The new Corporate Sustainability Reporting Directive (CSRD) was voted by the European Commission at the end of 2022. This directive, consists in framing the reporting of companies on the social and environmental impact of their activities and to improve the accessibility and quality of the required data. The CSRD regulation will impose extra-financial reporting (also called ESG reporting or CSR reporting) on approximately 40,000 new companies in the European Union (EU). These obligations will take effect as early as 2024, with the first ESG reports to be published in 2025. The CSRD will then gradually be extended to other European and non-European companies. Although the final standards will not be adopted until June 2023, it is necessary for companies to anticipate these changes quickly. In this article, Alcimed reviews the challenges of this regulatory evolution and analyzes how to turn it into an opportunity.
The CSRD directive as a new pillar for measuring the impact of companies on society and the climate
In the EU, so-called “sustainability” measures aimed at assessing the effect of a company on societal issues and climate change are governed by the Sustainable Finance Disclosure Regulation (SFDR) for investments and by the Non-Financial Reporting Directive (NFRD) for large companies.
The NFRD regulation adopted in 2014 requires listed companies and companies with more than 500 employees to provide information on the environmental and social impacts of their business. This text, which provides for nearly 150 indicators, does not, however, impose a methodological framework for their evaluation. The absence of a common framework for collecting information and calculation methods makes it impossible to compare the environmental and social performance of a company with another.
The new European CSRD directive aims to extend the requirements of the previous NFRD and above all to clarify the content of sustainability performance reports and the effect of a company’s business on the climate and society.
What is the CSRD and what are its requirements?
The CSRD primarily encourages companies to adopt a sustainable development approach by requiring them to report more extensively on their impacts on the climate. In addition, it encourages all stakeholders to reward companies that excel in this area rather than just financially and helps them better assess their vulnerability to future climate risks.
In order to harmonize its requirements, the European Commission will adopt in June a first set of non-financial standards proposed by the European Financial Reporting Advisory Group (EFRAG). These standards should be based on ESG (Environmental, Social and Corporate Governance) criteria and allow for measurable and more homogeneous standards. Currently, mid-sized companies and other companies not subject to the directive are content to communicate their undertaking based on CSR (Corporate Social Responsibility) requirements. These CSR criteria, which are based on undertakings that are difficult to measure and complex to monitor over time, should gradually evolve and turn towards quantifiable results.
In addition, the directive introduces a new concept among its requirements: double materiality. This concept indicates that companies are required to provide information on the impact of their activities on society and the climate, but also information on their vulnerability to these same factors.
These regulatory developments in non-financial performance reporting represent both challenges and opportunities for companies.
Which companies are affected by the CSRD regulation?
The CSRD concerns companies with more than 250 employees and a turnover of more than 40 million euros (approximately 50,000 companies in the EU). It extends the CSR reporting obligation to TSEs, then SMEs from 2026 and non-EU companies from 2029. EU member states will have until July 6, 2024 to implement the new CSRD standards. The 40,000 new companies concerned will therefore have to prepare quickly to assess and report on their impacts on sustainability issues, from an environmental, social and good governance perspective.
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The CSRD regulation raises challenges for companies
Proper compliance with CSRD regulations is a challenge for many companies. Companies will need to devote resources to ensure that they meet ESG reporting requirements (including additional expenses for staff training, set up of new procedures and possibly changes in partners and subcontractors). In addition, companies may need to engage external services to help them understand or comply with the new regulations, as well as to be audited on one of the pillars of the CSR approach, such as conducting a carbon footprint.
Non-compliance with the Corporate Sustainability Reporting Directive can also result in significant financial penalties. Regulators can impose fines and penalties on companies that do not comply with CSRD regulations set by each state. Non-compliance can also lead to a loss of trust from customers and stakeholders, which can result in reduced business activity and lower profits.
The CSRD as a source of opportunities for companies
Despite the challenges posed by CSRD regulatory developments, there are also many opportunities for companies:
- Companies can use these reports to improve the transparency and quality of their social and environmental impact data, which can help them obtain financing more easily and at lower interest rates.
- The regulations can also increase customer and stakeholder confidence in the company’s operations.
- In addition, these regulations will allow companies to be evaluated against a common benchmark and thus highlight what needs to be improved in their strategies, given their strengths and weaknesses. Thus, the actors concerned will be able to benefit from an orientation to give to their activities to make them more virtuous in the eyes of the Corporate Sustainability Reporting Directive.
The evolution of ESG reporting regulations raises both challenges and opportunities for companies. Taking advantage of these opportunities will allow a company to improve its revenues, avoid costs and improve its brand and marketing image. Alcimed can help you develop and set up your CSR strategy. Don’t hesitate to contact our team!
About the author,
Antoine, Consultant in Alcimed’s Health team in Lyon
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