CSRD and the future of business in the EU

The Corporate Sustainability Reporting Directive (CSRD) marks a major shift in the way companies in the European Union (EU) are required to report on sustainability-related data. Building on the Non-Financial Reporting Directive (NFRD), the CSRD aims to provide greater transparency and comparability for environmental, social, and governance (ESG) disclosures. It mandates that businesses demonstrate not only their impact on the environment and society but also their long-term strategies for mitigating risks and capitalising on sustainability opportunities.

Key Timelines for CSRD Implementation

The CSRD will be implemented over several years, and businesses must stay aware of the deadlines. Failing to prepare could lead to significant consequences:

1. January 2024:

Large companies already under the NFRD must comply with CSRD rules in their reporting for the first time.

2. January 2025:

The CSRD will apply to other large companies not previously covered by the NFRD. This includes both EU-based companies and non-EU firms generating more than €150 million in turnover within the EU.

3. January 2026:

Small and medium-sized enterprises (SMEs), unless exempted, must also begin to comply, with slightly simplified reporting requirements.

4. 2028:

By this point, listed micro-enterprises may also need to report under simplified rules.

This directive significantly broadens the scope of sustainability reporting, encompassing not only publicly listed companies but also large private businesses. As a result, more companies must now implement robust sustainability strategies and data collection systems to meet these new obligations.

What will Companies be required to report?

Under the Corporate Sustainability Reporting Directive (CSRD), companies will be expected to report on a wide range of sustainability-related factors, going beyond the basic environmental metrics to include social and governance aspects. The CSRD aligns with the European Sustainability Reporting Standards (ESRS), which provides specific guidelines on what needs to be disclosed.

Key Areas of Reporting Under CSRD:

1. Environmental Impact:

• Climate Change Mitigation and Adaptation: Companies must report on how they contribute to reducing greenhouse gas (GHG) emissions and how they adapt their business models to account for climate risks. This includes disclosing their strategies for achieving net-zero emissions.

• Energy Usage: Companies need to provide details on their energy consumption and their shift towards renewable energy sources.

• Water and Waste Management: Reporting will include how companies manage water usage, waste generation, and the application of circular economy principles.

• Biodiversity: Businesses must disclose how their operations impact biodiversity and what measures they take to protect ecosystems.

2. Social Factors:

• Employee Welfare: This includes reporting on working conditions, diversity, equality, and inclusion in the workforce. Companies will need to outline their strategies for occupational health and safety, employee development, and the promotion of human rights across their supply chains.

• Community Impact: Disclosures on how the business supports local communities, particularly in areas where it operates, including any efforts towards social responsibility and community engagement.

• Product Responsibility: Reporting on how the business ensures consumer safety, including product safety standards, and how it addresses any potential social impacts of its products and services.

3. Governance:

• Business Ethics and Anti-Corruption: Reporting on governance practices includes anti-corruption policies, whistleblower protection, and ensuring ethical behaviour across all levels of the business.

• Board Diversity: Companies will need to disclose the diversity of their board members, including gender, age, and background, to ensure transparency in leadership.

• Executive Compensation and Alignment: Details on how executive compensation is aligned with sustainability targets and long-term business objectives.

4. Double Materiality:

One of the cornerstones of the CSRD is the double materiality concept. This requires companies to report not only how sustainability issues affect their financial performance (financial materiality) but also how the company impacts society and the environment (impact materiality). For example, a company must report both the financial risks of climate change to its operations and how its activities contribute to climate change.

5. Supply Chain Sustainability:

Companies are expected to report on their supply chains, outlining how they ensure that suppliers are compliant with sustainability practices, particularly regarding labour practices, resource management, and environmental standards.

6. Risks and Opportunities:

A key part of the CSRD is reporting on sustainability-related risks and opportunities. This includes outlining potential risks from climate change (e.g., regulatory risks, market risks) and highlighting opportunities such as innovations in green technologies or new sustainable products that could enhance the company’s growth.

