CSRD and CSDDD: A New Era in Corporate Sustainability Reporting What are CSRD and CSDDD?

Kaan Vatansever 31 May 2024

 

 

Companies play critical roles in forming a sustainable economy and society due to their financial power and economic activities. These companies carry significant responsibilities in areas such as global supply chains, human rights, and environmental issues, which can lead to major violations. To improve companies' performance and ensure transparency in sustainability and responsible business practices, the European Union has developed two important directives: the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD).

CSRD mandates companies to provide more comprehensive and comparable information on environmental, social, and governance (ESG) issues. Additionally, it aims to increase the accuracy of reports by enhancing audit requirements. One of its primary objectives is to increase transparency and reliability in businesses' sustainability reporting.

CSDDD, on the other hand, is designed to ensure that companies respect human rights and the environment throughout their value chains. This directive requires companies to identify, prevent, mitigate, and account for potential adverse impacts in their business operations and supply chains. It promotes responsible business practices in relationships with suppliers and other business partners, aiming to identify and manage potential human rights violations and environmental damage at an early stage. CSDDD ensures companies are accountable for their performance in sustainability and human rights, encouraging more responsible and sustainable business practices.

These two directives are part of the European Union's efforts to achieve sustainable development goals, encouraging companies to consider not only their financial performance but also their environmental and social impacts.

Companies Required to Report under CSRD and CSDDD

The European Union's Corporate Sustainability Reporting Directive (CSRD) will be applied to companies of different sizes and types in four main phases from 2024 to 2028:

  1. Start for Large Companies (Subject to NFRD) in 2024:

    • Effective Date: January 1, 2024
    • Scope: Large companies currently subject to the Non-Financial Reporting Directive (NFRD) that meet at least two of the following three criteria:
      • 500 or more employees,
      • At least €40 million in revenue,
      • At least €20 million in assets.
    • Reporting Submission Date: These companies must submit their sustainability reports for the 2024 fiscal year in 2025.
    • Requirements: These companies must present sustainability reports prepared according to ESRS standards, covering comprehensive environmental, social, and governance (ESG) factors.

  2. Start for Large Companies (Not Subject to NFRD) in 2025:

    • Effective Date: January 1, 2025
    • Scope: Large companies not covered by NFRD that meet at least two of the following three criteria:
      • 250 or more employees,
      • At least €40 million in revenue,
      • At least €20 million in assets.
    • Reporting Submission Date: These companies must submit their sustainability reports for the 2025 fiscal year in 2026.
    • Requirements: These companies must also present reports according to ESRS standards, including carbon footprint, energy consumption, water usage, and other sustainability indicators.

  3. Start for Listed SMEs in 2026:

    • Effective Date: January 1, 2026
    • Scope: Small and medium-sized enterprises (SMEs) listed on the stock exchange, meeting at least two of the following three criteria (excluding micro-enterprises):
      • More than 10 employees,
      • Revenue over €700,000,
      • Assets over €350,000.
    • Reporting Submission Date: These businesses must submit their sustainability reports for the 2026 fiscal year in 2027.
    • Requirements: Simplified ESRS standards will be used for SMEs, allowing them to report sustainability information with less complexity but sufficient detail.

  4. Start for Third Country Firms in 2028:

    • Effective Date: January 1, 2028
    • Scope: Third country firms meeting certain criteria within the EU (e.g., having significant economic presence in the EU or exceeding a certain revenue threshold).
    • Reporting Submission Date: These firms must submit their sustainability reports for the 2028 fiscal year in 2029.
    • Requirements: These companies must report according to ESRS standards like their EU counterparts, contributing to the EU's global sustainability goals.

The Corporate Sustainability Due Diligence Directive (CSDDD) aims to impose mandatory human rights and environmental due diligence obligations on companies of certain sizes. The criteria are as follows:

  • European Companies (Group-1): All limited companies with more than 500 employees and €150 million in global revenue.
  • European Companies (Group-2): Companies with more than 250 employees and €40 million in global revenue, defined as having high impact.
  • Foreign Companies Operating in the EU: Third country companies meeting the criteria of Group 1 and Group 2 and operating in the EU.

Under the directive, companies and their subsidiaries are evaluated separately to prevent multinational companies from avoiding responsibility.

CSRD Reporting Criteria and Standards

The European Sustainability Reporting Standards (ESRS) have been developed under the Corporate Sustainability Reporting Directive (CSRD) by the European Financial Reporting Advisory Group (EFRAG). These standards are designed to ensure companies report their sustainability performance consistently and comparably. The main components of ESRS are:

  1. General Presentation Standards:

    • ESRS 1: General Principles: Defines the general principles of sustainability reporting, ensuring companies adhere to fundamental principles like transparency, comparability, reliability, and consistency.
    • ESRS 2: General Information: Requires companies to provide general information about their business models, strategies, governance structures, risk management processes, and sustainability goals.

