CSRD: The European Sustainability Reporting Directive

On 16 December 2022, the European Union published in the EU Official Journal the Directive number 2022/2464 Corporate Sustainability Reporting Directive as part of the European Green Deal. The aim is to transform the EU into a modern, resource-efficient and competitive economy. The European Green Deal envisages zero net greenhouse gas emissions by 2050, decoupling economic growth from resource use and no longer neglecting any place or person. The European Union is counting on the Green Deal for a 360° transformation in climate, energy, transport and taxation, which also passes through the Sustainability Budget. Hence the need for a directive to regulate the reporting obligation of non-financial information for certain organisations.

The CSRD Directive concerns corporate sustainability reporting. Its introduction will significantly increase the number of companies that will have to compulsorily draw up a Sustainability Report, a document that communicates corporate choices in terms of economic, environmental and social sustainability to customers, manufacturers, investors and employees. We are in the area of ESG criteria, Environmental, Social and Governance, which are becoming increasingly important because they describe the company according to non-financial parameters in order to value its social and environmental impact. The stakeholders want to be able to have a complete view of the company's operations not only in economic terms, but also in relation to the impacts on the territory and the community. The Sustainability Report offers them a snapshot of the company's reality.

The introduction of the CSRD Directive will increase the number of Italian companies obliged to draw up a Sustainability Report. The estimate is a shift from the current 200 companies with mandatory reporting to about 5,000 organisations. In Europe, on the other hand, there are currently about 11,600 listed companies that are obliged to draw up a Sustainability Report. With the CSRD regulation, all large companies will have to comply, as they are required to give an indication of their values and vision of their relationship with society and the environment. Reporting will have to be compulsorily audited and will have to follow the regulations on the EU Taxonomy concerning sustainable activities. In addition, companies will have to take into account standards that are the same for all when drafting reports. GRI, SABS but especially EFRAG's ESBS are the standards to be used for sustainability reporting.

The CSRD Directive extends the obligation to draw up a Sustainability Balance Sheet to all large companies, both listed and unlisted, that exceed one of three limits, i.e. a number of more than 250 employees, a balance sheet of at least 20 million per year and net revenues of at least 40 million euro. Micro enterprises are excluded while listed SMEs are included in the obligation. For companies and subsidiaries of branches with a non-EU parent company, the limits to be considered are net revenues exceeding 150 million for each of the last two consecutive financial years. In addition, they will have to have a subsidiary with the size requirements of the CSRD and a branch with net revenues exceeding 40 million in the previous financial year.

Twenty days have passed since the CSRD was published for entry into force. From then on, the EU Member States have 18 months to transpose the new directive into legislation. There are different timelines for the publication of the Sustainability Report depending on the type of company. Specifically, the CSRD requires listed companies with more than 500 employees to publish the report from January 2025 with reference to the fiscal year 2024. Large unlisted companies will have to proceed from January 2026 with reference to the fiscal year 2025. SMEs listed on the financial markets will have the obligation to publish from 2027 with reference to the fiscal year 2026. Finally, non-European companies with a minimum turnover of 150 million in the EU will have to publish the Sustainability Report from January 2029 with reference to the fiscal year 2028.

Through corporate sustainability reporting, the European Union intends to pursue three objectives. Firstly, it wants to address the shortcomings of the current legislation on the reporting of non-financial information. The current legislation is so insufficient as to demand a new way of reporting by companies that takes into account how the business model affects sustainability in an increasingly inclusive manner. CSRD sets itself a further objective, to curb the phenomenon of greenwashing, i.e. façade environmentalism. Companies will no longer be able to feign an attachment to the environment in order to enhance corporate reputation and image. Customers, suppliers, investors demand to be comprehensively informed about the sustainable practices followed by the company. Vague, rough language or incomprehensible technicalities will no longer be allowed. The Sustainability Report must be clear and transparent.

The third CSRD objective closely related to the previous ones is to improve sustainability reporting in order to take full advantage of the potential offered by the European single market and contribute effectively to the transition towards an inclusive and sustainable financial and economic system. Companies must follow the European Green Deal strategy to be part of the change taking place, to become more competitive and improve reputation. At the same time, they are called upon to achieve the UN Sustainable Development Goals - SDGs. In the Agenda 2030 there are seventeen goals and 169 sub-goals aimed at combating inequality, supporting social and economic development and environmental protection. To this end, 3Bee helps companies with regenerative projects to protect biodiversity that can help achieve Goals 13 and 15 of the 2030 Agenda, such as the Oases of Biodiversity.

Companies obliged to prepare a Sustainability Report will have to include specific information in the management report. The document will have to describe the business model and strategy of the organisation, indicating the risks and opportunities related to sustainability issues. Companies will also be asked to define plans to ensure that the strategies pursued are compatible with the transition to a sustainable economy and the limitation ofglobal warming to 1.5°. The report will have to contain a description of the sustainability-related goals and report on the progress made in achieving them. Policies should also be described in full as well as the diligence procedures applied in terms of the impact of the company's actions on the land, environment and society.

CSRD requires companies to disclose ESG factors because these criteria allow for an objective and shared measurement of the environmental, social and governance activities of the organisation. CSRD mandates climate disclosure with a focus on companies' physical and transitional risks, resilience and adaptation plans to various climate scenarios. In the area of social factors, then, the directive obliges reporting on aspects such as working conditions, non-discrimination and inclusiveness. Finally, with reference to governance, companies must communicate the role of boards of directors and risk management in relation to sustainability reporting, company ethics and corporate culture as well as the quality of relations with customers, suppliers and communities affected by company activities.

The CSRD directive emphasises that the future of corporate reporting is the Sustainability Report to embark on a path of adopting an increasingly sustainable economy. Companies must demonstrate a commitment to long-term sustainable value creation that meets regulatory and stakeholder requirements. In line with the CSRD Directive, 3Bee has developed XNatura, the innovative terrestrial biodiversity monitoring protocol based on bioacoustics and remote sensing. Thanks to this innovative methodology, companies will be able to truly improve the impact on biodiversity and obtain a detailed report of taxonomically monitored areas in line with European regulations, including the CSRD Directive. Want to know more?.

Article edited by Valentina Trogu