The CSRD links measures to achieve the objectives of the European Green Deal and the Action Plan on Sustainable Finance. From 2024 onwards, more companies will be required to comply with this directive each year. Who will be affected by the CSRD and when?
On January 5, 2023, Directive (EU) 2022/2462 of the European Parliament and of the Council of December 14, 2022, amending Regulation (EU) No. 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU as regards reporting of information on sustainability by companies (Corporate Sustainability Reporting Directive, hereinafter referred to as the "CSRD").
Why was the CSRD adopted?
The CSRD links measures to achieve the objectives of the European Green Deal and the Action Plan on Sustainable Finance. It introduces a system for assessing the impact of a company's economic activity on the environment, the social environment and corporate governance, with the aim of ensuring transparency that will help investors, analysts, consumers and other stakeholders to better assess the sustainability performance of EU companies, as well as the related business impacts and risks.
In 2014, Directive (EU) 2014/95 of the European Parliament and of the Council on the disclosure of non-financial information and information relating to diversity (Non-financial reporting directive, hereinafter referred to as the "NFRD Directive") was adopted. The NFRD, together with Regulation (EU) 2020/852 of the European Parliament and of the Council on establishing a framework to facilitate sustainable investment of 18 June 2020 (hereinafter referred to as the "Taxonomy Regulation") are the main components of the sustainability reporting requirements on which the EU's sustainable finance strategy is based. The CSRD builds on the existing requirements of the NFRD, extending and strengthening the rules on the disclosure of non-financial sustainability information.
The current free choice of standards through which companies comply with ESG (Environmental, Social, Governance) reporting will be replaced by mandatory European Sustainability Reporting Standards (ESRS). The ESRS are sustainability reporting standards within the EU and are an integral part of the CSRD.
According to the European Commission, the new rules are intended, among other things, to ensure that investors and other stakeholders have access to the information they need to assess the investment risks arising from climate change and other sustainability issues, as well as transparency on the impact of companies on people and the environment.
Who will be affected by the CSRD and when?
The deadlines for the first non-financial sustainability reporting are set for the following years, depending on the category of companies:
2024: large public-interest entities with more than 500 employees will be required to disclose sustainability information in 2025 for the 2024 accounting period (the definition of public-interest entities is set out in Section 2(14) of Act No. 431/2002 Coll. Section 2(14) of Act No. 431/2002 Coll. Act on Accounting, as amended, according to which public-interest entities include, for example, banks, branches of foreign banks, insurance companies, health insurance companies, management companies, pension management companies, securities dealers, etc.),
Year 2025: large companies that meet 2 of the following 3 criteria will be required to disclose sustainability information in 2026 for the 2025 accounting period
- turnover of more than EUR 40 million
- assets of more than EUR 20 million
- more than 250 employees,
2026: small and medium-sized companies that have issued securities traded on an EU stock exchange will be required to disclose sustainability information in 2027 for the 2026 accounting period,
2028: companies from third countries with a turnover exceeding EUR 150 million in the EU will be required to disclose sustainability information in 2029 for the 2028 accounting period.
ESG reporting or what needs to be reported in terms of sustainability
Until now, companies required to report on corporate sustainability have been able to choose the standards and scope of reporting. The CSRD aims to provide clarity and certainty on what sustainability information should be reported through mandatory standards, i.e. through ESRS standards. At the same time, the CSRD should make it easier to obtain information from suppliers, clients and investees.
The draft ESRS standards were developed in 2022 by the European Financial Reporting Advisory Group (EFRAG). EFRAG merged existing non-financial reporting requirements with those of the European Green Deal and the EU taxonomy. This set of standards was adopted by the European Commission on July 31, 2023. The ESRS provide a framework for what indicators companies must report and how they must report them in order to comply with the CSRD requirements.
There are currently a total of 12 ESRS standards, which contain detailed information and metrics on sustainability issues in four categories. These four categories include two cross-cutting standards and 10 thematic standards. Each of these focuses on environmental, social or governance topics.
Cross-cutting standards: general principles and general disclosures.
Environmental standards: climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy.
Social standards: own workforce, workers in the value chain, affected communities, consumers and end users.
Governance: business conduct.
Cross-cutting reporting is required of all organizations covered by the CSRD, while environmental, social, and governance reporting is mandatory for those companies that consider them material.
General requirements
ESRS 1 is about creating conditions for sustainability reporting. It provides mandatory terms and principles for the preparation of sustainability reports under the CSRD. Companies covered by the CSRD must disclose material information about their sustainability-related impacts, risks, and opportunities in accordance with the applicable ESRS.
