The acronym CSRD stands for Corporate Sustainability Reporting Directive and was drafted by the European Commission in April 2021. This new European regulatory framework for sustainability was published on December 16, 2022, in the Official Journal of the EU. CSRD is known as the Gold Standard for sustainability reporting frameworks as it considerably enlarges the scope of companies that must disclose sustainability information and brings forward new requirements.
The CSRD went into effect on January 5, 2023, and EU Member States have until early July 2024 (18 months from the effective date) to incorporate its provisions into national law. The directive sets forth the baseline, thus Member States may add provisions during this period but cannot eliminate any of the requirements in the CSRD.
The CSRD targets financial and non-financial companies covered by the Accounting Directive and the Transparency Directive, and falling into the following categories:
Given that the broad array of potential impacts from non-compliance with the CSRD may be far reaching — ranging from monetary fines to negative reaction of stakeholders — companies should discuss any potential non-compliance with legal counsel. Direct impacts may include a breach of certain contractual arrangements (including debt agreements) due to non-compliance with laws and regulations, and may also impact an entity’s ability to work with local, state, or national governments. In addition, companies should be aware that failure to comply may not only result in a qualified or adverse opinion on the sustainability report but may also impact the audit opinion on the financial statements. Auditing standards include requirements related to “other information” included in a document that includes an audit opinion. A material omission of information from the sustainability report would need to be disclosed in the financial statement audit opinion. In addition, intentional noncompliance with laws and regulations may have broader impacts on the audit of both the entity itself and its parent, if applicable. For example, noncompliance may impact the nature, timing, and extent of audit procedures, the auditor’s ability to rely on management’s representations, and the determination of whether there is a significant deficiency or a material weakness related to the control environment.
The CSRD reporting timeline is phased in, with different requirements based on company size and previous reporting obligations. Here’s a breakdown:
Who and When:
1. Complexity and Scope:
a) Extensive Reporting: The CSRD demands detailed reporting on environmental, social, and governance (ESG) factors across many areas, covering topics like climate change, human rights, and responsible production. Adapting to these expansive requirements can be complex.
b) Data Collection and Management: Gathering and integrating accurate data from various sources across the value chain can be time-consuming and challenging. The sheer volume of data points required (over 1,200) adds to the difficulty.
c) Standardization and Interpretation: The new European Sustainability Reporting Standards (ESRS) are still under development, leaving room for potential ambiguity and differences in interpretation. Companies need to stay updated and seek guidance to ensure compliant reporting.
2. Resource and Cost Implications:
a) Compliance Expenses: Implementing the CSRD can require significant investments in new technologies, staff training, and external support like auditors. This can be especially burdensome for smaller companies.
b) Internal Capacity and Expertise: Adapting internal processes and building employee expertise in sustainability reporting can be a challenge, especially for companies without prior experience.
3.Stakeholder Engagement and Assurance:
a) Identifying and Engaging Stakeholders: The CSRD emphasizes meaningful stakeholder engagement to understand sustainability impacts. This requires proactive outreach and effective.
b) Independent Assurance Costs and Challenges: Finding qualified auditors for mandatory third-party assurance may be challenging, especially for smaller companies. The cost of these services can also be significant.
4. Additional Challenges:
a) Greenwashing Concerns: Companies face scrutiny to ensure their reporting accurately reflects their sustainability efforts. Avoiding greenwashing is crucial.
b) Evolving Regulatory Landscape: The CSRD and related standards are subject to future updates and revisions, requiring companies to adapt their compliance approaches over time.
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