On November 28, 2022, the EU adopted its Corporate Sustainability Reporting Directive (in short 'CSRD'), which imposes a non-financial reporting obligation on larger companies. However, the obligation also extends to companies' suppliers, so smaller companies may indirectly be subject to the requirements. The requirements also apply to companies that rent out properties, but what do the requirements actually mean? And is your business covered? You can read more about this below.
This article takes a closer look at what the EU Corporate Sustainability Reporting Directive (CSRD) entails and which companies are covered by the directive.
Due to the comprehensive nature of the directive, not all details of the requirements can be covered in this article, so it is always recommended that you seek specific advice if you suspect you are covered by the directive and have questions in this regard.
What is CSRD?
CSRD is the abbreviation for the EU's Corporate Sustainability Reporting Directive, which was adopted on November 28, 2022. The directive replaces the EU's previous Non-Financial Reporting Directive (NFRD) from 2014, which forms the basis for sections 99a, 99b and 107d of the Danish Financial Statements Act.
These provisions deal with corporate social responsibility, the underrepresented gender and diversity policy respectively.
With CSRD, the circle of companies that must carry out non-financial reporting has expanded, as previously only companies with over 500 employees were covered by NFRD.
To be covered by CSRD, a company must now - for 2 consecutive financial years - exceed 2 out of 3 set criteria or be publicly listed.
These criteria are:
- A balance sheet total of DKK 156 million.
- A net revenue of DKK 313 million.
- A number of employees of 250
If the company exceeds 2 out of 3 of these thresholds, it will be
subject to the non-financial reporting requirements of the
CSRD.
This reporting covers the 3 areas:
- Environmental conditions
- Social conditions and
- Governance
Known in short form as ESG (Environmental, Social and Governance).
What does ESG reporting include?
If the company is covered by the non-financial reporting requirements of the CSRD, a separate section in the management report will be required to address the three areas: Environmental, Social and Governance (ESG).
The E - environmental conditions
Reporting on the E (environment) includes climate change, resource consumption, circular economy, pollution and biodiversity.
The S - social relationships
The S (social) reporting includes issues such as equal opportunities for all, working conditions and respect for human rights.
G'et - governance
Reporting on the G (governance) includes management's tasks in relation to corporate sustainability, supervisory bodies, corporate ethics and the company's control and risk management in relation to sustainability risks.
Information on these categories must now be gathered in a dedicated section of the management report and be in a digital format with the possibility of tagging data. Reporting on both how the company affects the outside world on these points ('inside out') and how each of these points affects the company ('outside in'), the documentation must often be both historical and forward-looking, and it must include both short-term, medium-term and long-term time horizons and contain both quantitative and qualitative elements.
More specifically, it requires your company to provide a description of your business model and strategy and their resilience to risks related to sustainability issues. At the same time, it must state how management addresses sustainability issues and sustainability policies are required if you are covered by the directive.
What do you do if you don't have the information to report on all the points?
CSRD works with a materiality principle called 'comply-or-explain', which means that if the information is not available, you must explain that this is the case and describe a plan for obtaining the necessary information.
At the same time, an audit obligation is introduced whereby auditors must conduct an actual audit of the sustainability report in the same way as the financial report is audited.
Why these reporting requirements?
If you become subject to the requirements of the CSRD directive, you will probably want to know the reason for the requirements.
The reporting requirements are due to the fact that the EU wanted non-financial reporting to be treated the same as financial reporting.
This means that this reporting must have the same level of credibility as the financial reporting and that value chain reporting must not only be done for own activities, products and services, but also for the entire value chain, including suppliers.
The aim is to increase transparency around sustainability and companies' sustainability efforts and to avoid greenwashing (marketing products and services as more sustainable than they really are).
In addition, more clarity, more/better information, transparency
and more data are needed to make it easier for investors, citizens
and other stakeholders to understand how each company contributes
to sustainability in society. This will make it easier for both
professionals and individuals to invest more sustainably.
Finally, it will improve the reliability of companies'
sustainability reporting and sustainability data.
What does CLEMENS expect and recommend?
As CSRD, as mentioned, replaces the EU's previous
Non-Financial Reporting Directive (NFRD), which forms the basis for
sections 99a, 99b and 107d of the Danish Financial Statements Act,
it is our expectation that there will be a revised Financial
Statements Act based on the new directive.
Partly because sections 99a, 99b and 107d are likely to be
expanded, and as these provisions deal with corporate social
responsibility, the underrepresented gender and diversity policy
respectively, it is also expected that they will be supplemented by
additional provisions on specific sustainability reporting.
You should follow this development, regardless of whether you are directly covered by the directive, see above, or not. This is because Denmark historically has a habit of tightening national requirements more than EU requirements, and thus you may risk being subject to such requirements even if you are not directly covered by the directive.
If you are covered by the directive, see above, it is recommended that you start setting up your reporting system now so that you can collect the necessary data and process and handle it correctly.
You should also consider what data you do and do not have so that you can justify why this is the case for the latter.
(We wrote the article for the magazine Danske Udlejere, February 2024)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.