The CSRD: paving the way towards a responsible and proactive transition for all

19/05/21 Awaited with great impatience by some, yet with caution or even concern by others, the Corporate Sustainability Reporting Directive (CSRD) adopted by the European Commission on April 21 has received a largely positive reception from many stakeholders, and rightfully so.

A key consolidating part of the ambitious European legislative and regulatory agenda, this new directive finally lays down the necessary framework for the full integration of the Environmental, Social and Governance (ESG) dimensions into the overall and long-term performance of companies. Beyond the reporting itself, which is an essential but insufficient means of communication, it above all helps to pave the way towards a responsible and proactive transition for all European economic players.

From the NFRD to the CSRD: more than a revolution, this is a structuring evolution

While the CSRD introduces significant changes, it also confirms and consolidates the existing foundation:

  • by confirming the principle of double materiality[1], central to Europe's sustainable development policy;
  • by upholding the principle that non-financial information must serve the needs of all stakeholders, including investors – and last but not least,
  • by confirming and supplementing the ESG approach on the one hand and the dimensions covered by mandatory information (emphasizing in particular the strategy and business model, and governance dimensions).

Therefore, driving evolution rather than revolution. But a structuring evolution that introduces fundamental changes, necessary to ensure that non-financial information is not only of a quality equivalent to highly standardized financial information, but also easily accessible and usable.

Some of the key changes include:

  1. A much broader and more inclusive scope of application: all large companies defined by two of the three criteria total balance sheet and / or turnover and / or an average threshold of employees lowered from 500 to 250, as well as all companies listed on a European market (including SMEs, except micro-enterprises) will henceforth be subject to a sustainable reporting obligation, i.e. around 49,000 companies, compared to only 12,000 today; unlisted SMEs are also strongly encouraged to publish sustainable reports on a voluntary basis, applying proportionate standards specifically defined for SMEs (listed or not);
  2. Mandatory application of European sustainability reporting standards, which will cover the generic, sectoral and specific dimensions of each company, determined on the basis of a double materiality analysis, from 2024 for the largest companies, 2027 for SMEs, including listed;
  3. A digital format imposed and common to all facilitating the sharing and use of published information, which will feed the future European Single Access Point (ESAP), which will centralize both financial and sustainability information of European companies;
  4. The obligation to have the sustainability reports audited in all European countries, by the statutory auditor or an independent third party; with limited assurance initially, before moving to reasonable assurance - as for financial statements - in the medium term.

A centrepiece of the European legislative and regulatory framework, serving the European Union' sustainable development objectives

By laying the foundations for a common “sustainability” language, the CSRD consolidates the legislative and regulatory arsenal recently put in place by Europe; in particular, the Taxonomy and Sustainable Finance Disclosure (SFDR) regulations. Intended to promote investments - and their transparency - in activities and projects aligned with the ambitions of the European Union in terms of sustainable development, these ambitious texts are the practical demonstration of the double materiality: there can be no sustainable financial performance without environmental and social performance and without taking into account, today, the related constraints. The words of the European Commissioner Mairead McGuinness during the high-level CSRD conference on May 6 clearly summarized this rising importance of the non-financial dimension and its entanglement with the financial dimension:

“Sustainability is no longer on the margins, it is central: at the heart of European Union policy.”

But the success of these texts, and beyond, of this ambitious European policy, nevertheless rests on a fundamental condition, rarely met today: for it to be usable, in particular by investors, the information provided by the economic players on their sustainable performance must be consistent, relevant, comparable and reliable. Just as financial information and performance is. It was therefore high time to remedy this weakness of the current NFRD.

By imposing on information on the sustainable performance of companies, quality requirements similar to those imposed on financial information, and by mandating that future European sustainable reporting standards take into account the criteria and information specifically prescribed by the Taxonomy and the SFDR, the common language created by the CSRD will help strengthen the coherence and alignment of the European system, and therefore its effectiveness! In doing so, it also aims to simplify the task of preparers by clarifying their obligations and therefore, incidentally, the legitimate and reasonable expectations of the many stakeholders in terms of the information to be provided. It is not necessarily a question of giving more information, but of giving better information.

A positive reception, but not without reservation

The text is very ambitious. Is it too ambitious?  Among the reservations expressed, there have been legitimate concerns:

  • Too aggressive an implementation schedule? If everyone agrees that there is an urgent need to clarify the expectations and rules of the game, the objective of a first application from 2024, for the 2023 financial year, seems unrealistic too many. The text has yet to be approved by the European Council and the European Parliament, and the first standards adopted by 2022. This would leave, at best, only one year for companies to prepare to meet these rules.Yes, it's true, the schedule is very ambitious. However, it remains feasible, provided that Europe gives itself the appropriate means. As a panellist at the May 6 conference rightly noted: “We can't tell the next generation that we haven't acted because we couldn't agree on a list of indicators”. The risk is not acting (too) quickly, it is not acting at all.
  • A disproportionate cost and burden for SMEs? Despite the announcement of the adoption of reporting standards specific to SMEs and proportionate to their situation, as well as an extended implementation period of 3 years for SMEs, the latter fear that the exercise will prove to be overwhelming. Yes, it’s true, for many SMEs, the effort will be significant, and it is difficult to define today what will be the right balance. However, SMEs are, like large companies, exposed to the risks and opportunities of the necessary transition to a fairer and more sustainable economy, and it is essential that they embark on this path as soon as possible. Well beyond the mere compliance exercise, by structuring the approach and insisting on the aspects of resilience, impacts, risks, opportunities and their integration into a transitional strategy, the CSRD also gives companies, including SMEs, the means to become aware of their position in relation to a transition path and to act proactively for their own sustainable development. 
  • A puzzle for international companies? Although it is widely acclaimed, the European approach remains somehow different, in certain aspects, from other international approaches which may continue to apply to companies operating outside European borders. This could make organisations fear the multiplication of reporting obligations, which are complex and costly to manage.Yes, it’s true, European standards will be different from the most widely used standards today (such as GRI, SASB or TCFD for example). Temporarily though: the CSRD requires that European standards consider and build from existing international standards as much as possible, insofar as they are aligned with European objectives and criteria. The ultimate goal is therefore convergence. Moreover, European standards will tend to be more demanding than international standards (which only integrate one of the two dimensions of double materiality). While efforts at clarification and equivalence will be necessary, there is still reason to believe that the information potentially required by international standards will already be included in European requirements. It would therefore be more a question of highlighting specific information rather than adding information. 

Areas of uncertainty that do not prevent economic players from getting ready now

Many elements therefore remain to be confirmed, before the first implementation of the CSRD, early 2024. Starting with the instructions for use - the reporting standards themselves. However, this is not the time for waiting and inaction. The CSRD itself gives important indications on the desired goal: beyond the reporting itself, companies have to question their current situation with regards to environmental and societal issues and to the collective transition they are calling for; to become aware of the advantages and risks of such a position; to define their role in this transition and the possible added value, for the company itself, and for its stakeholders; and to embark resolutely on this path.

For companies already involved and which already publish this type of information, it is a question of continuing to sharpen the analysis and identify possible areas of improvement in relation to the requirements already expressed by the CSRD. For the others, it is high time to initiate reflection and to learn from the experience of pioneers to define a fair and prosperous world, and lasting future. The future European reporting standards will arrive at an appropriate time to recount this transition, in this long-awaited common language. 

This article was first published in French on – you can see the original version here.

[1] The EU double materiality principle gives equal importance to the impacts of an entity’s operations on environment and society (impact materiality) on the one hand and to the impact of external sustainability (environmental and social) factors on the entity’s financial performance (financial materiality) on the other hand.