TL;DR Although the CSRD will initially be mandatory for large companies starting in 2025, SMEs will soon need to consider the directive's requirements.
The CSRD mandates companies to map out their entire value chain (including Scope 3 emissions), potentially requiring SMEs to supply information for larger clients.
Regreener advises not to wait until sustainability reporting becomes mandatory for SMEs, but to start now. This not only provides a competitive advantage but also ensures you are well-prepared for future legislation.
Introduction to the CSRD
What impact does our business have on climate change? And conversely, what impact does climate change have on our business, now and in the future?
These two questions are central to the Corporate Sustainability Reporting Directive (CSRD), the new European directive for sustainability reporting.
This blog provides updates on the latest developments around the CSRD and suggests steps SMEs can take to ensure that the CSRD regulations work for your business rather than against it.
What is the CSRD?
The CSRD is a directive under the EU Green Deal that legally requires companies to report the mutual impact of their business activities on people and the environment in their annual reports.
The CSRD standardizes the sustainability information that companies must include, making reports more comparable.
The CSRD has three main goals that collectively lay the groundwork for the greening of European businesses.
Transparency on Business Impact
With the CSRD, the EU aims to establish a standard that makes it easier to compare and monitor sustainability information. This helps prevent 'greenwashing' and enables businesses and consumers to make more sustainable choices.
Insight into Climate Change Risks
The CSRD is based on the so-called double materiality principle, which views climate change from two perspectives:
The financial impact of social and ecological developments, such as resource scarcity or the implementation of new legislation, on business operations
The impact of business operations on social and environmental issues
With the CSRD, you not only map out your ecological footprint, but it also encourages you to consider the risks of climate change, such as rising resource prices.
Shift capital flows toward sustainability
Transparency not only promotes sustainable choices, but also helps to make the risks of climate change more visible. The ultimate goal of the CSRD is that, through increased transparency and a growing awareness of risks, more financing will flow towards sustainable activities and less towards non-sustainable ones.
In this way, the EU aims to lay the foundation for the greening of the business sector with the CSRD.
When and for whom does the CSRD apply?
The transition to CSRD reporting is an important and valuable step towards greater transparency, but it also comes with a lot of additional work. Therefore, the CSRD will be rolled out in phases.
• 2024
Companies that fall under the Non-Financial Reporting Directive (NFRD) – large, listed companies within the EU, as well as banks and insurers – will be the first to report.
• 2025
Starting from the 2025 financial year, the CSRD directive will also apply to companies that meet two of the following three criteria:
More than 250 employees
Annual turnover above 50 million euros
Total assets above 25 million euros
• 2026
From 2026, there will be a specific standard for SMEs, the Listed SME Standard (LSME), a modified, less complex version of the CSRD. Reporting according to the LSME will remain optional until 2028, after which it will become mandatory for listed SMEs.
• ?
It is expected that the LSME standard will also become mandatory for non-listed SMEs in the following years.
What does the LSME, the SME-version of the CSRD, look like?
The definitive version of the LSME has unfortunately not been finalized yet. EFRAG, the organization responsible for drafting the report, has presented a draft version. The final version is expected soon, and we will update this blog once it becomes available.
What is already known is that the LSME will follow the same structure as the CSRD. However, the amount of additional information you need to provide under the LSME is less. The LSME requires about 50% fewer data points than the CSRD.
Both the LSME and CSRD structures consist of 12 standards. Two of these are ‘cross-cutting standards.’ These standards form the basis of the sustainability report and describe the ‘rules’ that the report must adhere to. The remaining ten ‘thematic standards’ are divided into the themes of environmental impact, social impact, and governance.
For each thematic standard, you will conduct a ‘materiality analysis,’ determining which information is relevant to include in the report. For example, a chemical company will have more to report under the ‘pollution’ thematic standard than a bakery.
Below is a schematic overview of the structure of the CSRD and LSME.
Would you like to learn more about conducting a materiality analysis? EFRAG has published a guide that can assist you with this.
Our Vision: What does the introduction of the CSRD mean for SMEs?
Although mandatory LSME reporting for SMEs is still a few years away, the introduction of mandatory sustainability reporting (CSRD, LSME) already has significant implications for SME businesses.
Direct impact (from 2025)
- CSRD-compelled companies may ask you for information
If your company is part of the supply chain of a CSRD-compelled company (scope 3), it may request data about your business. This information is required for their own CSRD reporting. The CSRD stipulates that CSRD-compelled companies may not request more information from SMEs than what is outlined in the LSME.
Indirect impact (in the coming years)
- Sustainability reporting becomes the new standard within business and financing requests
Since large companies must report according to the CSRD from 2025, providing sustainability reports will become the new standard in business. Failing to keep up with sustainability reporting can have two negative consequences:
1: Worsened competitive position Transparency about the ecological and social impact of your operations is becoming increasingly important. Companies and consumers want to make informed and sustainable choices. The CSRD requires large companies to make this information public. Companies that cannot share this information with customers will harm their competitive position.
2: Reduced chances of financing As the CSRD/LSME also maps risks for business operations, banks may adopt these requirements when providing financing.
Conclusion
Although LSME reporting will not be mandatory for non-listed SMEs until at least 2028, Regreener advises SMEs to adopt the LSME guidelines earlier. CSRD-compelled companies will be required to produce a sustainability report from 2025, and if your business is part of their supply chain (scope 3), they may request this information from you.
By adopting the LSME guidelines now, you will be well-prepared and avoid being caught off guard when customers request this information. Additionally, potential customers and financiers will prefer SMEs that have already transitioned to the LSME guidelines.
The transition to public sustainability reporting also offers new opportunities. Transparency is becoming increasingly important to customers, who want to make informed choices. Furthermore, sustainability reporting helps to identify the risks climate change poses to your business operations.
It allows you not only to understand the risks but also to discover opportunities for collaboration, such as optimizing logistics or production processes with supply chain partners, which can help lower costs and achieve more sustainable processes together.
Interested in taking action? Contact us here to get started!
Annex: How can I prepare for the transition to sustainability reporting?
Before you can start preparing a sustainability report, it’s essential to lay a solid foundation. The first step towards LSME reporting is to map your own footprint (scope 1, 2, 3) through a CO2 measurement. This will give you insight into the current footprint of your organization and form the basis for developing a sustainability strategy.
This strategy should include concrete goals and KPIs, so you can take targeted actions to reduce your company's footprint. In this way, you’ll be ready to provide the required information to CSRD-compelled companies and be prepared for their requests.
If you’ve already performed a CO2 measurement and developed a sustainability strategy, it’s a good idea to start practicing sustainability reporting by creating an internal report. Beginning to report now will make the transition to an official sustainability report less disruptive when it becomes a legal requirement. Additionally, it provides an excellent opportunity to raise awareness of the sustainability strategy within your organization and actively involve employees in the process.
Need more information? Read our info blog on how to conduct a CO2 measurement and develop a sustainability strategy. Our sustainability consultants are also ready to guide you through every step of the process and help you implement the right measures for your business.
Annex: Want to learn more about the CSRD and LSME?
The SER (Social and Economic Council) and the Dutch Accounting Standards Board, in response to thousands of questions from entrepreneurs, have created a document (in Dutch) addressing frequently asked questions about the CSRD and LSME. They’ve also developed a series of easy-to-follow webinars (with English subtitles) to keep you updated on key topics related to both.
