The European Union (EU) has established the Corporate Sustainability Reporting Directive (CSRD) as a crucial regulation mandating sustainability reporting. The goal of the CRSD is to provide transparency that will help investors, analysts, consumers, and other stakeholders better evaluate EU companies’ sustainability performance as well as the related business impacts and risks.
The CSRD, adopted by the EU Commission in late 2022, is set to be enforced starting January 1, 2024. Expanding and fortifying the reporting obligations outlined in the Non-Financial Reporting Directive (NFRD), the CSRD introduces the European Sustainability Reporting Standards (ESRS) as a reporting framework alongside guidelines for Environmental, Social, and Governance (ESG) reporting.
CSRD reporting is based on the concept of double materiality: Organizations must disclose information on how their business activities affect the planet and its people, and how their sustainability goals, measures and risks impact the financial health of the business. For example, in addition to requiring an organization to report its energy usage and costs, CSRD requires them to report emissions metrics that detail how that energy use impacts the environment, targets for reducing that impact, and information on how achieving those targets will affect the organization’s finances.
CSRD compliance is not a one-time task. It’s a continuous process that requires companies to consistently identify, manage, and capitalize on ESG risks and opportunities. The successful implementation of these strategies can not only help companies meet their regulatory obligations but also provide them with a competitive edge in an increasingly ESG-centric business environment.
The importance of becoming CSRD compliant cannot be understated. By adopting a strategic approach towards identifying and managing ESG risks and capitalizing on ESG opportunities, companies can ensure a smooth transition to a more sustainable and socially responsible business model. CSRD compliance is not just about meeting regulatory obligations, it’s about fostering a corporate culture that prioritizes sustainability, ethical practices, and inclusive governance. It’s about paving the way for a sustainable future where businesses thrive without compromising the well-being of the planet and its inhabitants.
From January 1, 2024, (start reporting in 2025 on 2024 progress): for major listed companies (with more than 500 employees) that are already subject to the NFRD
From January 1, 2025 (start reporting in 2026 – deferral possible until 2028 - on 2025 progress): for all large companies not currently subject to the NFRD that meet two of the following three criteria: Over 250 employees €40m in turnover €20m in total assets.
From January 1, 2026 (start reporting in 2027 on 2026 progress): for SMEs and other listed companies (10-250 employees)
From January 1, 2028 (start reporting in 2029 on 2028 progress): for European subsidiaries of non-European parent companies with more than €150 m in sales in Europe.
01 Large companies (both EU and non-EU subsidiaries): Companies with over 250 employees and/or with an annual turnover exceeding €50 million and/or with total assets exceeding €25 million are obligated to report under the CSRD.
02 Listed companies, including SMEs (excluding micro-companies): SMEs have a 3-year time lag before they are required to report under the CSRD.
03 Insurance and credit institutions: Entities within these sectors are subject to CSRD reporting requirements.
04 Non-European companies with subsidiaries in the EU: Non-EU companies with a net turnover of €150 million or more within the EU are obliged to report under the CSRD.
Exemptions
· Subsidiary if the parent company includes subsidiary in its report
· Listed micro companies
· Non-listed SMEs (report on a voluntary basis).
The Corporate Sustainability Reporting Directive (CSRD) introduces several key reporting requirements, compelling businesses to disclose specific aspects of their operations.
Reporting on:
Businesses are mandated to disclose detailed information regarding their environmental impact. This includes:
- Resource Conservation: Describe initiatives aimed at conserving resources, reducing waste, and promoting sustainable resource management.
- Pollution Prevention Strategies: Outline strategies implemented to prevent pollution, minimize environmental harm, and ensure responsible waste disposal.
The CSRD emphasizes the importance of social responsibility, requiring businesses to elaborate on their commitment to employees. This includes:
- Employee Health and Safety: Detail protocols and measures in place to ensure the health and safety of employees within the workplace.
