What is CSRD?

What is CSRD? It’s a standard of reporting in the European Union which significantly impacts many companies’ ESG commitments.

As sustainability becomes an increasingly central focus for global commerce, the regulatory landscape is flexing its muscles and catching up. In Europe, that evolution means lawmakers are moving on from mere “encouragement” and going for full accountability. 

The result is CSRD—or the Corporate Sustainability Reporting Directive—and it’s crucial for corporate boards across the continent to understand.

Here’s a quick guide to explain the very basics.

CSRD is a directive by the European Union designed to standardise how European companies report on sustainability-related information. 

According to the EU, the directive “modernises and strengthens the rules concerning the social and environmental information that companies have to report.”

CSRD requires companies to disclose detailed information on operating and managing social and environmental challenges. This includes reporting on sustainability risks and opportunities, the impact of the company’s operations on the environment, human rights, and diversity, among other ESG criteria.

It’s a type of legal mechanism in the EU designed to reflect the many differences between member states. 

The EU also has straight-up “laws” that function like any other jurisdiction. Directives are a more subjective way to achieve the same goal. 

Essentially, laws are the EU’s way of saying, “these are the rules.” Directives are the EU’s way of saying, “this is the goal we want to achieve; go make your own rules to ensure you achieve it.” 

CSRD applies to “large companies” and any small and medium-sized enterprises (SMEs) that are listed on European stock exchanges. Each of these two groups is specifically defined: 

• A business is a “large company” if it meets two of the following three criteria
  • More than 250 employees.
  • A turnover exceeding €40 million.
  • Total assets exceeding €20 million.

• SMEs must also meet two of three criteria:
  • More than 50 employees.
  • A turnover exceeding €8 million
  • Total assets exceeding €4 million

It also applies to any non-EU company with a net turnover of €150million inside the EU.

In many cases, yes, given the rule described above. This is especially important for boards in countries like the UK, the US, and Canada, the home nations of global brands that are popular in Europe and could easily meet the turnover threshold.

CSRD was introduced because EU lawmakers generally strongly support ESG-related policies, such as combatting climate change, reporting on emissions, and achieving a net-zero economy. 

In their eyes, and the eyes of many experts, such goals mean nothing without standardised, detailed reporting. In order to achieve this, the bloc has implemented CSRD. 

The CSRD was introduced to address several key challenges and gaps identified in the previous Non-Financial Reporting Directive (NFRD):

Boards of directors need to be acutely aware of the implications of the CSRD and take proactive steps to ensure compliance. Here are some key considerations:

1. Compliance requirements: Boards must understand the specific reporting requirements under the CSRD and ensure their companies have the necessary processes and systems to collect, verify, and report the required data.
2. Integration with business strategy: Sustainability reporting should not be considered a mere compliance exercise. Boards should integrate sustainability considerations into the company’s overall strategy and ensure that ESG goals are aligned with business objectives.
3. Stakeholder engagement: Boards should prioritise engagement with critical stakeholders, including investors, employees, customers, and regulators, to ensure their sustainability reporting meets stakeholder expectations and regulatory requirements.
4. Risk management: The CSRD will require companies to disclose sustainability risks, which means that boards need to have a robust risk management framework in place to identify, assess, and mitigate ESG-related risks.
5. Ongoing monitoring and adaptation: As the regulatory environment evolves, boards must stay informed of changes and updates to the CSRD and other related regulations. This requires continuous monitoring and, where necessary, adapting the company’s reporting practices.

The introduction of the Corporate Sustainability Reporting Directive (CSRD) marks a significant shift in how companies are expected to report on their sustainability efforts. With its broader scope and stricter requirements, the CSRD is set to enhance transparency, accountability, and comparability in sustainability reporting across the EU and beyond. 

Boards of directors must be proactive in understanding and implementing the necessary changes to comply with this directive, ensuring that their companies meet regulatory requirements and contribute positively to global sustainability goals.