  2. Environmental Standards:

    • ESRS E1: Climate Change: Mandates companies to report on greenhouse gas emissions, climate risks and opportunities, climate strategies, and emission reduction targets.
    • ESRS E2: Pollution: Requires companies to report on their performance concerning air, water, and soil pollution.
    • ESRS E3: Water and Marine Resources: Requires companies to report on water usage, water quality, water management strategies, and impacts on marine resources.
    • ESRS E4: Biodiversity and Ecosystems: Mandates companies to report on their impacts on biodiversity and ecosystem services management.
    • ESRS E5: Circular Economy: Requires companies to report on waste management, material usage, and circular economy strategies.

  3. Social Standards:

    • ESRS S1: Workforce: Requires companies to provide information on employee rights, occupational health and safety, employee satisfaction, diversity, and inclusion.
    • ESRS S2: Workforce in the Value Chain: Mandates companies to report on human rights, working conditions, and social impacts within their supply chains.
    • ESRS S3: Affected Communities: Requires companies to report on the social impacts of their activities on affected communities and their interactions with these communities.
    • ESRS S4: Consumers and End Users: Requires companies to report on the social impacts of their products and services on customers, including customer satisfaction and product safety.

  4. Governance Standards:

    • ESRS G1: Business Ethics and Integrity: Mandates companies to provide information on their business ethics policies, anti-corruption measures, strategies to prevent and report ethical violations.
    • ESRS G2: Governance Structure: Requires companies to provide information on their governance structures, board composition, board member independence, and governance practices.
    • ESRS G3: Internal Control and Risk Management: Requires companies to provide information on their internal control systems, risk management processes, and the effectiveness of these processes.

CSDDD Standards

CSDDD standardizes the human rights and environmental due diligence obligations that companies must comply with. The steps companies must follow are:

  1. Incorporating Due Diligence into Policies:

    • Companies should develop and integrate human rights and environmental policies into their corporate governance systems.

  2. Identifying Actual and Potential Human Rights and Environmental Violations:

    • Companies should identify potential adverse impacts of their activities and business relationships.

  3. Preventing and Mitigating Potential Impacts:

    • Companies should develop and implement prevention action plans according to a reasonable timeline.
    • Obtain contractual assurances from business partners to comply with ethical standards.
    • Provide technical support to small and medium-sized business partners for compliance with new rules.

  4. Terminating or Reducing Actual Impacts:

    • Companies should address identified adverse impacts and take necessary corrective measures.

  5. Creating and Maintaining Complaint Mechanisms:

    • Companies should establish and maintain mechanisms for affected parties to report grievances.

  6. Monitoring the Effectiveness of Due Diligence Policies and Measures:

    • Companies should continuously evaluate the effectiveness of their due diligence policies and practices.

  7. Public Disclosure of Due Diligence Policies and Measures:

    • Companies should regularly report to the public on the measures and policies related to due diligence.

Obligations and Advantages of CSRD and CSDDD for Companies

The Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) are two important regulations aimed at improving companies' performance in sustainability and social responsibility within the European Union. These directives impose various obligations on companies while also providing long-term advantages.

CSRD expands the scope of the Non-Financial Reporting Directive (NFRD) to require more companies to conduct sustainability reporting. It is expected that approximately 50,000 companies will report under this directive. Companies must provide more detailed and comprehensive reports on environmental, social, and governance (ESG) factors, including issues such as climate change, human rights, employee rights, and anti-corruption. Additionally, companies must prepare their reports according to the European Sustainability Reporting Standards (ESRS). These standards aim to increase transparency and comparability in reporting. Moreover, the sustainability reports must be verified by independent auditors to enhance their reliability and accuracy.

CSDDD imposes responsibilities on companies regarding human rights and environmental impacts. Companies are held accountable for environmental and human rights violations resulting from their activities, their subsidiaries' activities, and their supply chain partners' activities. Companies must integrate due diligence obligations into their corporate policies and effectively implement these policies. They must identify, prevent, and mitigate actual and potential human rights and environmental impacts. Companies should develop preventive action plans and take necessary measures to ensure their business partners comply with ethical standards. Additionally, companies should establish mechanisms for affected parties to report grievances and continuously monitor the effectiveness of their due diligence policies and practices. Companies should regularly inform the public about the measures and policies related to due diligence.

Alongside these obligations, CSRD and CSDDD also offer significant advantages to companies. Firstly, these directives ensure companies provide more transparent and reliable information in sustainability and social responsibility. Independent audits enhance the accuracy and reliability of reports, creating a more positive image among investors, consumers, and other stakeholders. Companies that improve their sustainability performance gain a competitive advantage in the market.

Moreover, effective management of human rights and environmental risks helps prevent adverse events and legal issues, increasing companies' long-term resilience. Sustainability reporting and due diligence obligations can attract ESG-sensitive investors and direct financial resources to appropriate investments. Standardization of sustainability across the EU reduces legal uncertainties and differences in implementation, providing companies with the opportunity to operate within a single framework.

Finally, fulfilling human rights and environmental responsibilities benefits society and the environment, contributing to sustainable development. CSRD and CSDDD aim to make companies more effective and accountable in sustainability and social responsibility, offering long-term advantages that enhance corporate reputation, provide competitive advantages, and create societal benefits.

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