Navigating the Corporate Sustainability Reporting Directive (CSRD): A Comprehensive Overview
DGE Group’s Finnish experts analyzed the legal application of the Corporate Sustainability Reporting Directive (CSRD) throughout 2023 and followed the steps taken throughout the process. In this article, we provide a case example of the legislative implementation process in our native country and delve into the knowns and unknowns of the CSRD and its national implementation in Finland and beyond.
A full on-demand webinar on CSRD in practice is also available here.
The Scope of the CSRD within the EU
In 2025, companies must first report their sustainability data under the new obligations for the financial year of 2024. In this first wave, CSRD will apply to those large companies that were already subject to its predecessor, the NFRD (Non-Financial Reporting Directive). The scope of the applicability covers the companies with an average of more than 500 employees, and companies, whose securities are listed on a regulated market, such as companies listed on the stock exchange. In addition, credit institutions and insurance companies employing more than 500 people must report their data in 2025.
From 2026, companies that meet the criteria for large companies as defined in the Accounting Directive 2013/34/EU will be subject to the reporting obligation. At the time the CSRD was adopted, this covered companies that exceeded two of the following three thresholds:
- More than 250 employees
- 40 million EUR in net turnover
- 20 million EUR in balance sheet
However, in October 2023, the EU Commission adopted an initiative that will increase the balance sheet and net turnover thresholds by 25%. The increase is based on the EU Commission’s obligation to review the thresholds and amend them, if necessary, to adjust for inflation effects. In the future, the above-mentioned thresholds for a large company will be:
- More than 250 employees
- 50 million EUR in net turnover
- 25 million EUR in balance sheet
The delegated directive based on the initiative was published in the Official Journal of the European Union on the 21 December 2024 and the amendments must be transposed in the member states by 24 December 2024 at the latest. This increase will reduce the number of companies covered by the CSRD, and several respondents in the Expert Group that Commission consulted for the amendment, opposed this adjustment as it would weaken the ambition of the CSRD, especially regarding the new threshold for large companies.
Finland – ahead of the curve as an example
In many ways, the CSRD and its application in EU countries is still very much a living process. Countries can adapt the directive into national legislation as they see fit, but the CSRD sets the minimum standard for ESG reporting within the EU. The ongoing changes and amendments mentioned above create an extra layer of complexity for the national application of the directive.
Finland is in many ways slightly ahead of the curve in its national application, but many questions, responsibilities and sanction mechanisms remain unclear. EU countries must bring the CSRD provisions into force by the 6th of July 2024 at the latest. In Finland the provisions related to the CSRD entered into force on the 31st of December 2023.
The complexity of the implementation process is reflected in the national adaptation process with different EU countries being at very different stages. EU Directives are not directly applicable legislation in the member states, and they must be transposed into the national legislation separately.
As a preface, it is important to note that there isn’t a separate Sustainability Reporting Act in Finland, and the requirements established by the CSRD can be found in several different Acts and Decrees, mainly in the amended Accounting and Auditing Acts. The preparation of the regulations in Finland has been conducted by the Ministry of Economic Affairs and Employment, and the national implementation was achieved by amending already existing acts – which may or may not have impacted the speed with which CSRD was adopted.
For the most part, Finland has implemented CSRD under the minimum conditions. However, the CSRD allows for an extended scope of application on a national level. Finland has decided to widen the scope of the application with large co-operatives and large pension providers added to the directive’s scope. With the extended scope, approximately 1300 companies in Finland need to report their sustainability data according to the ESRS – the European Sustainability Reporting Standards.
The Directive provides member states the opportunity to require the companies to make the report available to the company’s own website, and Finland has used this option. According to the new legislation in Finland, the annual report, including the sustainability report, as well as the financial statement, must be available to the public, free of charge on the company’s website.
The supervisory aspects of the CSRD are still in many ways a work-in-process. According to the directive, the European Securities and Markets Authority ESMA will issue guidelines on the supervision of sustainability reporting. ESMA expects to publish the final guidelines in Q3 of 2024. In Finland the sustainability reporting of listed companies, credit institutions, insurance companies and pension providers is monitored by the Financial Supervisory Authority. Large companies, that are not listed, seem to be – at this point – excluded from this supervision.
Each Member State must ensure that the undertaking's administrative, management and supervisory bodies have collective responsibility for reporting. In Finland the board of the company and the managing director have this responsibility and they may be liable for damages caused to the company.
The member states must ensure that there are effective, proportionate, and dissuasive penalties applicable to possible infringements. In Finland the sanctions are at this point administrative and include fines, late-filing fees and other sanctions that can be imposed by the Financial Supervisory Authority. During the legislative implementation process, criminal liability (sustainability reporting crime) was considered, but the content requirements for sustainability reporting were not considered to be precise enough.
In addition to the administrative sanctions that companies can be directly subjected to, new administrative sanctions for sustainability auditing companies were laid down.
Push and pull – The future of the directive amidst political shifts
While the application of CSRD into the Finnish regulatory framework has already started, there has been a somewhat radical shift in Finnish politics, which, in turn, might have broader implications. As of early February, Finland plans to pull its support for the Corporate Sustainability Due Diligence Directive, joining Germany in its intent to abstain from a Council vote. Finland’s argument for pulling its support was that aspects of the proposal would be incompatible with Finnish legislation and aspects of civil liability. This is certainly an example of how the future of sustainability-related legislation may end up in the crosshairs of political power struggles.
Even though the CSRD and CSDDD are different directives with different goals, they overlap in many areas, especially with the CSDDD also supporting the CSRD in setting due diligence standards for the information reported under the latter. The CSRD aims to add transparency and disclosure requirements to corporate activities, while the CSDDD has a very concrete goal of making sure that companies take real actions to reduce, mitigate or stop the harmful impacts their operations might have. The CSDDD has a stronger focus on the supplier base and its extended scope would therefore reach beyond the EU, whilst the CSRD is in many ways EU-centric.
Without concrete and concise supervision mechanisms and sanctions, there’s a risk of the directive and its purpose being watered down. As such, it is important for consultants to have a responsive and analytical approach towards the adaptation process and to be open about the uncertainties included in the process.
At this point, it remains to be seen if the administrative sanctions are effective enough in the practical application of the reporting requirements. It seems likely that the public relations’ and stakeholder effects rising from the publication requirements, will have a greater impact on the sustainability standards of companies than the administrative sanctions, which – at this point – are not particularly significant.
The evolution of the CSRD represents a significant step in the EU's commitment to sustainability and corporate responsibility. As we have seen in Finland's case, the directive's implementation is a complex but crucial process that requires careful balancing of regulatory demands with the operational realities of businesses.
In Conclusion
Looking ahead, the true measure of the Directive’s impact will be observed in how it influences corporate behavior towards more sustainable practices and transparent reporting. It is essential for companies to not only comply with the technical requirements but to embrace the spirit of the directive, fostering a culture of sustainability that goes beyond mere compliance.
This cultural shift, coupled with the evolving regulatory landscape, will play a pivotal role in shaping the future of corporate sustainability in the EU. By staying adaptable and proactive, companies can turn the challenges presented by the CSRD into opportunities for innovation, growth, and positive societal impact. Ultimately, the success of the CSRD will be judged by the tangible improvements it brings about in environmental and social governance, potentially setting a new benchmark for corporate responsibility globally.
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