EU CSRD Is Now In Force
The Corporate Sustainability Reporting Directive (CSRD) came into force on January 5, marking a significant milestone for ESG reporting in Europe and worldwide. The directive requires all large and listed companies operating in the European Union to publish regular reports on their environmental and social risks and the impacts of their activities on people and the environment. CSRD significantly expands and improves the existing reporting requirements of the EU Non-Financial Reporting Directive (NFRD).
In terms of reporting standards, the European Financial Reporting Advisory Group (EFRAG) published a set of draft standards in November 2022 known as the European Sustainability Reporting Standards (ESRS) to ensure consistency in sustainability reporting across the EU. However, the draft standards are subject to change and the European Commission aims to finalize them by June 2023 after consulting with EU supervisory bodies like the European Securities and Markets Authority (ESMA). Until then, companies will have to prepare as best they can based on the draft standards and stay tuned to any changes.
Corporate Sustainability Reporting Directive (CSRD) includes references to several existing sustainability reporting frameworks and standards, including the Global Reporting Initiative (GRI), the Non-Financial Reporting Directive (NFRD), and the EU Taxonomy.
The CSRD proposes that companies use recognized reporting frameworks and standards when reporting on sustainability issues. The GRI is one such framework that is widely used by companies around the world to report on their sustainability performance. The CSRD recognizes the importance of the GRI and other recognized reporting frameworks and encourages companies to use them when reporting on sustainability issues.
The NFRD is an existing EU directive that requires certain large companies to report on non-financial information, including ESG issues. The CSRD aims to replace the NFRD and expand the reporting requirements to cover all large companies and all listed companies in the EU, regardless of where they are registered. The CSRD will also introduce mandatory sustainability reporting standards, which will make reporting more consistent and comparable across different companies.
The EU Taxonomy is a framework that provides a classification system for sustainable economic activities. It aims to help investors identify which economic activities contribute to environmental objectives, such as climate change mitigation and adaptation. The CSRD references the EU Taxonomy and proposes that companies report on their alignment with the Taxonomy when reporting on sustainability issues.
Overall, the CSRD aims to improve the quality and comparability of sustainability reporting by companies in the EU, and it recognizes the importance of existing reporting frameworks and standards, such as the GRI, the NFRD, and the EU Taxonomy.
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EU member states have the responsibility to adopt the reporting standards and decide how to incorporate CSRD into their national law. This creates uncertainty for affected companies since different countries may have different approaches to CSRD and different sanctions for noncompliance. After the Commission formally adopts the standards, each country will need to transpose CSRD into their national laws, and the deadline for this is 18 months after the standard came into force. This leaves little time for affected companies to prepare for the first reporting deadline in 2025.
The new CSRD rule applies not only to European companies but also to any global company with significant operations in the EU. This includes many US-based companies that are not currently subject to mandatory ESG reporting requirements. US-based companies covered by the new rules could be required to produce their first reports as early as 2026 for the fiscal year 2025. It is important to note that simply getting up to speed with the US SEC's proposed ESG reporting requirements won't be enough since these differ substantially from CSRD.
The Corporate Sustainability Reporting Directive (CSRD) applies to all large and listed companies operating within the European Union (EU) and those with significant operations in the EU. It is not mandatory for countries that trade with the EU, but companies based outside of the EU may still be subject to the requirements if they meet the criteria. If a company from a non-EU country has a subsidiary or branch operating in the EU that meets the criteria, it will be required to comply with CSRD. The EU is also encouraging global companies to voluntarily comply with the CSRD standards to ensure consistency in sustainability reporting.
With the CSRD now in force, companies must immediately shift their focus from readiness to compliance. Collecting relevant ESG data, implementing new processes and controls, and aligning current reporting with the upcoming requirements are all top priorities. While there is still uncertainty surrounding the final reporting standards and their implementation in different EU countries, one thing is clear: mandatory ESG reporting requirements are here to stay, and companies must make ESG reporting a part of their core business strategy.
https://finance.ec.europa.eu/publications/reports-development-eu-sustainability-reporting-standards_en