CSRD: It’s five Minutes to Midnight

The Corporate Sustainability Reporting Directive (CSRD) will make sustainability reporting significantly more complex. Companies must set the course now and implement appropriate processes in order to be prepared for the new reporting obligations.

Until now, many companies have not had to provide any information about their sustainability measures, but the EU has changed this with the CSRD: Companies will gradually be required to submit an annual sustainability report, in the form of a phased model. Some companies will also be indirectly confronted with the regulations of the EU directive – such as suppliers of large companies. This year, around 2,000 companies in Austria will have to prepare a sustainability report covering the 2024 financial year in 2025 in accordance with the CSRD.

The CSRD puts sustainability reporting on the same level as financial reporting. It aims to ensure that companies provide standardised information on ESG issues (environment, social and governance) and engage in a strategic debate on these issues. The aim is to identify opportunities and risks and measure the success of the strategy using KPIs.

The new requirements of the CSRD will significantly change the reporting and strategy practices of many companies. While the Non-Financial Reporting Directive (NFRD) requires companies to report on environmental protection, diversity on management boards, social responsibility and the treatment of employees as well as anti-corruption, the CSRD expands the scope of reporting obligations to include sustainability. Another new feature is the principle of dual materiality, which prevents one-sided reporting.

Companies naturally like to talk about their sustainability endeavours and successes; they prefer to omit aspects to the contrary. This is hardly surprising, but will become more difficult with the new EU directive, as it stipulates uniform standards that must be met. If things are concealed or even glossed over, there is an increased reputational risk.

Who is affected by the CSRD?

In future, the reporting obligation will apply to all “large” companies that fulfil at least two of the three criteria:

• Balance sheet total over 25 million euros
• Net sales of more than 50 million euros
• Average number of employees of over 250 during the financial year

Listed companies (and therefore also certain SMEs) are also included, as are large credit institutions and insurance companies of all legal forms. However, a separate proportionate standard is to be developed for SMEs and they will not be obliged until three years later.

The timetable envisages a gradual introduction of the reporting obligations:

• Companies that are already subject to the current sustainability reporting obligation will have to report on the 2024 financial year for the first time in 2025.
• Companies that were not previously subject to the requirements of the NFRD but are now covered by the expanded scope of the CSRD must report on the 2025 financial year for the first time in 2026.
• Listed SMEs, small and non-complex financial institutions and captive insurance companies must report on the 2026 financial year for the first time in 2027 – with an opt-out option until 2028.
• Companies outside the EU that generate a turnover of more than 150 million euros in the EU and have at least one subsidiary or branch office within the EU must report on the 2028 financial year in accordance with the CSRD requirements for the first time in 2029.

What are the content requirements of the CSRD?

In terms of content, the CSRD is based on ESG logic. This means that key figures from the areas of environment, social and governance must be published, as well as key figures on the EU taxonomy. Information should be forward-looking, i.e. include strategy, targets and progress. In addition, reports must be externally audited in future (initially only with limited assurance) and published as part of the management report.

Previously, international frameworks (e.g. GRI standards) could be used for reporting; in future, separate EU reporting standards (ERS) will be mandatory. In addition to risk-related information, the principle of double materiality will apply in future. The previous principle of materiality only refers to the impact of sustainability factors on finances and business activities (outside-in), which prioritises the interests of investors and stakeholders. Double materiality also includes the impact of financial and corporate activities on sustainability aspects (inside-out), which gives greater importance to stakeholder interests. While the CSRD specifies the requirements, the European Sustainability Reporting Standards (ESRS) define the content of the new disclosure requirements. A legal act on the first 12 ESRS was adopted in summer 2023; more are to follow.

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