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The Corporate Sustainability Reporting Directive or CSRD which was published in the Official Journal of the European Union on the 16th of December 2022 has been sought as a measure of transposing the national laws of the member states under the European Union, in a period of 18 months. It was in 2022 again when this Directive was adopted by the European Parliament followed by a political agreement that was reached between the member states as a part of a negotiation between the representatives of the European Parliament and the European Council.
The main objective behind adopting this Directive was mostly aimed towards ensuring a fundamental extension of the Non-Financial Reporting Directive, as per the necessity of the requirements for corporate sustainability. Thus, in comparison to the NFRD implemented in Germany with the help of the CSR Directive Implementation Act, it required a more comprehensive disclosure of the areas of environmental, social, and corporate governance to ensure better transparency regarding the matter of sustainability within the companies and their performance and practices. In a way, this is intended towards enabling a better rate of monitoring and accountability of companies for realizing the social and environmental impact of operations, where European sustainability reporting is looking towards aligning with the requirements of the European Union’s Green Deal.
The Corporate Sustainability Report Directive covers all strategies related to corporate-market orientation, large insurance companies, and banks, excluding micro-enterprises. Somehow, the adoption of the CSRD also sought to affect the operations of around more than 50,000 companies working under the European Union, out of which 15,000 companies are registered out of Germany.
The process of application of the CSRD-
The Corporate Sustainability Reporting Directive will gradually get applied in a phase-based manner. These successive steps will include 4 major phases, which can be gradually understood in the following ways;
Companies covered under the current Sustainability Reporting Obligation that need to file their first reports in 2024 and 2025.
Companies that have not been subjected to the previous requirements of NFRD, and are currently being covered under the expanded scope of CSRD,need to report in the fiscal years 2025 and 2026
Listed SMEs and non-complex financial institutions or captive insurance companies to report by the fiscal years 2026 and 2027.
Companies outside the EU generating greater sales more than 150 million Euros must report for the financial year of 2028 in accordance with the CSRD requirements for the first time in 2029.
How the new rules of the Corporate Sustainability Reporting Directive will be applicable in the future-
As of 5th January 2023, the new Corporate Sustainability Reporting Directive has entered into force, in a full-fledged manner. In this new directive, the rules of social and environmental information which must be reported by the companies will get modernized and strengthened to a better level. In this case, many companies that are listed in the SMEs will be required to have submitted a report on the sustainability of approximately 50,000 words in total. In a way, these new rules will try to ensure the stakeholders and investors get access to the information which is required to be assessed what arises due to climate change and other sustainability issues, creating a culture of transparency regarding the impact the companies will leave upon the people and the environment. So, in order to get eligible for being recognized under the Corporate Sustainability Reporting Directive, the first companies need to apply for the new rules which will be coming up in the Financial Year of 2024, whose reports will get published in 2025.
Now the companies that are subjected to the CSRD need to follow certain rules when they will be reporting to the European Sustainability Reporting Standards (ESRS), as the draft standards which are developed by the EFRAG, previously known as the European Financial Reporting Advisory Group. The EFRAG is an independent body that gathers various stakeholders. Now, the standards of the EFRAG mostly get tailored by the policies of the European Union, with building and contributing to the international standardization initiatives. In such a way the Commission needs to adopt the first standards by the middle of 2023 based on the draft standards of EFRAG in November 2022. Also, the CSRD makes it quite mandatory for all companies to have an audit on the sustainability information that gets reported in addition to the digitization of the sustainability of information.
Application of new rules of the Non-Financial Reporting Directive-
The new rules of the Non-Financial Reporting Directive (NFRD) will remain in force until all the companies will apply to the new rules of the CSRD and under the new rules of NFRD. Thus, the introduction of new rules will apply to many public-interest based companies that have an employee base of more than 500, covering approximately 11,700 large companies and groups working across the European Union, which includes-
Several Listed Companies under the European Union
Banks and Insurance Companies
Other companies which have been designated by national authorities of the respective EU Member Countries as public-interest-based entities.
However, the future and applicability of the Corporate Sustainability Reporting Directive will be an innovation to see within Europe on how it helps and creates a change within the legal transactions taking place all over Europe.
Sources referred-
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