Editorial
The European Union has ratified a corporate sustainability reporting directive that promises to change how large and publicly listed companies report on their social and environmental impacts.
The Corporate Sustainability Reporting Directive (CSRD), officially enacted on January 5, enhances and expands companies’ reporting obligations. Notably, the scope of reporting has widened to include a broader set of large companies as well as listed small- and medium-sized enterprises (SMEs) — around 50,000 organizations in total.
Big Changes Coming to Sustainability Reporting
The CSRD is part of the European Green Deal. Its goal is to boost transparency around the effects businesses have on people and the environment, equipping investors and stakeholders with the information needed to assess climate change risks and other sustainability issues.
The catalyst behind this new legislation, the European Commission said in a press release, is “ample evidence” that the information companies currently report is insufficient.
“Reports often omit information that investors and other stakeholders think is important,” the release said. “Reported information can be hard to compare from company to company, and users of the information are often unsure whether they can trust it.”
Problems in the quality of reporting, according to the Commission, also create an accountability gap. “High quality and reliable public reporting by companies will help create a culture of greater public accountability.”
Related Article: The Impact of Privacy Regulations on Digital Workplace Technology
What Companies Does the CSRD Apply To?
Businesses must start to comply with the CSRD during the 2024 financial year, reporting their progress in 2025. They’ll also need to adhere to the European Sustainability Reporting Standards (ESRS), developed by EFRAG (formerly the European Financial Reporting Advisory Group).
The CSRD, once in effect, will apply to all large EU companies, including EU subsidiaries of non-EU parent companies, that meet two or more of the following conditions:
- 250 employees or more
- Net turnover of €40 million or more
- Total assets of €20 million or more
Non-EU companies with a net turnover of more than €150 million in the EU will also have to comply.
Smart companies, whether they’re in the EU or not, will jump ahead and adopt policies in support of this directive, said Kristina Podnar, digital policy consultant and author of “The Power of Digital Policy.” She sees the regulation as both an opportunity and a competitive edge.
“I think we will see investors, shareholders, clients and others asking for organizations to align their reporting to the standard, regardless of where the company is based (EU or not),” she said.
Still, this new regulation’s requirement to disclose information on policies and initiatives will be a tremendous challenge, said Podnar, pointing to the scope and scale of the enterprise and the necessary mapping.
“Those issues will be compounded by the need to define a clear baseline and report progress towards targets. For many organizations, this is nothing short of challenging.”
The vastness of information is tremendous, Podnar explained. And having the ability to both project to forward-leaning scenarios and understand retrospectives will make operations and decision-making harder.
“I don’t see processes or systems ready to stand up to this challenge, and most organizations are not nimble enough to adopt new systems or modify processes to support faster decision-making,” she said. “We will see a loss of competitiveness in some ways, until enterprises can stabilize.”
Podnar doesn’t believe these challenges will negatively impact corporate sustainability in the short term or that corporations will go up on sustainability goals. But, she said, “What it will fuel is distrust and frustration and lead to a push across verticals for increased data governance and data quality that ensures consistent reporting generation for all.”
Related Article: Why Congress Fails to Regulate Big Tech
What to Do Until CSRD Goes Into Effect
Right now, the CSRD is in a four-week feedback period, which will end on July 7. During this period, the Commission will take into account any commentary it receives. After this window closes, the Commission will finalize the sustainability reporting standards and submit them to the European Parliament and Council for scrutiny.
Until the new CSRD rules take effect, the existing rules of the Non-Financial Reporting Directive will continue to apply.
Under NFRD, large organizations must publish data relating to environmental matters, social issues, employee treatment, human rights, anti-corruption, bribery and diversity on company boards. More than 11,000 large companies across the EU currently fall under these rules.
Transitioning from NFRD to CSRD: Challenges & Opportunities
With these significant changes on the horizon, now is the time to prepare. One hurdle Podnar anticipates is adapting to the European Taxonomy, an EU-wide classification system for sustainable activities.
Conference
Sep
16
HR Tech Conference Las Vegas 2025
Register
Conference
Oct
27
Gartner HR Symposium/Xpo Orlando 2025
Register
Another issue? “Ensuring that the application of the taxonomy and the reporting is even across all companies,” she said. “Else the values mean nothing, which is an ongoing reporting issue that impacts disclosures and market price.”
Ultimately, this harmonization of information reporting is anticipated to reduce reporting costs for companies in the medium- to long-term. And Podnar thinks that might be true, along with operational and reporting efficiencies. But it’s going to take some time to get there.
“No doubt, in the short term, we are facing major disruptions and challenges as 49,000 companies that are required to report their ESG performance in alignment with the directive start to press the gas pedal,” she said.
Learn how you can join our contributor community.
