New Corporate Sustainability Reporting Directive (CSRD) adopted
On 28 November 2022, the Council of the European Union adopted the new - and long-awaited - Corporate Sustainability Reporting Directive (CSRD).
The CSRD replaces the Non-Financial Reporting Directive (NFRD), which was implemented in sections 99 a-b and 107 d of the Danish Financial Statements Act. The NFRD applied to listed companies and other large undertakings (accounting classes C and D). The adoption of the CSRD means that in the long term far more undertakings are to report their ESG data and that the reporting requirements are strengthened.
The intention behind the DirectiveThe CSRD is intended to improve the existing sustainability reporting requirements and in so doing ensure and improve the reliability of undertakings' sustainability reporting and data. It is done by strengthening the requirements for undertakings' reporting.
A strengthening of the requirements will help prevent greenwashing by seeking to avoid undertakings embellishing their sustainability initiatives, social responsibility and their results too much, as the reporting holds them accountable for their social footprint and their climate footprint. The Directive also ensures that investors and other stakeholders will be able to access relevant, comparable and reliable information about undertakings' sustainability initiatives and sustainability level when investments are to be made. This is all in keeping with the idea behind the Green Deal; to direct capital towards sustainable undertakings.
Requirements for sustainability reporting
The CSRD makes detailed requirements for undertakings' sustainability reporting. The reporting is to be disclosed in a dedicated paragraph in undertakings' annual reports, and the reporting is to be signed by an accredited accountant or by an independent certification body in order to strengthen reporting reliability. Requirements are made for digital tagging of the information to the effect that all information will be reported as is the case with the digital reporting of the annual report - which supports the idea that this information must be easily accessible for the general public.
Sustainability reporting must be made in accordance with European Sustainability Reporting Standards (ESRS) which are currently being developed. These standards are expected to be finally adopted by the European Commission in the spring of 2023.
The new requirements and standards are expected to focus on three main areas:
- Environmental - adaptation and mitigation of climate changes, resource use, circular economy, pollution, biodiversity, etc.
- Social - equal treatment and opportunities, good working conditions, respect for human rights, etc.
- Governance - management and supervisory bodies, business ethics, corporate culture, execution of political influence, internal control, risk management systems, etc.
Is your undertaking covered by this?
The regulation is comprehensive. Almost 50,000 undertakings will be subject to the new rules in the CSRD, which is far more than the current NFRD, which merely covers around 11,700 undertakings.
The strengthened rules on sustainability reporting will apply to all listed undertakings as well as other undertakings with more than 250 employees, which will also be responsible for assessing the information for their subsidiaries. The CSRD is also expected to impact undertakings forming part of the value chains of the undertakings covered. The rules will also apply to listed small and medium-sized enterprises.
Coming into force of the Directive
The sustainability reporting requirements will come into force from the financial year starting after the proposal has been implemented in the national legislation of the Member States. The CSDR is expected to come into force on 1 January 2024 with a gradual expansion in terms of which undertakings will be covered.
- On 1 January 2024 and with reporting from 2025: Public-interest entities with a number of employees in excess of 500 that are already subject to the NFRD. They will in particular be listed undertakings, insurance companies and banks.
- On 1 January 2025 and with reporting from 2026: Other large entities with a number of employees in excess of 250 and/or a net turnover of EUR 40,000,000 and/or a balance sheet total of EUR 20,000,000. Such entities are not currently covered by SFRD.
- On 1 January 2026 and with reporting from 2027: Listed small and medium-sized enterprises, small and non-complex credit institutions and captive insurance companies.
The final Directive will be published and come into force as quickly as possible following this. The new sustainability reporting requirements in the CSRD will subsequently be implemented into Danish legislation, probably by an update of the already existing rules (NFRD) in the Danish Financial Statements Act.
How to prepare for CSRD and ESG
As a consequence of ESG and the strengthened requirements in the CSRD being bound for the undertakings' annual reporting process, it will increase the amount of data to be collected, and the undertaking will have to allocate more resources in the form of time, staff and financing for the reporting process. Status quo for undertakings' annual reporting is available, and the CSRD has really brought into focus undertakings' joint responsibility for a more sustainable world in a broad sense.
You and your undertaking should first consider whether you are directly covered by the new CSRD requirements. As the CSRD may become important to both the undertakings that are directly covered and to their subsidiaries and other undertakings in such undertakings' value chains, it is essential to consider whether your undertaking is indirectly covered by the requirements in the CSRD and any other ESG requirements.
Undertakings which are covered should examine whether they already comply in full or in part with the CSRD requirements, or whether a completely new strategy for collection and reporting of ESG data should be implemented. Undertakings must focus on minimising risks and avoiding accusations of greenwashing, which covers several corporate wrongdoing issues in relation to corporate responsibility, sustainability and good governance, the so-called ESG data (Environmental, Social and Governance).
Like EU's Taxonomy Regulation, the CSRD is uncharted country and is an example of having to lay the tracks as you go. One thing is certain, undertakings that do not take this exercise seriously, earmark resources, prioritise and impose sanction from the highest level will be unsuccessful in the large sustainability lottery. Undertakings' sustainability profile - in the broad sense - will be crucial for the respective undertakings' survival, financing, etc. Green is the new black.
Plesner can help you plan your undertaking's ESG strategy, structure reporting, conduct ESG due diligence in terms of your undertaking or your asset and will be available for regular discussions regarding the development of rules and compliance in the area.