The European Commission has issued warnings to 17 member states regarding their failure to fully transpose the Corporate Sustainability Reporting Directive (CSRD) into national laws. This directive represents a significant upgrade from the Non-Financial Reporting Directive (NFRD), expanding the number of companies required to disclose their sustainability performance and risks.
The Importance of the CSRD
The CSRD is a cornerstone of the EU’s sustainability reporting framework. The new directive, which came into effect at the start of 2024, drastically increases the number of companies required to provide sustainability disclosures. Under the CSRD, more than 50,000 companies will be obligated to report, a substantial leap from the 12,000 under the previous NFRD. This shift aims to provide investors, policymakers, and other stakeholders with more comprehensive data on corporate environmental, social, and governance (ESG) performance.
The directive’s detailed sustainability reporting standards, based on European Sustainability Reporting Standards (ESRS), include reporting requirements related to companies’ impacts on the environment, social standards, human rights, and governance issues.
Member States Under Scrutiny
Despite the directive's importance, 17 EU member states have been called out by the Commission for not transposing the CSRD into their national legal frameworks by the July 6, 2024 deadline. The states in question include Belgium, Germany, Spain, Poland, and others. In response, the European Commission has launched infringement procedures against these countries, which is the initial step in legal action that could escalate if they fail to comply.
According to the Commission, the lack of timely transposition risks undermining the harmonization of sustainability reporting across the EU. Investors rely on standardized reports to evaluate the sustainability performance of companies and make informed investment decisions. Without consistent implementation across all member states, achieving this goal becomes increasingly difficult.
Potential Consequences
If member states do not comply, the Commission may escalate the infringement procedures. This begins with a letter of formal notice, followed by a reasoned opinion that formally requests compliance. Ultimately, the Commission could refer the matter to the Court of Justice of the EU, where member states may face penalties.
The Broader Impact on Sustainability Reporting
The Commission’s action serves as a warning not just to the 17 member states, but also to companies that have yet to prepare for the CSRD’s extensive reporting requirements. The directive applies to large public-interest companies with more than 500 employees in 2024, and will extend to those with more than 250 employees or €40 million in revenue in 2025. Additionally, listed SMEs will need to comply by 2026.
The CSRD introduces stricter regulations and necessitates that companies provide more detailed and verifiable data on their sustainability practices. These requirements mean that businesses must develop systems to collect and report on sustainability data, potentially facing substantial costs in doing so.
Renewable Energy Directive Non-Compliance
In parallel with the CSRD warnings, the Commission also addressed non-compliance with the Renewable Energy Directive. This directive requires that renewable energy make up 42.5% of the EU’s energy mix by 2030. Yet, only Denmark had met the July 2024 deadline for implementing the provisions aimed at accelerating the permitting process for renewable energy projects. Non-compliance with this directive presents significant risks to the EU’s overall energy transition goals.
Moving Forward: What Businesses and Governments Must Do
For companies and member states alike, the clock is ticking to comply with the EU’s evolving sustainability regulations. Businesses must ensure they are prepared for sustainability reporting under the CSRD by implementing the necessary systems, gathering data, and engaging with stakeholders to ensure compliance.
Governments must take swift action to transpose these critical regulations into national law, ensuring a harmonized approach to sustainability reporting across Europe. The EU’s ambitious goals for climate neutrality by 2050 depend on the successful implementation of frameworks like the CSRD and the Renewable Energy Directive.
Conclusion
The European Commission’s warnings to 17 member states for failing to implement the CSRD underscore the urgency and importance of aligning with the EU’s sustainability reporting framework. As Europe pushes forward with its Green Deal, both governments and businesses must rise to the occasion, ensuring transparency, accountability, and a commitment to sustainable practices.
