The Corporate Sustainability Reporting Directive (CSRD) is a piece of European Legislation which came into force on 5 January 2023. Even though the UK has now left the EU, some companies in the UK still need to comply with the directive, which has extra-territorial effect.
Which companies need to comply?
The companies that need to comply with the CSRD are those which:
- Have securities listed on and EU regulated market; or
- Have a net turnover in the EU of over €150 million for each of the last two consecutive financial years, AND either has:
- An EU branch which generated net turnover of €40+ million in the previous financial year; or
- An EU subsidiary which is listed on and EU regulated market; or
- An EU subsidiary with total assets of €20 million, and net turnover of €40 million, and an average of 250 employees over the financial year (large undertakings)
While these regulations only apply to large companies (at this stage), smaller companies are adopting the rules or similar frameworks for CSR, in readiness for possible tighter regulation in the coming years.
In fact, the European Commission has proposed to develop separate standards for non-listed SMEs, which they can use voluntarily. The rules will be less stringent, and adapted to take into account the resources and capabilities of SMEs. But the rules will act as a helpful framework to make it easier for SMEs to report their CSR information to banks, clients and investors.
How do companies comply?
Compliance means report on the progress of the business’s sustainability efforts. Entities do that by making relevant disclosures in annual sustainability reports. Those reports will cover environmental, social, human rights and governance matters.
So what does that look like in practice? In-scope companies are required to provide disclosure on:
- The company’s business model and strategy
Explain your plans to become carbon neutral and how you contribute to limited global warming to 1.5 degrees.
- Targets adopted and progress made towards these targets
Think about your greenhouse gas emissions and how you plan to reduce them
- Governance arrangements
The business policies you have in place to reduce your impact on the environment, and the skills of the management team to contribute to a more sustainable business.
- Incentive schemes
What incentives do you offer members to reduce their carbon footprint?
What is the timeline?
The reporting obligations will be phased in over the course of 2024 – 2029. Different companies will be required to comply at different times.
The first date to note is 1 January 2024. Some companies will be required to comply with the reporting obligations from this date, if their financial year starts on or after 1 January 2024. The companies in scope are:
- EU listed large undertakings
- EU listed parent undertakings of large groups
And in both cases, the company must have an average of 500 or more employees during the financial year.
The CSRD will apply to listed SMEs from 1 January 2026, but SMEs can opt-out until 2028.
The consequences of compliance and non-compliance for SMEs
One of the main objectives of the CSRD is to increase the transparency and accountability of business reporting. This in turn gives their stakeholders and better insight into the ins and outs of the company.
Even though SMEs are not required to comply with the CSRD at this stage, adopting the framework will help in a number of ways. For example, it will open doors to access to finance. Lenders are now scrutinising a business’s sustainability efforts when they make their decisions on lending, and compliance with the CSRD will reflect favourably on the business.
It will also give small businesses a competitive advantage. Investors and customers increasingly look for businesses which reduce their impact on the environment. You can attract more customers, and keep your stakeholders happy, by measuring and reporting on your sustainability efforts.
It’s likely that future tendering processes for lucrative contracts, particularly in the public sphere, may seek CSRD compliance as a pre-requisite. Without the right reporting processes in place, you may be excluding yourself from consideration for these high-value contracts.
And of coursed there’s the feel-good factor. The reason for the CSRD is to help companies have a positive impact on the climate. By complying with the CSRD, you can satisfy yourself that your business is improving your sustainability efforts, contributing to the drive towards Net Zero, and contributing towards the fight against climate change.
Overall, while it may take time to put in place the right processes and controls, doing so is an investment in the future success of the business.
The CSRD looks quite complex from the outside. But as time goes on it will become mandatory for more and more businesses. If you’d like any help to work out whether your business is in scope, or you need advice on how to prepare for compliance, please get in touch with us at SME Comply.