To Comply or Not Comply With CSRD

With the first reporting deadline for the European Union’s Corporate Sustainability Reporting Directive (CSRD) less than 6 months away, companies should be preparing for compliance. The directive is intended to provide insight into a company’s sustainability impacts, risks, and opportunities, including its sustainability strategy, targets and progress, products and services, business relationships, and incentive programs. The information that needs to be reported includes not only a company’s own operations, but also direct and indirect business relationships across the value chain. Value chain disclosures will be the most challenging, given the scope and the reliance on information from parties not controlled by the company.

A core concept of CSRD is double materiality, which requires that companies report information necessary to understand how sustainability matters affect their business and financial performance, along with the impact they have on a range of sustainability matters. In addition, the directive introduces a mandatory assurance obligation for all reported sustainability information.

Should US Companies Be Concerned About CSRD?

Even though the CSRD is an EU regulation, US companies that are within the scope of the directive should be preparing for compliance. If a US company has significant operations or subsidiaries in the EU, they likely will need to comply with reporting requirements. US companies that do business with EU-based companies may find that their EU partners will be demanding more detailed sustainability information, which could influence their own reporting practices. This means companies need to gather and disclose more detailed information about their environmental, social, and governance (ESG) performance than previously done.

CSRD is gradually being phased in based on company size, revenue, and location:

• Large companies that were reporting under the Non-Financial Reporting Directive (NFRD) must comply with CSRD in 2024, and begin reporting in 2025.
• Large companies that meet two of the following criteria must comply with CSRD in 2025, and begin reporting in 2026.
  • 250+ employees
  • €50 million+ net turnover
  • €25 million+ total assets
• Mid-market companies that meet two of the following criteria: small-sized (50-249 employees, €10-50 million net turnover, €5-25 million total assets) or micro-sized (10-49 employees, €900,000-10 million net turnover, €450,000-5 million total assets) must comply with CSRD in 2026, and begin reporting in 2027.

CSRD’s goal is to provide clarity that will help investors, analysts, consumers and other stakeholders better evaluate EU companies’ sustainability performance and related business impacts and risk. The directive requires EU companies, including EU subsidiaries of non-EU companies, to disclose their environmental and social impacts, and how their ESG actions affect their business.

Companies such as Ford Motor Company have been actively working to comply with European regulations, particularly those related to sustainability and environmental protection. By investing in electric vehicles, improving fuel efficiency, and implementing circular economy practices, Ford is well-positioned to comply with European regulations and contribute to a more sustainable future. In addition, Ford has been enhancing its sustainability reporting to provide transparent information about its environmental and social performance. The company has adopted frameworks like the Global Reporting Initiative (GRI) and the Task Force on Climate-Related Financial Disclosures (TCFD) to ensure consistency and comparability of its reporting.

Key Challenges of CSRD Compliance

While the CSRD is a significant piece of EU legislation designed to enhance the transparency of companies’ sustainability performance, it has faced considerable criticism from sustainability practitioners due to several key challenges:

• Complexity and scope: CSRD mandates a vast array of sustainability disclosures, covering topics such as environmental impact, social responsibility, and governance. This extent of scope can be overwhelming for companies, especially smaller ones.
• Double materiality: As mentioned, the directive requires companies to assess both the materiality of sustainability issues to their business and their impact on society and the environment. This presents challenges due to data complexity, stakeholder engagement, integration with financial reporting, and resource allocation.
• Lack of clarity and guidance: CSRD lacks clarity on double materiality, assurance, scope of reporting, data collection, and transition. This can lead to uncertainty and potential inconsistencies in reporting.
• Limited guidance: While the European Commission has provided some guidance, it may not be sufficient to address all the practical challenges companies face in implementing CSRD.
• Burden on resources: Compliance with CSRD can be resource-intensive, requiring significant investments in data collection, analysis, and reporting. This can be particularly challenging for smaller companies with limited budgets.
• Data availability: Gathering the necessary data to meet the CSRD’s requirements can be difficult, especially for certain sustainability metrics.

Noncompliance Penalties

Noncompliance with CSRD can have significant consequences for a company. These consequences include: financial penalties imposed by regulatory authorities, reputational damage leading to decreased trust from investors, customers, and employees, a disruption in company operations and increased costs, and limited access to certain markets or financing options.

Companies that do not comply will face varying consequences depending on the jurisdiction and the severity of the violation. For example, France has adopted strict penalties for CSRD noncompliance. These penalties include monetary fines such as:

• Up to €18,750 for not publishing the sustainability report
• Up to €100,000 for obstructing the work of external auditors or failing to provide necessary information
• Up to €375,000 and a maximum of 5 years in prison for not appointing an accredited independent third party for assurance

Additional penalties from France may include exclusion from public procurement contracts, and even criminal penalties. Corporate directors could face up to 5 years in prison, and fines of up to €75,000 for failing to provide necessary information for external auditors to validate their CSRD-compliant reports or for obstructing their work. In addition, failure to have the CSRD report audited by an accredited entity could lead to a 2-year jail term and fines of up to €30,000. France’s penalties for noncompliance with CSRD are among the most severe in Europe, reflecting its commitment to sustainability and desire to hold companies accountable for their environmental and social impact.

Current Status of CSRD

As of January 2024, five EU countries have adopted national legislation implementing CSRD. France has taken the lead in implementing CSRD, adjusting its Non-Financial Reporting Directive (NFRD) thresholds to align with CSRD requirements. In addition, Finland, Denmark, the Netherlands, and Slovakia have adopted national legislation implementing CSRD. Slovenia, Belgium, Spain, and Portugal have proposed legislation to implement CSRD. The remaining EU countries are still in the process of implementing CSRD.

Key Steps for CSRD Compliance

By following these steps, US companies can effectively prepare for and comply with CSRD, demonstrating their commitment to sustainability and potentially gaining a competitive advantage in the European market.

• Understand the scope and applicability: Assess whether your company meets CSRD’s criteria for compliance, and understand the specific disclosure requirements outlined in CSRD and the European Sustainability Reporting Standards (ESRS).
• Conduct a double materiality assessment: Determine the sustainability issues that are most significant to your company’s business model, strategy, and financial performance. Evaluate the impact of these issues on your company and the impact of your company’s activities on these issues.
• Collect and analyze data: Collect data on your company’s ESG performance, including metrics related to emissions, diversity, and supply chain management. Verify the accuracy and completeness of your data to ensure it meets CSRD reporting standards.
• Prepare report: Structure your report in accordance with the ESRS, which provides detailed guidance on the information to be disclosed. Obtain assurance from a qualified third party to enhance the credibility of your report.

The bottom line is, despite some backlash against sustainability initiatives here in the US, the EU is moving forward with legislation such as CSRD and the Carbon Border Adjustment Mechanism (CBAM). This means that US companies need to be monitoring developments with the directive and proactively preparing for compliance. While the SEC climate disclosure rules are still pending, and California sustainability bills are facing some legal challenges, investors, consumers and various stakeholders are invested in utilizing ESG criteria for investing and purchasing. The good news is that CSRD may provide some early standardization on reporting, and accountability.

As companies contend with the ever more complex array of regulatory compliance requirements, Canopy Edge specializes in helping our clients navigate the compliance landscape through the expert advice and guidance of our consultants. To find out more about the most effective CSRD compliance for your organization, contact Canopy Edge for an initial advisory session.