CSRD who is concerned

Entry into force in January 2023, the European directive CSRDor Corporate Sustainability Reporting Directive, is a directive that provides a methodology for how companies should report their non-financial performance. The aim of this directive is to create a standardized and common language in terms of non-financial reporting to enable better understanding and comparability of organizations' non-financial performance.

What was the background to the creation of the CSRD?

An update of the 2014 Non Financial Reporting Directive (NFRD), it aims to avoid greenwashing, by harmonizing sustainability reporting, but also tobroaden its scope. In fact, more than 50,000 European companies should be affected by this directive, according to auditing and consulting firm Ernst Young, compared with 11,000 European companies with the NFRD, according to Entreprises Engagées.

This directive is part of the Green Deal (2019). The Green Deal is a roadmap issued by the European Union with the aim of making Europe carbon neutral by 2050, with an intermediate target of reducing greenhouse gas emissions by 55% by 2030, compared with the 1990s.

As the investments linked to this Green Pact cannot be financed entirely by the public authorities, private investment will be essential in achieving these objectives.

For this, two other regulations have a key role to play:

• The Social Finance Disclosure Regulation (SFDR) imposes sustainability reporting for financial companies, as of 2022. By creating greater transparency, it should, like the CSRD, help to redirect private flows towards more sustainable choices.

• The European Taxonomy classifies economic activities and determines whether an activity is sustainable, based on technical criteria. The taxonomy requires the declaration of certain key performance indicators common to both the CSRD and the SFDR.

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CSRD, who is concerned?

The CSRD (Corporate Sustainability Reporting Directive) requires certain companies to publish detailed information on their environmental, social and governance (ESG) impact. It replaces and extends the obligations of the previous directive, the NFRD (Non-Financial Reporting Directive).

Whereas the NFRD applied only to large companies with over 500 employees, the CSRD extends its scope to companies that meet at least two of the following three criteria:

• have more than 250 employees,
• a balance sheet in excess of €25 million,
• sales in excess of €50 million.

To put it simply, the companies concerned by the CSRD are :

1. Large companies: This includes all companies with over 250 employees, sales in excess of €40 million, or a balance sheet in excess of €20 million.
2. Listed companies: Including small and medium-sized listed companies, but they will benefit from additional lead times.
3. Certain subsidiaries of international groups: If a parent company is concerned by CSRD, its European subsidiaries may also have to comply with reporting obligations.

The CSRD mainly concerns large companies, but it will also eventually include more companies than the NFRD, and will impose a stricter framework for the publication of non-financial information on CSR subjects.

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Companies excluded from the CSRD

Certain companies are excluded from the CSRD, including :

1. Small companies: those with fewer than 250 employees, a balance sheet of less than €25 million and sales of less than €50 million are not concerned.
2. Micro-enterprises: very small businesses with fewer than 10 employees, annual sales of less than €2 million or a balance sheet of less than €2 million.
3. Unlisted companies that do not meet the above criteria (size, sales, balance sheet) are also exempt.
4. Non-profit companies.
5. Public entities.

However, listed SMEs will have to comply, but will be given extra time to do so.

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The CSRD calendar

The timetable for the CSRD (Corporate Sustainability Reporting Directive) provides for gradual implementation, depending on the size and type of company. 

Larger companies have to comply first, while listed SMEs have more time to prepare.

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The cost of CSRD

Today, it's hard to know exactly how much a CSRD project will cost, but what we do know is that it should include : 

• Updating reporting systems: Companies will need to adapt their internal systems to collect and process ESG (environmental, social and governance) data. This may require investment in new software or management tools.
• Consulting and expertise: Many companies will need to call on external consultants or compliance experts to help them understand and meet CSRD requirements, and this comes at a cost.
• Audit and verification: The CSRD requires external verification of CSR reports. The use of auditors to validate data may entail additional costs.
• In-house training: Teams will need to be trained to understand and apply the new standards, which may entail costs in terms of time and human resources.
• Human resources: Some companies will need to recruit or train specialized sustainable reporting teams to ensure long-term compliance.

The cost of complying with the CSRD varies according to the size and structure of each organization. According to the Cour des Comptes, the costs of preparing for the directive could range from €40,000 to €320,000, while annual audit costs could amount to between €67,000 and €540,000.

