What is the CSRD Directive?

What is the CSRD Directive? Key Objectives and Scope

This new regulation sets mandatory baseline standards for sustainability reporting for businesses, aiming to increase transparency, accountability, and the assessment of efforts undertaken. According to the directive’s provisions, ESG reports, much like financial reports, will become mandatory and cover the fiscal year, even though they do not pertain to a company’s financial activities. They will include verification and evaluation of the implemented and ongoing shifts towards sustainable operations, such as those in the area of the Circular Economy, the legality of actions in the field of sustainable development, and benchmarking against competitors.

By reporting on data such as greenhouse gas emissions, the company’s environmental and social impact, and potential operational risks, businesses will be able to focus on the most critical issues and implement corrective measures.

Who is Subject to the CSRD Directive?

The CSRD Directive was adopted in December 2022 and came into force on January 5, 2023. As a result, some companies will be required to comply with the new rules for the first time in the 2024 fiscal year, with reports published in 2025.

Currently, the reporting obligation affects tens of thousands of companies operating within the European Union. In Poland, the Corporate Sustainability Reporting Directive will initially cover over 3,500 enterprises. The first ESG reports for the current year in our country must be submitted by large entities classified as public interest companies with a high revenue level (above PLN 170 million) that employ at least 500 people. However, the directive will gradually extend to smaller and smaller entities. The implementation schedule assumes that each year, more companies will be required to implement ESG reporting procedures in line with ESRS standards.

In the short term, it looks as follows:

• FROM JANUARY 2025 ESG reporting in Poland (and the European Union) will be mandatory for all large entities that meet at least two of the following three criteria:
  • Number of employees: 250 people;
  • Revenues: EUR 80 million;
  • Total assets: EUR 40 million.
• FROM 2026, reporting will also cover medium and small publicly traded companies, with the option to voluntarily delay this requirement until 2028.

Consequences of Non-Compliance with the CSRD Directive

The introduction of the Corporate Sustainability Reporting Directive (CSRD) primarily aims to enhance the transparency and accountability of businesses in terms of non-financial data. The new regulations require large companies and listed companies (excluding micro-enterprises) to disclose information on risks and opportunities related to social and environmental issues, as well as the impact of their activities on these areas. Companies that fail to report the above data, despite being obligated to, will face various consequences, including:

Financial Penalties and Legal Sanctions

Entities that fail to meet the non-financial reporting obligation in accordance with the CSRD will face financial penalties. Each EU member state will set its own level of fees, which may depend on factors such as the size of the company, repeated violations, or the degree of inaccuracies in reporting. Tariffs determining financial penalties in our country should be established within approximately 1.5 years of the directive’s entry into force. This is the time allotted for implementing the document into domestic law.

Reputational Loss

Failure to report sustainability data in accordance with CSRD guidelines can lead to a loss of credibility and trust from investors, employees, customers, and other stakeholders, including shareholders. Companies that refuse to demonstrate social and environmental responsibility may be perceived as dishonest and irresponsible. Loss of reputation can result in a significant blow, leading to a decrease in asset value, loss of customers, and difficulties in raising capital for growth.

Lack of Competitiveness

A lack of accurate reporting, including non-financial reporting, results in poor competitive positioning. Companies that do not put effort into sustainable development or fail to report related activities automatically become less attractive to the market compared to entities actively engaging in ESG strategy. Companies that are proactive in this area are seen as dynamic, flexible, and committed, giving them a clear market advantage.

Difficulty Accessing Capital

Investors carefully scrutinize the financial health of companies, but an equally important factor is the adopted development strategy in response to market demands. Entities without a defined ESG action plan (or those that do not report it) and that fail to keep up with legislation may encounter difficulties in securing capital.

CSRD Implementation – Challenges for Companies and Economic Sectors

The new reporting process involves significant costs and employee engagement, affecting not only entities directly subject to the directive but also their partners (in Poland, this could include tens of thousands of small businesses). Estimates vary, reaching up to several billion PLN annually, with a one-time adjustment burden arising from the need to collect, process, and publish large volumes of data and information. Companies will be forced to introduce new systems, processes, and organizational structures.

Expanding CSRD to all SMEs (excluding micro-enterprises) will therefore generate significant costs that may be disproportionate to the potential benefits. There is a concern that this directive could disrupt market balance. Large companies will reap greater benefits at relatively lower costs, while small and medium-sized enterprises will bear heavy bureaucratic burdens that may be difficult to manage. Moreover, widespread reporting could lead to additional regulations and public burdens.

CSRD Directive and Business Reporting – What Are the Main Requirements?

Enterprises subject to the CSRD Directive will need to report their activities in accordance with the European Sustainability Reporting Standards (ESRS). These standards will be adapted to EU policy and based on international standardization initiatives to best fit each member state.

CSRD imposes the obligation to disclose specific non-financial information, the scope of which is defined by the mentioned reporting standard, introducing precise requirements for public companies and other entities. The key obligations arising from the CSRD Directive include:

• Precise Definition of ESG Reporting Scope: This requires identifying areas relevant to the company’s operations, i.e., those that impact the environment, society, and governance.
• Consultation with Stakeholders: This includes investors, suppliers, employees, customers, and the local community. Consultations allow for identifying expectations and priorities of various stakeholders, enabling the adjustment of the report to actual needs.
• Standardized Reporting Guidelines: This means standardizing information on companies’ activities within the EU, allowing for reliable comparisons. However, the transition to ESRS requires companies to adapt their reporting systems, auditing procedures, and impact analysis of activities on ESG areas.
• Due Diligence in the Context of CSRD: Accurate identification and assessment of the negative impacts of businesses on the environment and society will allow for effective mitigation.
• Integration of Financial Data with ESG Aspects: This approach provides a comprehensive reporting view, showing both the company’s financial results and the risks and opportunities associated with its dependence on natural, human, and social resources.
• Conducting Audits by Independent Auditors: This new principle aims to enhance the credibility and comparability of the information contained in reports.

The CSRD Directive is an important and inevitable step towards more responsible business practices in Europe. Therefore, reporting should be taken seriously, and preparations for the CSRD guidelines should begin now.