CSRD Fines & Penalties For Non-Compliance

Introduction

Compliance with the Corporate Sustainability Reporting Directive (CSRD) is now a crucial aspect of modern corporate governance. This introduces mandatory sustainability reporting requirements for thousands of European Union (EU) and non-EU companies. Adhering to the CSRD’s common reporting framework helps companies align with EU sustainability goals, mitigate risks, and enhance their reputation among investors, customers, and the broader public.

Failure to comply, however, carries significant repercussions.

Companies that fall short of the disclosure requirements face substantial fines and penalties, which can severely impact their financial health and market position. These sanctions are designed to ensure enforcement and underline the importance of transparency and accountability in corporate operations.

In this post, we dig deeper into the specifics of CSRD fines and penalties, offering guidance on how to avoid costly pitfalls and ensure full compliance.

CSRD Fines and Penalties for Non-Compliance

The CSRD does not directly specify fines or penalties for non-compliance by companies subject to the new reporting requirements. Instead, the legislation amends other laws related to annual financial reports and audit. The requirements for EU member states to enforce the CSRD are inherited from those directives.

“Member States shall provide for penalties applicable to infringements of the national provisions adopted in accordance with this Directive and shall take all the measures necessary to ensure that those penalties are enforced. The penalties provided for shall be effective, proportionate and dissuasive”

-EU Directive 2013/34 on Annual Financial Statements

So, for example, the CSRD in Germany is entered into national law by amending the Commercial Code, Stock Corporation Act, Securities Trading Act and the professional regulations of the audit regulations.

In practice, this means:

• Fines and penalties are defined separately for each EU member state,

• They can be expected to be equivalent to current enforcement of annual report auditing and submission.

• Certain specifics relating to compliance, such as thresholds for company size, will similarly be different, depending on who you are reporting to.

Several member states publish information about the transposition alongside the CSRD legislation.

CoreFiling have teamed up with trusted partners to provide local CSRD services for all European Union (EU) countries, contact us to be put in touch with an expert.

Types of Fines And Penalties

We’ll now break down the different penalties you might get if you fail to comply with these new sustainability regulations.

Monetary Fines

Monetary fines typically vary based on the size and type of the company. For instance, large enterprises can incur large fines for failing to meet reporting standards. Small enterprises are also subject to fines, albeit lower, ensuring proportionality in the directive.

Companies will have to refer to the relevant national implementation of CSRD to see more detailed information on specific fines per company type.

Legal Implications

As well as hitting you in the pocket, non-compliance with the Corporate Sustainability Reporting Directive (CSRD) carries significant legal implications.

• Companies may face litigation risks, leading to costly legal battles and potential settlements.
• Failure to adhere to CSRD standards may trigger regulatory scrutiny, resulting in stringent audits and investigations.
• Persistent non-compliance could lead to operational disruptions, as regulatory bodies may impose corrective measures.

Understanding these legal implications is critical for businesses to mitigate risks and follow sustainability reporting obligations.

Corporate Sanctions

Non-compliance with CSRD will likely fall under the same laws as non-compliance for other corporate reporting. Therefore the results of non-compliance can be far reaching.

A non-compliant company may find business opportunities restricted with penalties such as not being permitted to bid in government tenders. For listed companies with obligations to submit annual financial reports for securities compliance, they may have trading frozen and may ultimately be delisted.

Reputational risk

Imagine a scenario where a renowned firm is exposed for failing to meet sustainability standards. Stakeholders, including investors and customers, lose trust, leading to plummeting share prices and a significant drop in sales. Media coverage intensifies, portraying the company as negligent and irresponsible. Competitors seize this opportunity to highlight their compliance, further isolating the non-compliant business.

The resulting loss in market share and diminished brand loyalty showcases how costly reputation damage can be for companies failing to adhere to CSRD requirements.

Steps to Ensure Compliance

Below are some key areas to focus on to ensure you are compliant with CSRD.

