16 August 2024
The EU Corporate Reporting Sustainability Directive (CSRD) is a new regulation requiring companies to assess and disclose information related to sustainability, diversity, and corruption. Non-compliance poses significant risks, including potential litigation. Here’s what businesses need to know.
The CSRD, which took effect in 2023, applies to both EU-based companies and non-EU firms with subsidiaries or operations within the EU. By 2028, non-EU parent companies with annual EU revenues exceeding EUR 150 million and an EU-based subsidiary will need to report on sustainability and related factors.
Impact on Businesses
The European Commission adopted the European Sustainability Reporting Standards (ESRS) on July 31, 2023, which are integral to the CSRD. These standards require companies to disclose their impact on climate change, pollution, water resources, biodiversity, and human rights.
Under the ESRS, companies must meet specific disclosure requirements, including metrics and reporting practices, and align their ESG (environmental, social, governance) targets with these standards. The concept of “double materiality” means companies must consider both their value creation and the broader impact on the environment and society when determining what to report.
Penalties for Non-Compliance
Failure to meet CSRD requirements could result in penalties beyond formal sanctions, including damage to a company’s brand and reputation. The climate change standard (ESRS E1) includes a “comply-or-explain” provision, meaning companies must report or justify why they are not reporting on this issue.
James Bosley, Head of Climate Strategy at Gallagher, notes: “Businesses must carefully evaluate the financial and reputational risks of non-compliance, as the expected level of reporting detail and consequences are still evolving.”
Companies must prioritize meeting these obligations to avoid penalties and protect their reputation.
