The Corporate Sustainability Reporting Directive (CSRD) became law in the European Union on January 5, 2023, and is being rolled out in phases through 2028. The CSRD establishes specific environmental, social, and governance (ESG) reporting requirements for EU businesses, and replaces the Non-Financial Reporting Directive (NFRD) that was adopted in 2018.
Although the CSRD was created for EU-based businesses, there are some instances where it applies to U.S. companies.
Is the CSRD different from the SEC’s climate rules?
Although the U.S. Securities and Exchange Commission (SEC) has proposed similar reporting requirements, the CSRD is much stricter than the SEC’s proposed Climate Change Disclosure Rules. For example, under the CSRD, companies will need to report on additional things like risks related to water, biodiversity, ecosystems, and the value chain all based on “double materiality.”
When is the CSRD applicable to non-EU companies?
There are two general, overall categories of non-EU companies that will be required to follow the CSRD reporting requirements:
- Non-EU companies with securities on an EU-regulated market (although if a company only has debt securities listed in excess of EUR 100,000, that organization might be exempt).
- Non-EU companies with an annual net turnover in the EU that exceeds EUR 150 million for the last two consecutive financial years, and have an EU-based subsidiary that generated an annual net turnover of more than EUR 40 million the year prior.
Not sure if your business falls under this requirement? Check out Workiva’s CSRD guide for a full, in-depth look at this requirement, the challenges businesses may face, and recommendations for meeting reporting requirements.
CSRD exemptions
There are numerous exceptions to the CSRD reporting requirements, but they’re not exactly straightforward. The best way to figure out if you qualify for an exemption is to discuss the matter with an expert in the matter.
CSRD disclosure requirements
Under this directive, companies are required to disclose various information related to sustainability and business practices, including:
- A description of the company’s strategy, sustainability risks, and opportunities
- ESG goals and yearly progress reports
- ESRS-compliant sustainability statements
- A list of issues that impact how the company affects sustainability matters
- Processes that address the actual and potential adverse impacts of the company’s operations on sustainability
- Targets for greenhouse gas emissions
- EU taxonomy alignment data
- Plans to transition to a sustainable economy
- Measures taken to limit global warming that adhere to the Paris Agreement and to achieve climate neutrality by 2050
Keep in mind, there is a proposal to narrow the scope of these rules, so things might change slightly in the future.
How the CSRD is being rolled out
The CSRD is being implemented in four separate phases that aims to gradually include all in-scope businesses.
Here is the current timeline including which companies must comply by each target date.
Note that large companies are defined as those which meet at least two of the following requirements:
- A balance sheet in excess of EUR 20 million
- More than EUR 40 million in net turnover
- More than 250 employees
January 1, 2024
All large EU public interest entities that are already governed by the NFR, and large non-EU companies with more than 500 employees and securities on an EU-regulated market.
January 1, 2025
Large EU companies that don’t fall under the NFRD and large non-EU companies that are listed on any regulated EU-based market.
January 1, 2026
Some EU SMEs along with small credit institutions and captive insurance undertakings. Also, some non-EU SMEs listed on any regulated EU-based market.
January 1, 2028
Non-EU companies that meet the “EU Turnover Test.”
Next steps if you think your business falls under this scope
If you think your non-EU business might fall under the scope of the CSRD, you’ll want to consult with a team of experts to help you prepare to meet your obligations. While there is plenty of information available online, you really need a knowledgeable expert to guide you along the way. The CSRD is too complex to try to figure out on your own.
Once you start drafting your reports, it’s imperative to have them reviewed to make sure your data and narratives are accurate and appropriately expressed. Regulators look at these disclosures with extreme scrutiny, and omissions and fabrications can lead to a lawsuit.
The CSRD is a complex set of sustainability reporting requirements, but when you hire the right team to help, you can reduce your risk of making avoidable, costly mistakes.
Featured image provided by MART PRODUCTION; Pexels; Thanks!
