EU Adopts New Corporate Sustainability Reporting Directive (CSRD) to Enhance Transparency and Accountability

Friday, March 15, 2024 Print Email

New Law: Corporate Sustainability Reporting Directive (CSRD)

The Corporate Sustainability Reporting Directive (CSRD) entered into force on January 5, 2023, marking a significant shift in sustainability reporting requirements for companies within the European Union (EU). The CSRD expands on the previous Non-Financial Reporting Directive (NFRD) and mandates a broader set of large companies, including listed SMEs, to report on sustainability aspects such as environmental, social, and governance (ESG) factors.

Effective Date of the New Law

The application of the CSRD will be phased in gradually, with the first reporting cycle commencing for financial years starting on or after January 1, 2024. EU-incorporated companies subject to the NFRD will be the first to report under the CSRD, followed by other large companies and parents of large EU subsidiaries or branches with reports due in subsequent years. The first companies will have to apply the new rules for the first time in the 2024 financial year, for reports published in 2025.

About ESRS (European Sustainability Reporting Standards)

Companies subject to the CSRD are required to report according to the European Sustainability Reporting Standards (ESRS). These standards cover a wide range of environmental, social, and governance issues, including climate change, biodiversity, and human rights. The ESRS were developed by the European Financial Reporting Advisory Group (EFRAG) and aim to provide investors and stakeholders with comprehensive information to assess the sustainability performance of companies.

How Will These Changes Affect the Actions of Audit Firms?

With the implementation of the CSRD, companies will be required to have their sustainability information audited by an independent third party. This new level of scrutiny will impact both EU companies subject to mandatory reporting requirements and non-EU companies eventually falling under the law. The assurance can be provided by the statutory auditor already used for financial statement verification or another authorized third-party.

The introduction of mandatory sustainability reporting and third-party assurance will necessitate a cultural shift within organizations towards more comprehensive and transparent reporting practices. Companies will need to ensure that their sustainability reports align with their actual practices and values, moving away from superficial reporting towards detailed, verified disclosures. Additionally, companies will need to manage the flow of information across various departments to ensure accurate and comprehensive reporting.

As the reporting deadlines draw nearer and the demand for independent assurance providers increases, companies will need to focus on materiality assessments to identify and prioritize the most relevant sustainability and ESG issues. Ensuring the accuracy and consistency of these assessments will be crucial for building a strong foundation for reporting and assurance processes under the CSRD.

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