According to ESRS 1, certain sustainability information must be disclosed regardless of the company's assessment of its materiality. This includes information on governance, strategy, management of impacts, risks and opportunities, as well as metrics and targets related to climate change.
It is important to note that although ESRS 1 mandates these disclosures, companies may omit specific requirements and data if they can achieve the reporting objective by alternative means.
Sustainability information is valuable when it can predict future performance or confirm existing performance. Stakeholders, i.e. those who may be affected by or affect a company's activities, play an important role in determining this value.
Companies must identify two main groups of stakeholders: affected stakeholders and users of sustainability reports. Affected stakeholders are those whose interests could be positively or negatively affected by the company's activities. Users of sustainability reporting include a wide range of stakeholders, including investors, creditors, business partners, trade unions, civil society organizations, and others.
General disclosures
ESRS 2 builds on the foundations laid in ESRS 1. It sets out sustainability disclosure requirements that are universally applicable. It includes a general description of the company, an overview of its business activities, and specific disclosures on compliance issues. The standard covers various aspects, including: the value chain, uncertainty in estimates, changes in the preparation and presentation of sustainability information, prior period errors, disclosure of strategy and governance, assessment of the significance of sustainability impacts, risks and opportunities.
Double materiality
Double materiality means that companies must view their sustainability aspects from two perspectives. On the one hand, they must assess the company's impacts from an "inside-out" perspective. This dimension is called impact materiality. Impact materiality refers to the impact that companies have or may have on sustainability issues (e.g., carbon emissions, workforce diversity, respect for human rights). On the other hand, companies must include financial materiality in their assessment from an "outside-in" perspective. Financial materiality refers to the impact that sustainability issues have or are likely to have on a company's finances (e.g., cash flows, risk, access to finance).
Based on the double materiality principle, companies will have to address their positive, negative, potential, actual, short-term, medium-term, and long-term impacts on the environment and society. At the same time, the effects of external factors on the company's own profitability are taken into account.
All sustainability reports must therefore meet the double materiality standard, i.e. companies must report on:
- the materiality of the impact and
- the financial materiality.
Taxonomy Regulation
The EU taxonomy is enshrined in the Taxonomy Regulation. Reporting under the CSRD must be in line with the EU taxonomy. Under the Green Deal, the European Union has committed to achieving climate neutrality by 2050, and the transition to a zero-emission economy will require a large amount of public and private funding. The taxonomy of sustainable activities is intended to help mobilize private capital for sustainable and low-carbon projects.
The EU taxonomy is primarily a tool for classifying sustainable economic activities. It aims to contribute to the transparency of investments and thus to more informed investment decisions. The EU taxonomy gives priority to environmentally friendly and sustainable business practices, but does not in itself prohibit investment in activities that do not meet the taxonomy criteria. Nor does it specify the specific technologies that would be necessary to achieve the classification criteria, i.e. it enshrines the principle of technological neutrality.
The EU taxonomy defines six main environmental objectives that are used in the assessment. According to the EU taxonomy, a green activity is one that contributes significantly to one of the six environmental objectives, namely: climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.
The conditions for fulfilling the taxonomy are contributing to at least one of the above objectives, not significantly harming other objectives, and a minimum guarantee of investments, i.e. i.e. investments should meet minimum guarantees in other areas of business – not be subject to corruption, not use child labor, not discriminate, etc.
The taxonomy primarily concerns financial market participants, for whom it should facilitate reporting on the environmental objectives to which their investments contribute and on the share of investments that are in line with the taxonomy. The taxonomy also applies to companies that are already subject to non-financial reporting requirements (in the environmental or social field) and to the EU and Member States for which it may be useful and indicative in setting standards for environmentally sustainable financial products.
Preparation for the CSRD and ESG reporting
The scope of the new requirements and rules relating to the disclosure of information on corporate sustainability is complex. ESG expresses a company's creditworthiness, which is an indicator of the company's direction and one of the basic criteria for assessing a company as a suitable candidate for investment. Companies should therefore start preparing well in advance to ensure that their initial reporting is successful and timely. Building internal knowledge, analyzing ESRS gaps, and developing a plan of action to be implemented gradually all require preparation. Reporting under the CSRD also requires numerous external links with stakeholders that are likely to extend beyond the company's boundaries, and companies will also have to take into account that it will be necessary to allocate sufficient financial and human resources to successfully manage ESG reporting. Companies should not underestimate the importance of reviewing the new EU standards in a timely manner and preparing for reporting, and should use the remaining period to prepare for compliance with the CSRD requirements.
For more information on our services in the area of CSRD and ESG reporting, please visit our website in the T | R | Csection.
