4. Oktober 2023

Navigating Sustainability Reporting

Corporate Sustainability Reporting Directive (CSRD)

In the current real estate environment, sustainability compliance is a game-changer. The Green Buildings market is projected to grow at 10% YoY through 2030, reaching around $1312 billion by 2030, according to a MRFR report. In 2020, GRESB's assessment covered 96,000 properties in 64 countries, with over 1,200 property companies and funds participating, while in 2023, it covered more than 1,800 property companies, with 800 infrastructure funds and assets. This rising involvement in ESG reporting highlights the growing significance of sustainability in investment choices.

Governments and regulatory bodies worldwide are emphasizing environmental and social responsibility in the real estate sector. Many countries have implemented building codes and zoning regulations promoting energy efficiency, green construction, and reduced carbon emissions, often providing incentives like tax breaks, grants, or faster permitting for sustainable projects. Non-compliance may result in fines, delays, or suspended permits.

At the forefront of this sustainability drive is the Corporate Sustainability Reporting Directive (CSRD), a pivotal regulation that is reshaping how sustainability information is reported within the real estate industry and beyond.

Understanding CSRD

Born out of a commitment to more sustainable and responsible business practices, CSRD is set to become a mandatory requirement for all relevant companies by January 2025 (using 2024 data). It aims to redefine how companies, including those in the real estate sector, should report their sustainability performance, promoting transparency and impacting around 50,000 companies within the EU.

CSRD is generally considered a major improvement in the EU's Non-Financial Reporting Directive (NFRD) as it further builds to make reporting more transparent and relevant. This table offers a straightforward comparison of the key distinctions between the CSRD and NFRD:

Aspect	Corporate Sustainability Reporting Directive	NFRD (Non-Financial Reporting Directive)
Applicability	>49,000 organizations	11,700 large public interest entities
Reporting Criteria	Publicly listed companies, >250 employees, €40M+ turnover, or €20M+ total assets (meeting 2/3 criteria)	Large public interest entities with >500 employees
Assurance and Auditing	Requires third-party assurance and external auditing	Often optional under NFRD
Integration with Management Report	Integrates sustainability reporting into a management report	Part of an annual report
Reporting Scope Expansion	Includes targets, risk and opportunity management with a forward planning focus	Focused primarily on non-financial disclosures
Commitment to Raising Standards	Emphasizes raising sustainability reporting standards	Focused on disclosure rather than raising standards

Scope and Reporting Obligations

CSRD mandates detailed sustainability reporting for large European companies, including those listed on EU markets and EU subsidiaries of non-EU parent firms. It also includes listed SMEs, except for "micro" companies with less than 10 employees or below €20 million in turnover. In essence, CSRD applies to organizations with over €20 million in total assets, €40 million+ net turnover, or 250+ employees, referred to as 'large undertakings.' Additionally, non-European companies with an annual net turnover of €150 million in the EU and at least one EU subsidiary or branch will be subject to these requirements from 2028. Altogether, around 49,000 organizations will adhere to CSRD's sustainability reporting.

Some of the key aspects introduced by CSRD are:

Expanded Scope: CSRD broadens the range of organizations subject to sustainability reporting, holding more listed and unlisted companies accountable for their ESG impacts.

Enhanced Content: Companies must offer comprehensive sustainability reports, assessing both quantitative and qualitative data, such as ESG policies and strategies. This provides stakeholders with a deeper understanding of the company's sustainability efforts and performance.

Standardized Framework: A mandatory EU-wide reporting framework ensures consistent sustainability reporting practices across member states, simplifying comparisons and assessments.

Assurance Statement: CSRD requires assurances from independent auditors on sustainability reporting, enhancing reliability and accountability.

Digital Format: Companies must prepare and share sustainability reports in digital XHTML format, promoting accessibility and searchability.

Double Materiality Perspective: CSRD focuses on both outward (environmental and social impacts) and inward (sustainability issues affecting the business) materiality for a comprehensive view of sustainability risks and opportunities.

Value Chain Inclusion: Companies must report on sustainability factors within their value chains, assessing suppliers, partners, and measuring scope 3 emissions.

Comprehensive ESG Reporting: topics covered include equal opportunities, climate protection, working conditions, human rights, business ethics, and corporate culture.

European Sustainability Reporting Standards (ESRSs): CSRD proposes the development of ESRSs by EFRAG to ensure uniform sustainability reporting guidelines across the EU.

Sector-Specific Standards: CSRD plans to introduce specialized standards for various industries, addressing unique sustainability challenges and enabling tailored reporting.

The reporting requirements introduced by the CSRD will be phased in from 2024 to 2028 for the following categories of companies:

	Category	Implementation date
1	Large undertaking or parent undertaking (whether EU or non-EU) which has securities listed on an EU-regulated market, or is otherwise a public interest entity¹: and has more than 500 employees on average	Reporting from 2025 in respect of the financial year commencing on or after 1 January 2024
2	EU large undertaking and EU parent undertaking of large groups (other than those in category 1)	Reporting from 2026 in respect of the financial year commencing on or after 1 January 2025
3	Small and medium-sized undertakings (not being micro-undertakings) with securities listed on an EU-regulated market.	Reporting from 2027 in respect of the financial year commencing on or after 1 January 2026
4	Non-EU parent company of large group (other than those in categories in 1 or 3) whereby the group has a net turnover generated in the EU of more than €150 million and which has an in-scope EU subsidiary or a significant (i.e., net turnover in EU of more than €40 million) branch in the EU.	Reporting from 2029 in respect of the financial year commencing on or after 1 January 2028

Even when not directly in scope, many companies will also be indirectly impacted by the CSRD as they will have to provide various information to those CSRD-compliant companies as a subsidiary, supplier, or customer.

₁_{'Public interest entity' is defined under Article 2(1) of the Accounting Directive as including listed EU undertakings, as well as certain other specific types of undertakings, such as credit institutions and insurance undertakings, and entities designated as such by EU Member States}_.

Impact on Businesses

Non-compliance consequences vary among EU Member States, with Germany imposing fines up to €10 million, 5% of annual turnover, or double the profits gained or losses avoided. In France, fines may only occur if requested by a concerned party and confirmed by a judge.Companies should be aware of their jurisdiction's regulations and proactively comply with CSRD requirements to avoid penalties. ESG-friendly companies can enjoy reduced capital costs, increased profitability, stock performance, and transparency. CSRD compliance can also enhance a company's reputation, attract stakeholders, and facilitate access to capital as investors seek sustainable, ESG-compliant investments.

Challenges and Global Implications