The Corporate Sustainability Reporting Directive (CSRD) was implemented in early 2023 as a corporate sustainability guideline. It marked a groundbreaking step by the European Union (EU) to address the limitations of the previous Non-Financial Reporting Directive (NFRD). It was felt that the NFRD failed to inspire sustainable business practices, so the new CSRD would mandate reporting for a broader spectrum of businesses, including small and medium-sized enterprises. Below, we break down the CSRD legislation and shed light on the challenges and opportunities it will present for SMEs, delving into the CSRD impact to provide a comprehensive understanding of its significance.
Understanding the European Corporate Sustainability Reporting Directive (CSRD)
The Corporate Sustainability Reporting Directive (CSRD) is a monumental piece of legislation driving a seismic shift in the European business landscape. This impactful directive was enacted to promote sustainable business practices and improve transparency amongst a broad spectrum of businesses operating within the EU.
This piece of legislation strives to expand and standardise the scope of sustainability reporting for large businesses and listed SMEs. With this in mind and the many other sustainability directives that exist, businesses could greatly benefit from receiving sustainability training to ensure they fully adhere to all requirements.
It came into effect on the 5th of January 2023 and forms part of the broader European Green Deal initiative, which looks to make Europe the first climate-neutral continent by 2050. The introduction of the CSRD has led to an extensive modernisation of the rules related to the social and environmental information that businesses must report on.
With this in mind, a more substantial set of bigger businesses, as well as listed SMEs are now required to report on sustainability. The main driving force behind the adoption of the CSRD was the EU’s belief that investors and consumers should be privy to the ecological impact of businesses. Before the introduction of the Corporate Sustainability Reporting Directive, the Non-Financial Reporting Directive (NFRD) paved the way for big businesses to disclose their sustainability practices.
The European Commission, however, found the quantity and quality of information reported under the NFRD was lacking. This resulted in the introduction of the CSRD, a means to set higher standards for non-financial reporting and expand the number of businesses obliged to disclose their social and environmental impacts. The adoption of the CSRD was a clear signal from the EU that businesses must take an active role in addressing climate-related issues.
What’s different about the CSRD?
While the CSRD is an EU directive, its reach goes much further than the European Union. Businesses outside the EU, but have a presence here are also subject to the CSRD. What this means is that a US-based company with several subsidiaries must comply with the CSRD if even just one of those subsidiaries is situated within the EU.
One rather unique aspect of the Corporate Sustainability Reporting Directive is the concept of double materiality, which refers to when companies have to not only assess the risks they face from sustainability issues but also examine the CSRD impact on society and the environment.
Businesses have to now perform a thorough self-assessment, looking in at their operations and outward at how their actions affect the world we live in. This dual focus is a major departure from traditional business risk assessments and signals a more holistic approach to sustainability.
The CSRD also allows for better comparability through standardisation. In other words, it mandates that businesses submit their sustainability data in a standardised digital way. This requirement aims to level the playing field in sustainability reporting, which lacks uniformity currently.
This standardisation of sustainability reporting has been considered by the EU Parliament to be a potential way to put an end to greenwashing but also to lay the groundwork for sustainability reporting standards at a worldwide level and strengthen the EU’s social market economy.
How the CSRD impacts SMEs
The Corporate Sustainability Reporting Directive applies to a much larger number of businesses compared to that of the NFRD. Although the latter meant approximately 11,000 businesses had to comply, the CSRD applies to nearly 50,000 companies. It applies to large businesses, including those based outside of the EU, that meet at least two of three conditions.
These conditions include having a net turnover of €50 million, assets worth €25 million, and having 250 or more employees. Additionally, non-EU companies with a turnover of more than €150 million in the EU must also comply with the CSRD. The CSRD does not place any new reporting requirements on small companies except for those with securities listed on regulated markets.
What’s more, to make it a bit easier for listed SMEs, they can report using simplified standards. Although the Corporate Sustainability Reporting Directive does not apply to non-listed SMEs, the European Commission has proposed creating separate standards that non-listed SMEs could voluntarily use.
These standards would be scaled to suit SMEs’ capabilities and make it easier for them to report information to clients, investors, and banks, enabling them to play their role in the transition to a sustainable economy. In saying that, as climate-related issues only become more pressing, rapid change is happening in this space, and even those non-listed SMEs should be prepared in case those separate standards become mandatory.
The implementation of the CSRD presents opportunities and challenges alike for businesses. However, the extensive reporting requirements, double materiality assessments, and the need for third-party auditing can mean SMEs face additional challenges. On one side of things, companies can showcase their dedication to sustainability, attract investment, and gain a competitive edge.
Not to mention, complying with the Corporate Sustainability Reporting Directive may limit long-term reporting costs by harmonising the information given. To comply with the CSRD, SMEs may need robust reporting tools to ensure they meet the requirements and can handle the extensive data collection. They may not have access to these tools, which are key to helping them accurately track and report on a wide range of sustainability metrics. These tools can also help them navigate complexities related to double materiality assessment.
Looking ahead
Although the Corporate Sustainability Reporting Directive presents a variety of challenges for SMEs, it can also be a golden opportunity to set your business up for success. By embracing the new regulations with open arms, SMEs can thrive in a competitive landscape, unlock new exciting business avenues, and significantly enhance their CSRD impact, positioning themselves as frontrunners in sustainability and corporate responsibility.