A C3D study reveals that, in terms of human resources, 40% of companies surveyed estimate that the extra workload generated by the CSRD is equivalent to 1 full-time equivalent (FTE), while 26% consider that it would represent 2 FTEs.

Lastly, 75% of companies estimate their budget for implementing CSRD at between €1 and €200,000, but 11% declare a budget in excess of €600,000, which highlights the disparities depending on the complexity of the organization and its needs.

Penalties for non-compliance

In the event of non-compliance with the CSRD, companies are exposed to several types of sanctions, which vary from one EU country to another, as each member state applies its own rules and penalties. Here are the main possible sanctions:

• Financial penalties: Companies may be required to pay fines. The amount of these fines depends on the seriousness of the non-compliance, and may be proportional to the size of the company.
• Administrative sanctions: These can include official warnings or orders for immediate compliance.
• Bad reputation: Failure to comply with CSRD can damage a company's image. Stakeholders (investors, customers, partners) could lose confidence, especially in a context where sustainability is becoming a major decision-making criterion.
• Restrictions on access to financial markets: More and more investors are demanding transparent and reliable information on sustainability before making investment decisions.

In France, the penalties for non-compliance with the directive are as follows:

• A fine of 3,750 euros for failure to publish the report or for publishing incomplete or incorrect information.
• A fine of 30,000 euros and up to 2 years' imprisonment if the non-financial report is not audited.
• A fine of 75,000 euros and up to 5 years' imprisonment for obstructing audits or controls by auditors.

The sustainability report must be verified by :

• A statutory auditor,
• Or an independent third-party organization (OTI) accredited by COFRAC (Comité français d'accréditation).

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What content must be declared for CSRD?

‍Complete reporting

The full report must contain all the information below.

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1. A brief description of the company's business model and strategy, including :

• The level of resilience of the latter two to risks related to sustainability issues
• Sustainability-related opportunities for the company
• Plans to ensure the compatibility of its business model and strategy with the transition to a sustainable economy in line with the Paris Agreement (i.e. the goal of climate neutrality by 2050)
• How the company's business model and strategy take into account stakeholder interests and the company's impact on sustainability issues.
• How the company has implemented its strategy with regard to sustainability issues

2. A description of the role of the administrative, management and supervisory bodies with regard to sustainability issues, as well as a description of their expertise and skills in exercising this role or the opportunities available to them to acquire this expertise or these skills.

3. A description of the company's policies regarding sustainability issues .

‍4. Information on the existence of incentive systems related to sustainability issues that are offered to members of administrative, management and supervisory bodies.

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5. A description of the company's due diligence procedure with regard to sustainability issues and, where applicable, in accordance with EU requirements for companies to carry out such a procedure.

6. A description of the main actual or potential negative impacts related to the company's own activities and value chain, including its products and services, business relationships and supply chain, the measures taken to identify and monitor these impacts, and other negative impacts that the company is required to identify under other EU requirements for companies to conduct due diligence.

7. A description of any measures taken to prevent, mitigate, correct or eliminate actual or potential negative impacts, and the results achieved in this regard.

8. A description of the main risks associated with sustainability issues, including a description of the main dependencies in this area and a description of how the company manages these risks.

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9. Indicators relating to the above points.

• These plans also include the actions taken and the investment and financial plans.

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Simplified reporting

Simplified reporting must contain : 

• A brief description of the company's business model and strategy.
• A description of policies regarding sustainability issues.
• The main actual or potential negative impacts on sustainability issues, and any measures taken to identify, monitor, prevent, mitigate or remedy them.
• The main risks associated with sustainability issues and how the company manages these risks.
• The key indicators required for the information to be published referred to in points.

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Conclusion

In conclusion, the CSRD is an important step in helping companies to be more transparent and to have standardized extra-financial reporting in Europe. 

It aims to harmonize sustainability practices and avoid the risk of greenwashing, while contributing to the objectives of the European Green Deal. 

Although its implementation implies significant costs and efforts for companies, it will enable better comparability of ESG performance, thus promoting the transition to a more sustainable economy.