The Corporate Sustainability Reporting Directive (CSRD) is new EU legislation, which requires all large companies to publish regular reports on their environmental and social impact activities. It is designed to help investors, consumers, policymakers, and other stakeholders evaluate large companies' non-financial performance.
To understand CSRD, we sat down with Professor Ian Thomson, World Wide Generation’s Chief Sustainability Officer.
CSRD is an add-on to the non-financial reporting directive that is currently in place, covering about 11500 plus companies. Why is it needed?
Things change. The Non-Financial Reporting Directive (NFRD) came out in 2014, which was before the UN Sustainable Development Goals and the EU Green Deal. It was for a different time. This is the natural evolution to the Non-Financial Reporting Directive, which was very much restricted to a specific group of companies, largely focusing on very large financial types of institutions.
CSRD reflects the change in times, the change in commitment within business, within the EU, different nations within the EU, and the different acceptability, or maybe the unacceptability, of one's sustainable practices. It’s very much something that is designed within a wider programme of activities, which the NFRD wasn’t. It is simply for a different time, reflecting particularly the UN’s Sustainable Development Goals and the EU’s Green Deal, which are much more holistic and a much more structured systemic approach to change the world and the world of business.
What are the differences between the NFRD and the proposed CSRD? What are the timescales and the numbers we’re talking about?
There are a few differences. One is the scope of the CSRD, which covers a wider range of issues, again connected to the Sustainable Development Goals. It also includes an evaluation of the business model and strategy, and it has a forward-looking focus. It includes transition plans, key targets, ESG targets, and it covers anti-corruption, human rights, social impact, and environmental impact. In many ways the scope is different and it's really tied into the EU Green Deal.
The other thing is the types of organisations it is linked to. So, the NFRD was relatively focused on a particular group of large organisations. By 2025, all of the companies that are currently reporting under the NFRD have to report according to the CSRD. It’s a larger comprehensive set of data points.
Then, we move onto 2026, where it will be for virtually all large companies based and operating in the EU. A large company is one with a balance sheet of €220 million and a turnover greater than €40 million, and over 250 employees. So, it's asset-based, and based on your turnover and your employees. You pick any of those two and if any of those two matches, then you’re a large company and need to comply by 2026.
Then perhaps the bigger move is in 2027, when all listed small-medium enterprises in EU-regulated stock exchanges are then going to be required to report. That is a big shift because then we are talking about moving up to 50,000 companies needing to comply with that.
But, they are not finished there. You then have another stage, which is for 2029. It then includes any company that has a significant operation in the EU, even though they are not based in the EU. There you’ve got a different set of qualifications: you must have at least one subsidiary or branch operating in the EU territory and overall turnover is around about €250 million, so it’s big companies. But, it’s for their operations in the EU so if you are based there and you are listed on the stock exchange, you are going to have to comply. If you’re operating in the EU and you are a large company, you are also going to have to comply even though you are not necessarily based in the EU or headquartered in the EU. If you operate in the EU, by 2029 you are going to have to prepare these reports as well. So, it's much more inclusive in terms of the types of information that is required. It's also much more inclusive in terms of the type of organisations that are actually going to be there. We are moving from large EU-based financial based institutions to any company that is listed and operating in the EU territorial space. That's something that should be considered for UK companies - they are not exempt.
However, if you have a substantial part of your business in Europe, which a lot of UK businesses did, (they maybe set up a subsidiary on the continent, and it’s very good business sense to do that) then that part of their business could well be not exempt, particularly if it's set up as a separate company and it’s listed anywhere. The qualifications are a little bit complex: it’s size based and there are different time scales and, like all things EU, that may change slightly over time because it needs to be integrated.
The EU has issued the CSRD. It needs to be enacted within national government legislation and adopted within the next 18 months, so there may well be slight variations in different nations dependent upon their political process and legislative agenda.
So for any business that’s in the EU or has a presence in the EU, what's the development of CSRD? Is it something, that as a business in the area, I can actually start thinking about reporting now?
Again, as with most EU legislation, it’s not a nice simple clean answer. There are a number of different kinds of bodies involved in this process. Effectively, it's an EU commission that has finalised the process. It then goes through Parliament and the European Parliament to become embedded within practices, so it needs to become a directive and a process. It then needs to be linked with the national EU standards setters of engagement and national governance and legislation as everything needs to be harmonised within the process, which is very similar to what happened with the NFRD. So, it's a well-established practice.
Then the slight issue is that the details of the CSRD and the standards and the measurement protocols are under development and are not finalised. So we have an organisation called EFRAG, which is the European Financial Reporting Advisory Group, who are a technical expert group who propose the draft standards, the draft protocols, and the different ideas. They’re made up of representatives from different industries, the financial sector, and the consumer organisation. We’ve got academics in there, we’ve got regulators, we’ve got representatives from the different countries, key different countries involved. Then we also have civil society representatives involved like trade unions, consumer organisations, as well as certain community groups and trade unions.
So, there’s a body of different stakeholders and that’s important because one of the differences of CSRD is that it’s not solely focused on investors. It’s actually got a wider remit looking at different stakeholders. It's a stakeholder-oriented standard and, therefore, you have more stakeholders involved in this standard-setting process.
There’s also policy: you’ve got lots of relevant policy and that’s one of the key drivers of the CSRD, which is to channel funds towards growing the businesses within the EU along a sustainable trajectory. So, it looks at policy-makers, public finance providers, as well as regulators because there is a regulatory dimension to this as well.
What you get is an enabling framework that’s been passed as a directive and then the details are worked on by EFRAG, who go through lots of consultations. They design drafts, draft standards, draft protocols, which are then passed over to the commission.
The commission then works on it and then, depending on the recommendations, either they can be put forward as EU Commission recommendations, or if they are more radical and substantive then they might need to go to the parliament to be passed through and then acted through by the National Government.
It’s a little bit complicated, but it is the EU and they are trying to do something quite radical here, which is taking something that comes as part of a transition plan for a whole continent. The EU is pushing forward a quite radical transformation plan so it’s not trivial. It’s not just a ‘we’ll change the way we report things’, it’s got a real goal to it which is transformative and about changing a whole economy of maybe one of the most important economic blocks which operate in the world right now. For any business, it’s a really significant transformation and it’s important to keep on top of this, to keep your eye on it, to keep looking at EFRAG standards, to keep in touch with your producer organisation, if you have one, or if you have some sort of coalition there because you really need to be aware of what is actually going on.
It’s a lot of work for one business, but look for networks and different organisations who may be helpful in assisting with this because this is not massively difficult to do, but it is different. Therefore, due to the extent of the difference, it’s actually going to require quite a lot of planning, and quite a lot of organisation.
Waiting until it hits you is a really bad idea. You want to be involved in the feedback to the standards. If you’ve got something which is going to be impossible for your sector, you need to tell them! They might know, or they might not know, but because of the nature of its complexity, there’s lots of opportunity for engagement. If you don’t engage, they are going to say, ‘well, you had the opportunity to talk about it. You had the opportunity to come in and do things’. If you didn’t, how are they supposed to know? Look for consultation for this and look for opportunities to engage because there are opportunities to engage!