The Corporate Sustainability Reporting Directive (CSRD) is a significant regulatory advancement in the realm of corporate sustainability and transparency. It was developed by the European Union (EU) to enhance and standardize sustainability reporting across member states. Understanding the creation and development of the CSRD requires delving into the broader context of the EU’s legislative process, the involved stakeholders, and the evolution of corporate reporting standards.

The European Commission: The Driving Force

The CSRD was primarily initiated by the European Commission, the executive arm of the European Union responsible for proposing legislation and implementing decisions. Within the Commission, the Directorate-General for Financial Stability, Financial Services, and Capital Markets Union (DG FISMA) played a crucial role. DG FISMA oversees financial regulations and policies aimed at ensuring the stability and integrity of the financial system, which includes improving transparency and disclosure in corporate reporting.

The push for the CSRD was part of the European Green Deal, a comprehensive plan introduced by the European Commission in December 2019 to make the EU’s economy sustainable by turning climate and environmental challenges into opportunities. The European Green Deal includes a range of initiatives and regulatory measures aimed at making Europe the first climate-neutral continent by 2050. As part of these efforts, the Commission recognized the need for enhanced transparency and accountability in corporate environmental, social, and governance (ESG) reporting, leading to the proposal of the CSRD.

The European Parliament and the Council of the European Union: Co-legislators

The legislative journey of the CSRD involved both the European Parliament and the Council of the European Union, the two legislative bodies of the EU. The European Parliament, directly elected by EU citizens, represents the interests of the public and works closely with the Council to pass laws.

Members of the European Parliament (MEPs), particularly those on the Committee on Legal Affairs (JURI), played a pivotal role in shaping the CSRD. This committee is responsible for the EU’s legal framework concerning company law, corporate governance, and corporate reporting. Throughout the legislative process, MEPs reviewed, amended, and debated the proposals put forward by the Commission to ensure they aligned with the EU’s broader sustainability goals and addressed concerns from various stakeholders.

The Council of the European Union, representing the governments of the member states, also had a significant role in the development of the CSRD. The Council consists of ministers from each EU country, depending on the policy area under discussion. In the case of the CSRD, finance ministers and ministers responsible for company law and sustainability issues were heavily involved. The Council’s task was to negotiate with the European Parliament and agree on the final text of the directive, balancing different national interests and regulatory traditions.

Stakeholder Involvement: A Collaborative Effort

The development of the CSRD was not an isolated endeavor by the EU institutions; it was a collaborative process involving a broad range of stakeholders, including businesses, civil society organizations, and industry associations.

1. Business and Industry Associations: These groups were essential in providing feedback and representing the interests of companies that would be directly impacted by the new reporting requirements. Associations such as the European Round Table for Industry (ERT), BusinessEurope, and the European Federation of Financial Analysts Societies (EFFAS) were actively engaged in consultations and dialogues with EU policymakers. They highlighted concerns regarding the potential administrative burden on companies, particularly small and medium-sized enterprises (SMEs), and the need for harmonized reporting standards that would be consistent across the EU.
2. Civil Society Organizations and NGOs: Environmental and social NGOs played a critical role in advocating for more stringent and comprehensive sustainability reporting standards. Organizations like the European Coalition for Corporate Justice (ECCJ), WWF, and Transparency International pushed for increased corporate accountability and transparency, arguing that robust ESG reporting is crucial for achieving the EU’s sustainability and climate goals. These groups were instrumental in ensuring that the CSRD included provisions for disclosing not just financial information but also non-financial information related to environmental, social, and governance issues.
3. Investors and Financial Market Participants: Institutional investors and financial market participants were also key contributors to the development of the CSRD. They underscored the growing demand for consistent, comparable, and reliable ESG data to make informed investment decisions. Organizations such as the European Fund and Asset Management Association (EFAMA) and Principles for Responsible Investment (PRI) emphasized the importance of aligning the CSRD with global sustainability reporting standards, such as those developed by the Task Force on Climate-related Financial Disclosures (TCFD) and the Global Reporting Initiative (GRI).

Evolution of Corporate Reporting Standards

The CSRD builds on and significantly expands the scope of the Non-Financial Reporting Directive (NFRD), which was adopted in 2014. The NFRD required large public-interest companies with more than 500 employees to disclose non-financial information related to environmental, social, and employee matters, human rights, anti-corruption, and bribery. However, over time, the limitations of the NFRD became apparent. The directive provided too much flexibility, resulting in inconsistent and incomparable disclosures, which undermined the usefulness of the reported information for investors and other stakeholders.

Recognizing these shortcomings, the European Commission proposed the CSRD in April 2021 to address the gaps in the NFRD and respond to the evolving expectations of investors, consumers, and other stakeholders for greater corporate transparency on sustainability issues. The CSRD aims to ensure that companies provide consistent, comparable, and reliable sustainability information that meets the needs of the capital markets and supports the EU’s transition to a sustainable economy.

Key Features of the CSRD

The CSRD introduces several key changes to the EU’s corporate reporting framework:

?      Extended Scope: The CSRD extends the scope of companies required to report, covering all large companies and all companies listed on regulated markets, except micro-enterprises. This change significantly increases the number of companies subject to sustainability reporting requirements in the EU.

?      Detailed Reporting Requirements: The CSRD introduces more detailed reporting requirements and mandates the use of European Sustainability Reporting Standards (ESRS), developed by the European Financial Reporting Advisory Group (EFRAG). These standards provide a comprehensive framework for reporting on a range of sustainability topics, including environmental, social, and governance matters.

?      Mandatory Assurance: The CSRD requires companies to have their reported sustainability information independently assured, enhancing the reliability and credibility of the data provided.

?      Digitalization of Reporting: The CSRD promotes the digitalization of sustainability information by requiring companies to prepare their reports in a digital format and to tag the reported information using a digital taxonomy. This change aims to facilitate access to sustainability data and improve its usability for investors and other stakeholders.

Conclusion

The Corporate Sustainability Reporting Directive is a product of a complex and collaborative process involving multiple EU institutions, various stakeholders, and extensive consultations. It represents a significant step forward in enhancing corporate transparency and accountability on sustainability issues in Europe.  The reason why the CSRD was made was to to ensure that companies disclose meaningful and comparable information that supports the EU’s transition to a sustainable and resilient economy. As such, the CSRD is not just a regulatory measure but a critical tool for driving corporate behavior toward more sustainable practices and for enabling investors and other stakeholders to make informed decisions based on reliable ESG data.