Sircle - CSRD is coming: revolution in the new European regulatory environment

The CSRD was adopted in response to the pressing needs of consumers and investors and is intended to contribute strongly to achieving the objectives of the European Green Deal, which aims to transform the EU into a modern, resource-efficient, competitive and net greenhouse gas-neutral economy.

The Directive recognizes the need for better quality and uniformity of data on ESG impacts reported by companies and responds by imposing clear accountability and transparency obligations, providing - as a guarantee of the accuracy of the data being reported - for their mandatory review, adapting to the ESRS standards drafted by EFRAG. The standards relate to the reporting of non-financial data, valuation of assets, included immaterial, impacts, risks and liabilities. While waiting for the completion of ESRS standards, the most common standards know and applied up-to-now (i.a. GRI Standards, in the updated 2023 release), may still be used. All of these standards involve the accountability by the administrative body and adequate disclosure of the data, besides, the new Directive entails the accountability on the part of the administrative body and an appropriate system of sanctions. 

Therefore, in addition to extending the scope of reporting obligations to a broader range of companies, the CSRD provides for the introduction of uniform and detailed reporting standards (being progressively defined by EFRAG) and mandatory certification.

But that is not all. The CSRD also helps to clarify some key elements of the process leading to reporting, starting with the principle of double relevance (or 'double materiality') and eliminating any ambiguity about the fact that companies must disclose both information about the impacts of social and environmental factors on their activities, and information about the effects of their business activities on people and the environment.

In addition, it requires companies to report on their strategy, their objectives, the role of the board of directors and management, the negative effects of the company's activities and its value chain, intangible assets (including research and development) and, last but not least, the very way in which the data were identified and determined.

With regard to the data object, the CSRD specifies that companies must communicate qualitative and quantitative, prospective and retrospective information and, as the case may be, short, medium and long-term information.

But the real revolution, perhaps passed over a bit quietly, concerns governance obligations and the related responsibility of the administrative body.

The CSRD, in fact, provides for the collective responsibility of the members of the company's administrative, management and supervisory bodies, and specifies the minimum types of sanctions and administrative measures that Member States must provide for in the event of violations of the national legislation transposing the Directive.

Under the CSRD, a company may be exempted from consolidated financial reporting obligations but not from consolidated sustainability reporting obligations, with the consequence that even smaller companies, which do not have direct reporting obligations, if part of a group, must still equip themselves to provide accurate data to the parent company for consolidated reporting purposes.

It is clear that the scope of the changes introduced by the CSRD goes well beyond the extended range of application and that it is necessary, and indeed urgent, to set up from the outset an adequate governance of sustainability that becomes an integral part of company management, placing at the centre the concept of Due Diligence, in order to act in an informed and accountable manner.

These due diligence obligations cover the entire value chain of the company, including its operations, its products and services, its business relationships and its supply chains. 

In a nutshell, the new European legislation requires the company (particularly the governing body) to govern sustainability, making it the subject of an integrated medium- to long-term strategy.