Published 2.7.2024
Sustainability regulation is tightening, and even small and medium-sized enterprises (SMEs) must take action to satisfy customers and financiers. It is also expected that requirements will increase soon through legislation.
To solve the climate and nature crisis, actions are needed from everyone. Previously, environmental work has been seen as a way to improve the company’s brand, but soon it will be a necessity for profitable business operations. When the sustainability regulation for large companies is tightened through the Corporate Sustainability Reporting Directive (CSRD), the effects will also impact smaller companies through the supply chain and stakeholder relationships. Consumers are increasingly asking for sustainability information from companies, and financiers also expect companies to act sustainably.
Briefly about CSRD
What?
The EU’s new Corporate Sustainability Reporting Directive (CSRD) came into force at the beginning of 2023 and introduces reporting obligations for over 50,000 companies within the EU.
Why?
The purpose of the directive is to make companies’ sustainability efforts more transparent and reporting more comparable.
Who is affected?
The reporting obligation is introduced in stages:
Fiscal year 2024: Large listed companies already subject to non-financial reporting (NFRD).
Fiscal year 2025: Companies meeting at least two of the following criteria: over 250 employees, a turnover of over 40 million euros per year, or a balance sheet total of over 20 million euros per year.
Fiscal year 2026: All listed small and medium-sized companies with a two-year transition period.
What changes from before?
CSRD replaces the Non-Financial Reporting Directive (NFRD) and introduces the following changes:
- The number of companies covered is expanded
- Standardized reporting requirements (ESRS) are introduced
- Mandatory independent audit
- Requirement for machine readability
The right time to start sustainability work is now
Even if sustainability reporting is not yet required by law for all companies, it is wise to prepare. To begin with, it is good to assess what the CSRD directive means for your company and what timeline applies. Will it eventually become directly mandatory through legislation or indirectly through possible stakeholder requirements, and when? The basis for sustainability reporting is a double materiality assessment, i.e., the company’s outward sustainability impacts and the sustainability-related financial risks and opportunities affecting the company. This also includes impacts related to the value chain and an assessment of stakeholder expectations. Only factors material to the company’s operations are included in the reporting. Next, the necessary information is identified, data is collected, and a sustainability report is prepared. A sustainability report made according to the legal framework requires verification by an independent auditor.
Not just an obligation, but also an opportunity to develop business
Sustainability regulation should not be seen only as paperwork, and the additional work burden should not be discouraging. The requirements from the regulation can be an opportunity to review the business more broadly and explore what benefits can be gained by considering climate and environmental impacts. Various measures to increase sustainability, such as efficiency in operations, energy, and material use, can lead to direct cost savings. Changing business models can also reveal many new business opportunities, for example, different solutions within the circular economy.
If you are wondering how sustainability regulation affects your business, get in touch!