
- a fine of 75,000 euros and up to 5 years in prison in the event of hindrance to auditors' verifications or controls
Moreover, not complying with the obligations of the CSRD also means giving up to its many benefits companies committed to a CSR approach have better competitiveness and talent retention, but also make financial savings on non-renewable resources. In short: to anticipate the European directive is not only to respect the law, it is also to make a strategic choice.
3. Our advice on preparing for the CSRD
3.1 Anticipate changes of ESG reporting standards
The application of CSRD is shaping up to be a major challenge for businesses in 2024 and in the years to follow. It is therefore strongly recommended that companies quickly anticipate changes, especially for those that are newly subject to non-financial reporting obligations!
You can start right now to analyze your impact on the environment and prepare your CSR strategy by following these different steps:
- Realize the carbon footprint of your company ;
- Start a dialogue with stakeholders (collecting information from suppliers, looking for subcontractors in a low-carbon approach, etc.);
- Seek external skills to carry out the carbon footprint, the monitoring of ESG criteria and the CSR strategy.
3.2 Where to turn? or How to get support?
Part of the reporting imposed by the CSRD and that you can easily anticipate is the carbon footprint.
Our platform can precisely assist you in this task by providing you with:
- A software that calculates your greenhouse gas emissions, simplifies and automates data management, from collection to monitoring;
- Experts to advise you and offer you a solid strategy for reducing your emissions;
- Trusted partnerships to implement your low-carbon strategy.
- And many other resources to make your environmental commitment a reality.
Conclusion
Now you know what to expect with CSRD. This European directive will mark a real turning point in the climate commitment of many companies, especially those that have previously fallen through the cracks...
But while companies already subject to the NFRD will be sufficiently prepared, this will not necessarily be the case for the 40,000 other companies soon to be concerned. The latter therefore have any interest in anticipating and evaluating the impacts and risks of their activities on ESG criteria now.
To make sure you don't miss out on your obligations, start now to measure your greenhouse gas emissions !
To understand everything at CSRD, here are other particularly useful contents:
- The 25 questions that all businesses ask themselves about CSRD
- ESRS standards: understanding European reporting criteria
- CSRD: understand everything about the ESRS E1 “Climate Change” standard
- Double materiality analysis: the basis of the CSRD
- ESRS application guide for French companies, ANC, December 2023
- The ESRS checklist
- The table of expected data points for each ESRS
- First version of the ESRS adapted to European SMEs not affected by the CSRD, EFRAG, November 2023
- Implementation guidance for materiality assessment, EFRAG, November 2023
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