The Corporate Sustainability Reporting Directive (CSRD) modernises and strengthens the rules governing the social and environmental information that companies are required to report. A broader set of large companies, as well as listed SMEs, will now be required to report on environmental, HR and social issues. With approximately 50,000 companies in the EU expected to have to start complying with the CSRD in the next two years, it is essential that businesses start learning now about the requirements and start setting up a compliance process to meet them.
What are the CSRD and EU Taxonomy?
The Corporate Sustainability Reporting Directive (CSRD) came into effect in early 2023, modernising and strengthening the rules concerning the social and environmental information that companies have to report. It replaces 2014’s Non-Financial Reporting Directive (NFRD) and is part of the EU Taxonomy. The CSRD establishes reporting and disclosure requirements on a range of sustainability issues, from a company’s plan to ensure compliance with net-zero targets, to due diligence, to the role of the board and management in sustainability matters.
The EU Taxonomy, introduced in 2021, classifies environmentally sustainable economic activities. Under the Taxonomy regulation, companies based in Europe, or operating a European legal entity with more than 500 employees (or less, if countries stipulate this), must report on how and to what extent their activities are associated with environmentally sustainable economic activities. The CSRD therefore forms a package with the EU Taxonomy and is intended to help improve the flow of capital into sustainable activities.
When will you have to comply with the CSRD?
The first wave of companies will have to apply the new rules for the first time in financial year 2024 for reports published in 2025. These companies are typically large parent companies that already report under the NFRA. In financial year 2025 (published in 2026) all large parent companies must comply with the CSRD, unless a block exemption applies.
Next up are the SMEs. For you, the starting pistol is financial year 2025 for publication in 2026. Finally, certain non-EU companies will have to comply with the CSRD requirements in their 2028 annual report.
Who will the CSRD affect?
Since 2014, listed companies in the EU have had to comply with the EU’s Non-Financial Reporting Directive. This directive required certain companies to disclose non-financial information in their annual reports.
This guideline has now been replaced by the CSRD. The CSRD extends coverage to encompass all large companies that meet at least two of the following criteria:
- more than 250 employees (average over a year)
- turnover exceeding €40 million per year
- a balance sheet total of more than €20 million per year.
Of the estimated 50,000 companies in the EU that are affected by this, around 1,000 of them are in the Netherlands. The CSRD also applies to the subsidiaries of non-EU companies. Importantly, there will be a special disclosure regime developed for non-EU companies with a (consolidated) turnover of more than €150 million in the EU.
Large companies (a more broadly defined category than in the past) must publish their first CSRD-compliant sustainability report in their 2025 financial year. Which means they must gather the information to do so in 2024. Stock exchange listed small and medium companies must follow suit in their 2025 financial year for publication in 2026. Of the non-EU companies affected, they must start in 2027 for their 2028 annual report.
Slightly off topic but worth noting: an EU supply chain law is currently being drafted. This will introduce additional reporting obligations on due diligence compliance in the supply chain.
What are the rules in the Netherlands?
Turning specifically to the Netherlands, the CSRD directive places an obligation on large companies in the Netherlands to report on their sustainability performance in their annual report. Depending on the size of the organisation, this requirement comes in from financial year 2025 for large companies that are already required to report under the NFRD regulations, financial year 2026 (listed SMEs) or financial year 2027 (non-EU companies with turnover of more than €150 million).
The European Sustainability Reporting Standards (ESRS) mentioned briefly above sets out what information ought to be reported. We’ll look at this in more detail in another blog, but here’s an overview of what’s covered:
What are the requirements of the CSRD?
In November 2022, the European Financial Reporting Advisory Group (EFRAG) published the first set of European Sustainability Reporting Standards (ESRSs). These standards form the heart of the CSRD and are to be used when deciding on which information needs to be reported.
The first set of standards comprises 12 conceptual standards, or frameworks, to guide the way financial statements and other financial reporting documents are prepared. The idea is to ensure that financial statements are accurate, complete and consistent across different organisations The 12 standards of the CSRD contain 82 disclosure requirements plus application guidance detailing exactly how the obligations must be applied.
Below is a summary of the ESRS Standards:
ESRS 1 and ESRS 2 are generic standards, ESRS E1 - E5 are climate-related, ESRS S1 - S4 are socially related, and G1 is governance-related. All companies covered by the CSRD are required to report on the following standards:
- ESRS 1 and ESRS 2
- ESRS E1
- For companies with more than 250 employees: S1-1 to S1-9
In the future, more sector-specific standards will be introduced, including standards specially tailored to SMEs.
Together, these standards require companies to create and disclose a comprehensive perspective on sustainability. This entails providing information that enables readers of their annual report to envision how the company intends to achieve specific sustainability goals. The company must communicate its sustainability objectives precisely, and the information it provides should shed light on whether the company has a positive or negative influence on ESG factors like human rights, pollution and financial crime. It should also illustrate the extent to which these issues affect the company as a whole. Additionally, it is crucial to mention that the information must be presented in a consistent digital reporting format.
How will these obligations be enforced?
Domestic enforcement in the Netherlands will be undertaken by the Authority for the Financial Markets (AFM). The AFM has strict and less strict enforcement measures, such an instruction or a fine.
The main enforcement measure is reputational damage in relation to ESG, and how investors and potential stakeholders view and value the company.
Conclusion
With the CSRD soon to become domestic law in the Netherlands, it is imperative that companies familiarise themselves with the rather onerous obligations that they will soon have to comply with. The new Corporate Sustainability Reporting Directive looks to bring about forward-thinking disclosure on sustainability reporting, allowing investors and even the general public to see what you, as a company, are trying to achieve in relation to your activities.