Sometimes, and usually due to existing company law, some countries have more stringent compliance requirements than others. This is referred to as “gold plating” and means that companies should familiarise themselves with the national version of CSRD that applies to their country rather than rely on the EU text alone.

Materiality and Content

The need for a comprehensive double materiality assessment is a cornerstone of the CSRD. Companies need to demonstrate that they have carried this out properly. The safest route is to follow the EFRAG guidance on materiality assessments and report the procedure accordingly.

The materiality assessment is used to identify all matters that should be addressed in the sustainability report. The European Sustainability Reporting Standards (ESRS) say how these matters must be reported. So, once a materiality assessment has been carried out, the specific parts of the ESRS can be examined to find out what data must be collected and consolidated to create the content of the report.

CSRD-related reporting requirements must be included as part of the management report in the company’s annual statement or as part of the consolidated management report. The whole report must then be submitted to the company or group’s national supervisor.

Format and Deadlines

In order to make the reports more usable, a digital format has been mandated. This is known in legislation as the European Single Electronic Format (ESEF). The ESEF format is based on XHTML – a stricter version of the HTML used for websites. It also allows for computer-readable tagging to be applied which creates an inline eXtensible Business Reporting Language (iXBRL) report.

By using the iXBRL standard, ESEF enables formatted and readable reports to be tagged with computer readable information. Computers can then be used to easily extract this information from a large number of companies for analysis.

The most common method to produce the digital report is to use specialist software, such as CoreFiling’s Seahorse. Tagging solutions convert a report from PDF and other formats and allow users to select and apply computer readable tags for text and figures in the report. This can be a complex and time consuming task, to make this easier, Seahorse includes an AI assistant and extensive auto-tagging.

Deadlines for submission are usually given in reference to an amount of time after the balance sheet date. The CSRD says this time must be reasonable and shall not exceed 12 months after the balance sheet date. The exact deadline will be set by the national supervisor and will vary widely by jurisdiction, listed status and the size of the company.

Audit Requirements

The need for an external review is paramount, as it provides an independent verification of the company’s sustainability practices and disclosures. This external review not only enhances the credibility of the reported information but also identifies any discrepancies or areas needing improvement.

Auditors play a crucial role in ensuring compliance with CSRD. Their responsibilities will extend beyond traditional financial audits, encompassing the evaluation of ESG metrics. Auditors assess the accuracy and completeness of the sustainability reports, ensuring that companies adhere to the prescribed standards.

The below extracts from the CSRD text, show the position the EU has taken to auditing standards. Described as “a progressive approach to enhancing the level of the assurance required for sustainability information“, this starts with “an obligation on the statutory auditor or audit firm to express an opinion about the compliance of the sustainability reporting with Union requirements based on a limited assurance engagement” and makes provisions for a “gradual approach from limited assurance engagements to reasonable assurance engagements“.

Asking member states to start with a limited assurance engagement is done primarily to handle the “absence of a commonly agreed standard for the assurance of sustainability reporting“. It allows for the “progressive development of the assurance market for sustainability information” and for companies to “phase in the increase in costs“.

Final Thoughts

In summary, the Corporate Sustainability Reporting Directive (CSRD) imposes stringent disclosure requirements and significant penalties for non-compliance.

Key points include the necessity of establishing thorough and robust reporting processes, aligning with harmonised standards, and utilising specialised tools such as Seahorse to prepare annual reports. Proactive compliance is essential to avoid hefty fines, mitigate legal and reputational risks, and maintain stakeholder trust.

Looking ahead, the future of CSRD only suggests a continued and increased emphasis on transparency and accountability in sustainability reporting. This is especially true in terms of the auditing required. Companies must stay abreast of evolving regulations and integrate best practices into their operations. By doing so, they not only ensure compliance but also contribute to a sustainable and responsible business environment.

Embracing these requirements can lead to long-term benefits, including enhanced operational efficiencies and increased investor confidence, positioning businesses for future success in an increasingly sustainability-focused market.

Speak to us to find out more on compliance and getting the most value for your company from CSRD.