Why the CSRD guideline?
The member states of the European Union set the goal of making Europe climate neutral by 2050 in the so-called "Green Deal" presented on December 11, 2019. As an elaboration of this Green Deal, legislation is currently being developed and introduced. On November 28, 2022, the European Parliament approved the introduction of the Corporate Sustainability Reporting Directive (CSRD Directive).
What does the CSRD directive mean?
The CSRD Directive aims to provide insight into the impact of companies' activities on people and the environment. It becomes business owners mandatory to report on this in a so-called "sustainability report." On this basis, banks and investors, among others, can better assess which companies develop sustainable economic activities and which do not or to a lesser extent.
It is expected that banks and investors will adjust their credit policies and conditions accordingly. This will promote that cash flows go to sustainable enterprises. which contributes to the objectives set out in the Green Deal.
Sustainability Reporting
The CSRD Directive requires companies to include sustainability reporting in the annual report in addition to financial reporting. business owners must then start reporting on topics such as environmental, HR, and social and governance issues within the company in its annual report.
The mandatory topics are determined by standards called "European Sustainability Reporting Standards" (ESRS). There are standards that apply to all companies and the remaining standards are determined by sector.
It has not yet been fully worked out what construction companies must comply with, but it is advisable to already map out (or have mapped out) company and production processes well in view of this new legislation.
When does this CSRD directive apply?
The CSRD directive is being phased in for companies:
- Starting in fiscal year 2024: large companies already required to report under the Non-Financial Information Disclosure Decree;
- From fiscal year 2025: all large corporations;
- From fiscal year 2026: listed SMEs;
- From fiscal year 2028: non-EU companies.
Large companies
The largest group that will soon have to publish sustainability reporting will consist of large companies. For these companies, sustainability reporting for the 2025 financial year must be published in 2026. A company qualifies as large if two of the three requirements below are met:
- More than 250 employees;
- More than 40 million euros in sales per year;
- More than 20 million euros on the balance sheet.
Listed companies (with more than 500 employees) are required to report on sustainability as early as fiscal year 2024.
What does this mean for practice?
It is expected that this new legislation for business owners will once again involve a great deal of additional administration and recording to ensure that the impact of business processes and operations on people and the environment can be reported. In addition, this will help banks, investors, customers, etc. to make a transparent choice in the future about whether they want to do business with a company based on the results of the sustainability reporting.
Competition
Thus, with sustainability becoming an increasingly important issue, it is advisable to score as high as possible on the sustainability theme in view of competition. For construction companies, this may require more investment in various aspects of operations, such as risk management, governance, strategy and internal and external reporting. Construction companies should therefore - if they have not already done so - draw up a sustainability strategy with clear targets in it.
Organizational changes within a construction company are also expected to be needed to understand the impact of business activities.
Drop effect
Even when a company itself is not required to publish sustainability reporting, it may be affected by the CSRD Directive. This so-called "trickle-down effect" can be at issue when construction companies build for companies that are already required to report. In that case, data will have to be provided so that the reporting company can meet its obligations.
Consequences of not complying with sustainability reporting
Competitive position
If a construction company lacks transparency in terms of sustainability reporting or is exposed to high risks due to sustainability issues, this can have a negative impact on the competitive position of that construction company. After all, a company that scores well on sustainability will be more attractive to investors, banks and customers.
Board liability
Furthermore, it is also very important for a director of a construction company to comply with the obligations of the CSRD Directive. After all, in discharging his duties, the board of a company must focus on the interests of the company and its affiliated business. If a director does not fulfill his duties properly in doing so, he may be liable for the consequences.
With the introduction of the CSRD Directive and the concomitant increasing influence of corporate sustainability, the interest of the company is partly colored by sustainability regulations and corporate social responsibility. When the corporate interest is not served, which therefore includes aspects such as sustainability regulations and corporate social responsibility, a director may be at risk of liability.
At present it is not yet clear to what extent failure to take sustainability requirements into account in decision-making by the board will lead to directors' liability. However, it is expected that the board can be held responsible for implementing and monitoring the policy of taking measures with regard to appropriate care for people and the environment.
All in all, plenty of reasons for construction companies to properly map business processes and business activities (or have them mapped out) for future mandatory sustainability reporting!
