CSRD Part 1: The What, Who, Where and Why and When

As a private equity investor, it's essential to understand the nitty-gritty of CSRD, not just for compliance, but as a strategic component of your investment decision-making process.

I’ve split our guide to CSRD into two parts. Today is all about the essentials of CSRD – put simply, what is it? Who does it impact? Where will it impact? And when will it come into play?

2023 was a year of regulatory transformation in sustainable finance, and as we move into 2024, the focus shifts to the Corporate Sustainability Reporting Directive (CSRD). This EU legislation is reshaping business sustainability reporting, impacting both public and private companies (and not just in Europe!).

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Let’s start with the ‘What’

The CSRD is an expansion of the Non-Financial Reporting Directive (NFRD). It demands more detailed sustainability reporting from companies. The directive introduces the concept of double materiality, mandating firms to report on both the impact of sustainability issues on their business and their operations' impact on the environment and society.

Some example questions include:

1. Carbon Footprint: What is the company's total greenhouse gas emissions?
2. Resource Usage: How does the company manage natural resources such as water and raw materials?
3. Social Responsibility: What policies are in place for employee rights, diversity, and inclusion?
4. Supply Chain Ethics: How does the company ensure sustainability and ethical practices in its supply chain?

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So who needs to comply?

For EU Companies

• Listed Companies (Excluding Micro-Undertakings)
• Large Companies (Non-Listed): The CSRD applies to large companies that are not listed (meet at least two of the following):More than 250 employees on average during the financial year.A net turnover of more than EUR 40 million.A total balance sheet of more than EUR 20 million.
• Other Entities: The CSRD also applies to other entities like insurance companies and banks, regardless of their size.

For Non-EU Companies

• The CSRD applies to non-EU companies that generate a net turnover of more than EUR 150 million in the EU, provided they have at least one subsidiary or branch within the EU.Subsidiary Requirements: A subsidiary is included if it meets the size criteria listed above for large companies.Branch Requirements: A branch is included if it generates a net turnover of more than EUR 40 million in the EU.

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When does it come into action?

The implementation of the CSRD will be phased in over several years:

• Phase 1: Starts from the financial year 2024, where companies that were already subject to the NFRD will start to report under the new CSRD requirements in 2025.
• Phase 2: In the financial year 2025, z will start reporting under the CSRD in 2026.
• Phase 3: From the financial year 2026, listed SMEs, small and non-complex credit institutions, and captive insurance undertakings will report under the CSRD in 2027.
• Phase 4: Non-EU companies falling under the CSRD criteria will start reporting from the financial year 2028.

For more excruciating detail, you can read more here: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32022L2464

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Don’t we already have enough EU regulation?!

While some investors may see regulation as another thorn in their side, the three main legislative changes brought in by the EU aim to stop greenwashing and bring clarity to reporting.

Interplay with EU Taxonomy

The EU Taxonomy defines environmentally sustainable economic activities. Under the CSRD, companies need to align their reporting with these classifications, demonstrating their contribution to environmental objectives.

Integration with SFDR

The SFDR mandates disclosures on how sustainability risks are integrated into investment decisions. This means ensuring portfolio companies’ reporting is in line with both CSRD and SFDR requirements.

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Wrapping up It’s clear that this directive is set to transform the landscape of sustainability reporting both within the EU and beyond. Its impact extends beyond public companies to include SMEs and, importantly, affects non-European companies with significant operations in the EU.

Looking ahead, in Part 2, we’ll delve deeper into the practical implications of the CSRD for portfolio companies, GPs, and LPs. We'll explore why you should pay close attention to the regulation and offer insights on navigating its complexities. Follow the blog now to make sure you don’t miss it!

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_{Learn more about ESG Compass at https://www.starcier.com/esgcompass}

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Frequently Asked Questions

For those of you who just want the gist, we’ve pulled together all the things you need to know in one place:

1. What is the CSRD and why does it matter?

The Corporate Sustainability Reporting Directive (CSRD) expands the Non-Financial Reporting Directive (NFRD). It mandates more detailed sustainability reporting, focusing on the double materiality principle - how sustainability affects business and vice versa. It's crucial as it significantly shapes sustainability reporting standards in the EU and beyond.

2. What is double materiality?

The material impact of a business and its operations on the environment and society, and vice-versa: the impact of the environment and society on its business.

3. Who needs to comply with the CSRD?

CSRD applies to:

• EU Listed Companies (excluding micro-enterprises).
• Non-listed large EU companies (with 250+ employees, over EUR 40 million net turnover, or more than EUR 20 million in total assets).
• Non-EU companies with significant EU business (EUR 150 million+ net turnover in the EU, having a subsidiary or branch meeting specific criteria).

4. When does CSRD reporting start?

Reporting starts in phases:

• Phase 1 (2025): Companies already under NFRD report for the financial year 2024.
• Phase 2 (2026): Large companies not under NFRD report for the financial year 2025.
• Phase 3 (2027): Listed SMEs and certain institutions report for the financial year 2026.
• Phase 4 (2028 onwards): Non-EU companies under CSRD criteria report for the financial year 2028.

5. Are there any specific reporting standards under CSRD?

Yes, companies must follow European Sustainability Reporting Standards (ESRS), which provide specific guidelines on various ESG aspects, including governance, strategy, impacts, risks, opportunities, and detailed topical disclosures.

6. What are the implications of non-compliance with CSRD?

Non-compliance can lead to legal and reputational risks. It may affect investor confidence and access to capital, especially as sustainable investing becomes more prevalent.

For detailed information, visit the official EU legal document on CSRD: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32022L2464

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