What is the Corporate Sustainability Reporting Directive (CSRD)?

What is the corporate sustainability reporting directive, otherwise known as the CSRD? Why is it so important for the financial future of the European Union?

CSR 🌱

 — 

6 min

 — 

August 12, 2022

person signing documents shot of hand

Table of contents

If other powerhouse countries and companies around the world were required to report their environmental and social impact, the world could be well on its way to global sustainability – and that is precisely what the Corporate Sustainability Reporting Directive, otherwise known as CSRD, aims to do for the European Union. 🇪🇺

But is the CSRD really effective in improving sustainability across large companies in Europe? Does the Corporate Sustainability Reporting Directive hold any potential to improve the environmental and social sectors of business throughout the European Union? 

 

What is the CSRD?

Corporate Sustainability Reporting Directive, definition

The CSRD, otherwise known as the Corporate Sustainability Reporting Directive – is a law in the EU that demands certain companies to share information on how they monitor and manage both social and environmental issues. 🌱

The Corporate Sustainability Reporting Directive is beneficial to investors, civil organizations, consumers, policy makers and stakeholders so that they can determine the environmental and social success of large companies. Ultimately, the CSRD influences these large businesses to instill sustainable business habits and seek balance and success in other sectors, such as environmental and social, rather than just the financial one.

What is the main goal of CSRD?

The main goal of CSRD is to increase the economic flow towards more sustainable business models throughout the European Union. 

Basically, the CSRD aims to accentuate the growing awareness of environmental, social and governance factors, otherwise known as ESG factors.

It has been shown that most companies do not strive to create transparency and therefore, the European Union feels it is necessary to implement regulations like the corporate sustainability reporting directive in order to provide companies with the proper incentive to increase their awareness towards the social and environmental impacts their company may have.

The European Union has always been a leader in environmental measures, and the CSRD helps to unify the European Union in the efforts to cultivate more sustainable business practices.

What are the key components of CSRD?

In order to be required to participate in the corporate sustainability reporting directive, the EU required, before the new updates made to the corporate sustainability reporting directive in April 2021,  that the reporting be required if a company has a large interest to the public and over five hundred employees.

This means that nearly twelve thousand companies around the EU were, and still are, required to participate in the CSRD.

These companies can include insurance companies, banks, companies garnered towards environmental projects, companies dedicated to social rights, human rights, or the general well-being of employees, companies  committed to anti-corruption, companies pertaining to public interest entities, and companies dedicated to diversity in the employment sector. 

What is the difference between NFRD and CSRD?

There are a multitude of differences between the NFRD, otherwise known as the non-financial reporting directive, and the CSRD. In general, the CSRD concerns more companies than the NFRD due to it’s new specificity that is only expected to increase with the new measures being implemented to improve sustainability reporting.

For instance, only large companies with over five hundred employees are obliged to report to the NFRD, whereas any large company that pertains to at least two of the three: 250 or more employees, a forty million euro revenue, or twenty million euros in assets – must participate in the CSRD. 

While the NFRD has been in action since 2018 and the CSRD is newer, proposing that companies have 2023 to comply – the CSRD is expected to increase its current expectations on sustainability reporting over time. Therefore, it could be said that the CSRD is more innovative and contemporary than the NFRD.

The corporate sustainability reporting directive adheres to a widespread audience of the business sector than the non-financial reporting directive does. The NFRD only concerns 11,600 companies, whereas the CSRD demands sustainability reports from nearly 50,000 businesses within the European Union – which means the CSRD concerns nearly three-quarters of all businesses in the European Economic Area.

With the NFRD, companies are required to publicly delineate five key elements of: their efforts to protect the environment, how they treat their employees, how they plan to adhere to general human rights, how they mitigate corruption or bribery, and how they promote diversity in their work environment. In conjunction with the NFRD, companies can demonstrate their commitment to the following categories by sharing their policies, potential outcomes of said policies, risk factors, and their key performance indicators. 

On the other hand, the CSRD, in addition to the demands illustrated by the NFRD – the CSRD also requires companies to depict their sustainability risk, and their companies overall impact on both society and the environment.

Those that are a part of the corporate sustainability reporting directive are also obligated to carefully explain financial partnerships to stakeholders, set new environmental and social targets to ensure improvement, share any information that could impact said progress, and to ensure that their sustainability reports for the CSRD adhere to the regulations disclosed in the EU taxonomy regulation and SFDR, otherwise known as the Sustainable Finance Disclosure Regulation.

Clearly, the corporate sustainability reporting directive has numerous additional requirements in comparison to the non-financial reporting directive – but it’s all a part of the European Union’s efforts to improve sustainability in the business sector.

Other differences between the NFRD and the CSRD include the fact that non-financial reporting directives do not need to be audited by a third party, whereas the corporate sustainability reporting directive does.