7. Sustainability Targets and KPIs:

Companies must provide key performance indicators (KPIs) to measure their progress towards sustainability goals. This includes setting clear, measurable targets for environmental impact reductions, diversity initiatives, or ethical governance improvements.

Use of Reporting Standards:

Under the CSRD, companies will be required to use European Sustainability Reporting Standards (ESRS), which are closely aligned with international frameworks such as the Global Reporting Initiative (GRI), Task Force on Climate-Related Financial Disclosures (TCFD), and Sustainability Accounting Standards Board (SASB). These standards ensure that reports are consistent, comparable, and transparent across the EU.

The Risks of Being Underprepared for the CSRD

Being unprepared for the CSRD can pose significant risks for businesses. The directive demands comprehensive data collection, analysis, and reporting capabilities that many companies are currently not equipped to handle. Here are some of the key risks for businesses that are underprepared:

1. Data Management Challenges:

Gathering the required sustainability data is a complex process, especially for companies that do not have the necessary IT infrastructure or data management systems in place. Companies will need to ensure they can track a broad range of sustainability metrics across their entire value chain, which can be resource-intensive and time-consuming.

2. Reputational Damage:

Sustainability reporting is increasingly scrutinised by stakeholders, including consumers, investors, and regulators. Incomplete or inaccurate reporting may be perceived as greenwashing, severely damaging a company’s reputation. Furthermore, with transparency at the heart of the CSRD, any discrepancies between a company’s sustainability claims and actual performance could lead to public backlash and lost investor confidence.

3. Operational Disruptions:

Many companies underestimate the operational demands of gathering sustainability data. Scrambling to meet deadlines could disrupt normal business activities, with departments diverting resources to manage compliance efforts. This could impact productivity and divert attention away from other key business priorities.

4. Missed Investment Opportunities:

Investors are placing growing importance on ESG performance when making investment decisions. Companies that fail to comply with the CSRD or fail to report comprehensively may struggle to attract sustainable investments, reducing their access to capital.

Potential Sanctions for Non-Compliance

Failure to comply with the CSRD can result in significant legal and financial penalties, as well as long-term damage to a company’s reputation. The specific penalties will vary depending on national regulations, but possible consequences include:

1. Monetary Fines:

Companies that fail to report adequately may face substantial fines. These fines are likely to be proportional to the company’s turnover, meaning larger businesses could face significant financial penalties for non-compliance.

2. Reputational Harm:

Non-compliance or incomplete reporting can lead to reputational damage. This may affect customer loyalty, investor confidence, and public perception of the company’s commitment to sustainability. Furthermore, companies could be accused of greenwashing, which could lead to additional legal risks.

3. Legal Action:

Stakeholders such as investors or advocacy groups may pursue legal action against companies that fail to disclose their true sustainability performance, leading to costly litigation.

4. Exclusion from Sustainability Indices:

Companies that do not comply with the CSRD may be excluded from key sustainability indices such as the FTSE4Good Index or the Dow Jones Sustainability Index (DJSI). Such exclusion can reduce investor interest and lower a company’s stock market valuation.

Conclusion: Act Now to Avoid the Risks

The CSRD marks a new era of corporate transparency in sustainability reporting. Companies that are proactive in preparing for these requirements will not only ensure compliance but also position themselves as leaders in the transition to a more sustainable economy. However, those that are underprepared could face significant risks, including operational challenges, reputational damage, and substantial fines.

To avoid these risks, companies must invest in the right technology, training, and processes to ensure that they can gather, analyse, and report sustainability data effectively. Failing to do so could not only result in sanctions but also damage the company’s standing in an increasingly sustainability-driven business landscape.

Call to Action

Don’t wait until it’s too late. The CSRD is rapidly approaching, and the time to act is now. Contact XL Horizon today for a consultation, and let us help your business thrive in the new era of sustainability reporting. Together, we can build a future that benefits your business, your stakeholders, and the planet.

What is the CSRD? An Overview of Timelines, Risks, and Sanctions