CSRD: The new Sustainability Directive and companies' wager on compliance

The new CSRD Directive creates new obligations for European and, by extension, Cypriot businesses, which companies throughout the EU are required to comply with and which concerns the submission of sustainability reports (Corporate Sustainability Reporting Directive).

The CSRD essentially revises the 2014 Non-Financial Disclosure Directive (NFRD), introducing more detailed reporting requirements and requiring European companies to submit sustainability information, which will be specified, for the first time, through the European Reporting Standards (ESRS).

The European standards were developed by the European Financial Reporting Advisory Group (EFRAG) and their final version was approved by the European Commission on 31 July 2023, following consultations with the EU Member States and European agencies.

The Directive, which was implemented by the European Commission in January 2023 as a follow-up to the European Green Agreement, should be transposed into the national law and of Cyprus with the passing of relevant harmonising legislation by the Parliament by next June, at the time of course which, compliance will be the only choice for all companies within its scope.

Expanded scope…

A specific difference that has been created, among other changes, is that the obligation to publish sustainable development reports based on the strictest standards required by the CSRD is extended from the approximately 11,000 companies that already fall under the previous regime of the NFRD Directive, to approximately 50,000 large companies and listed small and medium enterprises.

Something that, as is understood, presupposes that some of these companies will have to undertake a radical restructuring of their operating model so that they are able to respond. At the same time, it is understood that the implementation of the new Directive is anticipated to create a series of challenges impacting the activity of multiple business sectors.

In this regard, it is worth mentioning the fact that an important new obligation for companies becomes, among other things, the control of submitted reports by an independent statutory auditor, while in accordance to the requirements for financial information, the use of digital tagging also becomes mandatory in order to facilitate the analysis and comparability of ESG disclosures.

The CSRD Directive contains a total of 12 sections, each of which describes how companies should report on specific thematic areas. There are the general standards ESRS 1 (regarding general requirements) and ESRS2 (regarding general disclosures), while the rest are divided by ESG (Environment, Social, Governance) theme.

The four phases of implementation

The implementation of the new Directive will take place in four phases, based on the categorisation of companies and corresponding schedules that have been set, as follows:

First: Reporting in 2025 for fiscal year 2024 for companies already subject to the NFRD.

This category includes large entities in regulated EU markets. with more than 500 employees.

Second: Reporting in 2026 for the 2025 financial year for large companies or parent companies of large groups, not currently subject to the NFRD.

A large company is defined as one that meets two of the three criteria below:

a) Balance sheet over 25 million euros.

b) Turnover in excess of 50 million euros.

c) Has more than 250 employees during the financial year.

Third: Submission of reports in 2027 for the financial year 2026 for listed small and medium-sized enterprises (except very small enterprises), small and non-complex credit institutions and dependent insurance enterprises. It also applies to non-EU entities, but with securities listed on a regulated EU market.

It is noted that the possibility of opt-out of listed SMEs during the transition period is foreseen, which means that they will be excluded from the application of the Directive until 2028.

Fourth: Submission of reports in 2029 for the financial year 2028 for third country companies with a net turnover of more than 150 million in the EU, and with at least one subsidiary or branch in the EU, with a turnover of more than 40 million euros.

The big compliance wager

As can be seen from the above and as already mentioned above, the new CSRD Directive and in particular its implementation seems to be a big wager for Cypriot businesses, to an even greater extent than the existing one, given that its scope now includes large and listed small and medium-sized enterprises, as categorised according to EU criteria.

It is a well-known fact that, in our country, small and medium-sized enterprises -several of them listed- occupy the largest percentage of the pie of the business ecosystem and are, as is usually called, the backbone of our economy.

Some of these businesses, and specifically those that fall under the criteria set by the Directive, are now de facto required to readjust their structural form and mode of operation, in order to be able not only to comply with the new requirements in relation to the sustainability reporting, but also to redefine their corporate strategies in the direction of reducing greenwashing tactics and promoting efforts for a more sustainable future, aligned with global sustainability goals.

After all, the non-compliance of companies with the new requirements poses risks on multiple levels. In addition to potential fines and penalties, they may face difficulties in raising capital, as investors will likely seek out and turn to companies that provide transparent EGS disclosures and comply with regulations.

Furthermore, non-compliance may also affect the choices of their customers, who over time are becoming more aware of issues related to the protection of the environment and society.

The history of the CSRD Directive

CSRD is intended to fill the gaps in the existing rules on sustainability information.

The European Commission presented the CSRD proposal on 21 April 2021 as part of the European Green Deal and the Sustainable Finance agenda.

On February 24, 2022, the EU member states unanimously agreed on the Council's position on the CSRD proposal.

On 21 June 2022, the Council and the European Parliament reached an interim agreement on CSRD, which was signed by the representatives of the EU Member States. on June 30, 2022.

See the Corporate Sustainability Reporting Directive (CSRD) as it received the final green light from the EU Council. in November 2022 and with a view its of implementation by the member states 18 months later HERE

(Source: InBusinessNews)