In recent years, the growing focus on sustainability has driven companies to reassess their environmental, social, and governance (ESG) impacts. One of the most significant initiatives in this field is the Corporate Sustainability Reporting Directive (CSRD), an EU directive that revolutionizes how companies communicate their sustainability performance. The CSRD came into effect on January 5, 2023, replacing the 2014 Non-Financial Reporting Directive (NFRD) and introducing new requirements to improve the transparency and quality of ESG reporting. On August 30, 2024, Italy’s Council of Ministers officially approved the legislative decree adopting the Corporate Sustainability Reporting Directive (CSRD) (Directive 2022/2464/EU).
The CSRD is part of the European Union’s broader strategy to achieve the goals of the European Green Deal, which aims to make Europe the first climate-neutral continent by 2050. The directive’s objective is to ensure that companies don’t merely provide generic data but offer accurate and comparable information about their environmental and social performance. This aims to not only meet the growing demand for transparency from investors but also to encourage more sustainable and responsible business practices.
The Origins of the CSRD and Its Differences from the NFRD
The 2014 NFRD required companies with over 500 employees classified as public interest entities to report on non-financial aspects, such as environmental issues, human rights, and anti-corruption. However, the directive had some limitations: only about 11,600 companies were required to prepare such reports, and the information often lacked detail and comparability. With the CSRD, the European Union aims to address these shortcomings by extending reporting obligations to a much larger number of companies and improving the quality and comparability of the information provided.
Expanded Scope of Application
One of the key changes introduced by the CSRD is the expanded scope of companies subject to reporting requirements. In addition to large companies, the directive will gradually include SMEs listed on regulated markets, small credit institutions, and some subsidiaries of large non-EU groups. This expansion means that the number of companies affected by ESG reporting will increase from 11,600 to over 49,000 across Europe, with around 7,000 of them based in Italy.
The adoption of the CSRD follows a phased approach: large companies will be the first to be involved starting in 2024, followed by listed SMEs and non-listed companies that exceed certain size thresholds from 2026 onward. This expansion aims to ensure that even small businesses, which are often overlooked, adopt sustainable and transparent practices.
Double Materiality
A key aspect of the CSRD is the introduction of the double materiality principle. This principle requires companies to consider both the impact of their activities on ESG factors (impact materiality) and how those ESG factors affect the company’s financial performance (financial materiality). This marks a significant paradigm shift from the NFRD, which focused primarily on external impacts.
With this new approach, companies must provide both qualitative and quantitative information, covering both past and future performance, and include data on the entire supply chain. This obligates organizations to provide more detailed and transparent reporting, allowing stakeholders to have a full view of their impact and the challenges they face.
Introduction of Common European Standards
To ensure the comparability of information between companies, the CSRD introduces the obligation to report according to the European Sustainability Reporting Standards (ESRS), developed by the European Financial Reporting Advisory Group (EFRAG). These standards create a common framework for sustainability reporting and require companies to publish their reports in the European Single Electronic Format (ESEF), facilitating data access and analysis by investors and regulators.
The goal of these standards is to create ESG reporting that is easy to interpret, comparable, and reliable, enabling stakeholders to accurately assess companies’ sustainability efforts.
External Assurance and the Role of the Sustainability Auditor
Another significant innovation introduced by the CSRD is the obligation for companies to submit their reports for external verification (assurance). This step will ensure that the information provided is accurate and complies with ESRS standards. To meet this requirement, the role of the sustainability auditor has been introduced—a new professional figure responsible for verifying ESG reports.
The sustainability auditor may overlap with the legal auditor but must still undergo specific training. This new obligation will help strengthen confidence in the information published by companies and promote greater integrity in sustainability data.
Involvement and Sanctions
The legislative decree implementing the CSRD in Italy places significant emphasis on involving workers’ representatives in the ESG reporting process. Companies must establish procedures to inform and consult workers’ representatives on sustainability issues, making the process more participatory and inclusive.
Finally, financial penalties are planned for companies that fail to meet their reporting obligations. Consob will be the authority responsible for overseeing compliance and applying penalties, which in the first two years of the law’s enforcement cannot exceed €125,000 for audit firms and €50,000 for sustainability auditors.
Conclusion
The adoption of the CSRD represents a major shift for Italian companies, which will need to adapt to a more stringent regulatory framework. In addition to extending reporting obligations to a larger number of companies, the directive introduces common standards, external assurance, and a holistic approach to sustainability. While this may seem like a challenge, it also provides companies with the opportunity to demonstrate their commitment to a more sustainable future and improve their reputation with investors and customers.
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