By Guillaume Février and Christian Stotz
This article has been published in the September issue of the HKA, by bved: Die HKA – bved
The Corporate Sustainability Reporting Directive (CSRD) came into force in 2023. It is a European legislation designed to standardise and broaden the corporate sustainability reporting, which is outlined by its predecessor, the Non-Financial Reporting Directive (NFRD).
As part of the EU Green Deal, which aims to reach the carbon footprint net-zero by 2050, capital flows are to be increasingly directed towards sustainable economic activities in the future. To this end, the so-called “greenwashing” has to be avoided in a preventive manner. Greenwashing describes a misleading form of corporate Environmental, Social and Governance (ESG) communication that is intended to build a particularly environmentally friendly and responsible image without creating a real basis of reliable sustainable information, hindering investors from making informed investment decisions. The use of this practice has exposed significant limitations in the quality and quantity of sustainability information provided by companies. To address the issue, the CSRD is part of the EU’s “action plan on financing sustainable growth”, which has three overarching objectives:
- Redirecting capital flows to sustainable investments in order to achieve sustainable and inclusive growth;
- Addressing the financial risks arising from climate change, natural disasters, environmental degradation and social issues;
- Promoting transparency and a focus on long-term impacts in financial and economic activity.
Scope of the CSRD: Which companies are affected and when?
The CSRD is intended to significantly increase the amount of sustainability information available on the EU economy. It therefore expands the scope of the NFRD, increasing the number of companies subject to ESG reporting obligations from around 11,000 to approximately 50,000 entities. Until now, the NFRD only mandated reporting for large companies that are of public interest. It also includes non-EU companies listed on the EU-regulated market. The CSRD extends these reporting obligations to all large companies.
According to Article 3 of the amended Accounting Directive, companies are defined as large companies if they meet two of the following three criteria:
- An average of more than 250 employees during the financial year
- Balance sheet total of more than 25 million euros
- Net annual turnover of more than 50 million euros
As of January 1, 2024, the companies that were already subject to the NFRD fell within the scope of the CSRD. For the 2025 financial year, the CSRD will then affect all other large companies that meet two of the three criteria mentioned above but have not yet had to report on their sustainability under the NFRD.
The directive will then extend its reporting obligations in 2027 (for the 2026 financial year) to all listed small and medium-sized enterprises (SMEs) that meet two of the following criteria:
- An average of 10 to 250 employees during the financial year
- Balance sheet total from 350,000 to 20 million euros
- Net annual turnover from 700,000 to 40 million euros
However, SMEs will have the option to opt out of the reporting obligation until 2028.
It should be noted that micro-enterprises that do not exceed a balance sheet total of more than 450,000 euros, a net turnover of 900,000 euros or an average of 10 employees in the financial year are exempt from the requirements of the directive.
Furthermore, from January 1, 2029 (for the 2028 financial year), the CSRD will also apply to non-European companies with branches or subsidiaries in the EU, should they reach or exceed a net turnover of 150 million euros within the Union.
What type of information needs to be provided?
The CSRD mandates companies to include a broader range of information in their sustainability reports than under the NFRD. It comprises a list of environmental impacts, such as greenhouse gas emissions, pollution prevention strategy and energy consumption, as well as social and employee matters, encompassing diversity, human rights, and labour practices. In addition, companies must report on anti-corruption, bribery measures and the governance structures they have established internally to manage these risks.
A major challenge of the CSRD is to ensure that the disclosed sustainability information is relevant, high-quality, and trustworthy. To achieve this, the Directive prescribes a double materiality assessment. In practice, it requires companies to assess sustainability aspects from two perspectives: how their activities impact people and the environment, and how sustainability-related trends create risks or opportunities for their business. Under this concept, a sustainability aspect can be material from either an impact perspective or a risk and opportunity perspective. This assessment is important to guarantee the CSRD compliance, as it determines what is essential for inclusion in the sustainability report, what can be omitted.
To ensure the accuracy of the sustainability reporting, the CSRD mandates third-party review. For the latter, companies must only to obtain limited assurance, a less rigorous level of scrutiny compared to a financial audit. Under limited assurance, the auditors simply determine that there is no indication of material misstatements in the information provided. While a stricter level of assurance is not currently mandatory, the European Commission may reassess this requirement after 2028.
