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Frequently Asked Questions about CSRD

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Co-authored by Rohit Adlakha and ESGTree

What is CSRD?

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.

Who does it impact?

The CSRD targets financial and non-financial companies covered by the Accounting Directive and the Transparency Directive, and falling into the following categories:

  • Companies listed on European regulated markets, including listed SMEs (micro-enterprises identified by the Accounting Directive are excluded);
  • Other large European companies, listed or not, exceeding two of the three defined thresholds (250 employees, 40 million euros in revenue, and/or 20 million euros in total assets);
  • Non-European companies whose subsidiaries or branches have revenues exceeding 150 million euros within the European Union.

What are the legal implications?

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.

When is reporting required and by who?

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:

  • Large public-interest companies (over 500 employees) already subject to NFRD
  • Compliance: Financial year 2024 (reports due in 2025)
  • Large companies not previously subject to NFRD (over 250 employees and/or €40 million turnover and/or €20 million in total assets)
  • Compliance: Financial year 2025 (reports due in 2026)
  • Listed SMEs and other undertakings
  • Compliance: Financial year 2026 (reports due in 2027)
  • Opt-out option: SMEs can choose to opt out until January 1, 2028.

What are the challenges that could come up?

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.

What are the risks?

  1. Increased Costs and Complexity: Implementing the CSRD requires investments in data collection, reporting systems, staff training, and external services like auditors.
  2. Greenwashing Concerns: Companies face scrutiny to ensure their reported sustainability achievements match their actual practices. Stringent regulations and stakeholder attention can be challenging to navigate.
  3. Data Management and Quality: Gathering and ensuring the accuracy and reliability of vast amounts of sustainability data across the value chain can be complex and time-consuming. Deficient data can lead to inaccurate reporting and reputational damage.
  4. Evolving Regulatory Landscape: The CSRD and related standards are still under development and subject to future changes. Companies need to adapt their compliance approaches as the regulations evolve.
  5. Limited Expertise and Resources: Smaller companies might lack the internal expertise and resources to effectively implement the CSRD, requiring significant external support, adding to costs and potential dependency.

What are the opportunities?

  1. Enhanced Reputation and Brand Value: Demonstrating strong sustainability performance through transparent and comprehensive reporting can enhance brand reputation, attract ethical investors, and strengthen stakeholder relationships.
  2. Improved Risk Management: Implementing robust sustainability practices can identify and mitigate environmental, social, and governance risks, leading to long-term cost savings and operational efficiency.
  3. Innovation and Competitive Advantage: The CSRD can drive innovation in sustainable products, services, and processes, potentially opening up new markets and creating a competitive edge.
  4. Attracting and Retaining Talent: Transparency and commitment to sustainability can attract and retain talent who value purpose-driven organizations, contributing to employee engagement and morale.

ESGTree provides powerful cloud-based data solutions to help private equity (PE) and venture capital (VC) firms gather, collect, analyze, benchmark and report their ESG data and that of their portfolio companies. Our carbon calculator, customizable and automated ESG frameworks, multi-level report viewing, trends analysis dashboard, and other features turn ESG into a value creation tool rather than a reporting burden.

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References: EY, PWC, IBM, Grant Thornton, Deloitte, KPMG

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Summary

Share:

What is CSRD?

Who does it impact?

What are the legal implications?

When is reporting required and by who?

What are the challenges that could come up?

What are the risks? What are the opportunities?

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