Also, the NFRD does not need to accommodate digital reporting whereas the CSRD does. Reporting for the NFRD can be done online in a PDF format, but reporting for the CSRD needs to be done in a more specific electronic format in order to comply with the regulations set forth by the ESEF – otherwise known as the European Single Electronic Format.

What are the new rules of the CSRD?

As of April 2021, the commission of the European Union proposed amendments to the current corporate sustainability reporting directive and seeks to improve the existing requirements of the non-financial reporting directive from 2014. 

The new corporate sustainability reporting directive demands more specific reports from large companies, and asks them to share multivarious sustainability issues including environmental, social, and human rights – as well as various governance factors that influence these sectors.  

The new CSRD also requires companies to obtain a certificate before reporting their current sustainability measures as an attempt to ensure greater transparency of the sustainability information provided. This will be done by requesting proof of the certificate in a pre-dispositioned section of the sustainability reports.

The European Financial Reporting Advisory Group, otherwise known as the EFRAG, has provided the standards of the new CSRD. 

The new CSRD will demand even more companies to be required to report the social and environmental issues within their business, and will include any company listed on regulated markets except for micro-enterprises. All reported information regarding the corporate sustainability reporting directive must be audited, and provide more detailed information to pertain to the new EU sustainability reporting standards. In addition, companies will be required to “tag” their information digitally so that the reports can be easily interpreted through machines. 

The new improvements and regulations required in the new CSRD are beneficial to all consumers in the EEA, or European Economic Area. This is because all consumers in the EEA will now have more information on the environmental and social impact of whatever product or service they are purchasing. This helps to create greater transparency, prevent future greenwashing, and establish overall improved goals towards greater sustainability.

Does CSRD help to reduce climate change?

While the corporate sustainability reporting directive doesn’t directly do anything to make large companies reduce their carbon emissions, it still can make a difference in the fight against climate change. 

This is because if a company is given the imperative to report the environmental and social impact, it nearly forces them to improve corporate social responsibility and make their business more sustainable. If their business model has to change in order to prevent greenwashing and improve upon environmental and social measures, then they are likely to indirectly improve upon their carbon footprint as well – and ultimately help to mitigate climate change. 

For example, if a company is encouraged to improve their sustainability – they may find that their consumers aren’t a fan of plastic packaging. If the company in question changes their packaging to be recyclable, then consumers will be content, the corporate sustainability reporting directive will be satisfied, and measures to reduce waste and further climate change will all be taken care of at the same time.

What are the pros and cons of the Corporate Sustainability Reporting Directive?

The corporate sustainability reporting directive, or the CSRD – is one of the most detailed sustainability reporting systems in the European Union to date. But implementing the CSRD does it come at a cost?

The pros and cons of the corporate sustainability reporting directive can be viewed both ways. For instance, many see it as a pro that the corporate sustainability reporting directive requires nearly 50,000 companies within the EEA to comply, but it could also be seen as a negative – as it would mean even certain small businesses would have to comply with the sustainability reports and regulations set forth by the CSRD. While it’s good for creating transparency and for consumers in the European Union to know exactly what they're financially contributing towards, it could prove even more difficult for businesses to get their feet off of the ground. 👟

This is because sustainability efforts often require more thought processes: like taking the time to hire with human rights and diversity in mind. Many new companies that are still economically establishing themselves don’t have the incentive to keep sustainability measures in mind when cultivating a new business – the most imperative thought is to just get started. Therefore, it could be said that the CSRD could prolong newer businesses from achieving financial success. 

Another consequence that could be viewed as both a flaw and positive for the CSRD is the fact that companies that don’t comply with the CSRD might be subject to a fine.

Again, this could be viewed as a positive – seeing that it really will be compulsory to comply with the sustainability reports required by the CSRD. On the other hand, this could be seen as a fiscal threat for some companies – who could be living in fear of being fined simply for forgetting one of the many specific elements required in the process of the corporate sustainability reporting directive. 📖

Can CSRD improve worldwide sustainability?

Given the CSRD is only applicable to businesses within the European Economic Area, the corporate sustainability reporting directive isn’t going to have a direct global impact on sustainability.

However, that isn’t to say that the CSRD doesn’t hold the potential to influence other nations and regions of the world to require the same sustainability reporting as the European Union does. If the EU can illustrate the environmental benefits of regulations like the CSRD, the world could be well on its way to a more sustainable future.

What about Greenly?

If reading this article about the corporate sustainability reporting directive, otherwise known as the CSRD, has made you interested in reducing your carbon emissions to further fight against climate change – Greenly can help you!

Greenly can help you make an environmental change for the better, starting with a carbon footprint assessment to know how much carbon emissions your company produces.

Click here to learn more about Greenly and how we can help you reduce your carbon footprint. 

🚀 If you enjoyed reading this article, here are a few more :

Help us spread awareness

by
Stephanie Safdie

Join hundreds of companies trusting in Greenly with their ecological transition