- Employee Benefits: Disclose the range of benefits provided to employees, covering areas such as healthcare, wellness programs, and other employee-centric initiatives.
- Company Culture: Provide insights into the company's culture, emphasizing values, diversity, and inclusivity.
Companies are obligated to address their policies and practices concerning human rights to ensure they are safeguarded within their operations. This involves:
- Policy Framework: Clearly articulate the policies in place to uphold and respect human rights in all aspects of the business.
- Implementation Measures: Explain the practical measures taken to ensure these policies are effectively implemented and adhered to.
The CSRD places a strong emphasis on transparency and ethical business conduct, necessitating companies to:
- Preventive Strategies: Describe the strategies and measures in place to prevent corruption and bribery within the organization.
- Corporate Governance: Outline the corporate governance structures that support ethical conduct and ensure accountability.
- Ethics Training Programs: Highlight any training programs aimed at instilling a culture of ethics and compliance throughout the organization.
The CSRD places a specific focus on the diversity of company boards, requiring businesses to provide a comprehensive breakdown, covering:
- Gender Diversity: Detail the gender representation on the board, showcasing efforts to achieve gender balance.
- Age Diversity: Provide insights into the age distribution among board members, fostering an inclusive environment.
- Nationality Diversity: Disclose the nationality breakdown of board members, promoting diversity on an international scale.
By addressing these key areas, companies can demonstrate their commitment to transparency, sustainability, and ethical business practices, aligning with the objectives set forth by the Corporate Sustainability Reporting Directive.
Double materiality: Double materiality requires companies to disclose both their sustainability impacts on society and the environment (impact materiality) and the potential financial implications of these sustainability matters (financial materiality).
Third party assurance: The CSRD introduces an EU-wide audit for sustainability reporting, with standards set by the EU Commission. Companies can choose from various assurance providers, with Member States ensuring consistent auditing quality.
Mandatory Scope 3 reporting: Companies are mandated to disclose indirect Scope 3 GHG emissions, encompassing their entire value chain. It requires detailed breakdowns from categories like purchasing, transportation, and investments, aligned with the GHG Protocol Corporate Standard.
Targets and progress reporting: Companies must set and report on their emission reduction targets (e.g Science-based targets).
Align with existing policies: Reporting in line with the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation. It also recognizes TCFD and GRI.
Reporting in electronic format: CSRD reporting must be included in the management report. It must be xHTML or electronic format in accordance with the European Single Electronic Format (ESEF) regulations and EU Sustainability Taxonomy.
European Sustainability Reporting Standards (ESRS): The draft ESRS framework includes general, cross-cutting requirements applicable to all in-scope companies and topical disclosures that may or may not be material to a company.
Cross cutting standards
ESRS 1: General requirements - sets general principles to be applied when reporting according to ESRS and does not itself set specific disclosure requirements.
ESRS 2: General disclosures - specifies essential information to be disclosed irrespective of which sustainability matter is being considered. ESRS 2 is mandatory for all companies under the CSRD scope.
Environmental
ESRS E1: Climate change
ESRS E2: Pollution
ESRS E3: Water and marine resources
ESRS E4: Biodiversity and ecosystems
ESRS E5: Resources use and economy
Social
ESRS S1: Own workforce
ESRS S2: Workers in the value chain
ESRS S3: Affected communities
ESRS S4: Consumers and end-users
Governance
ESRS G1: Business conduct
The process of generating your CSRD report may vary depending on several factors, such as your organizational structure and your company's maturity in terms of Sustainable Finance. However, there are ten fundamental steps that apply to most organizations embarking on their CSRD compliance journey.
· Scope the Application of the CSRD
· Consider the Level of Disaggregation of Material Information
· Perform the Double Materiality Assessment
· Familiarize Yourself with the ESRS
· Engage with your Organization and Communicate CSRD Requirements with Internal Stakeholders
· Perform a Data Gap Assessment
· Discuss with your Auditor
· Streamline Data Collection and Monitoring
· Embed Technology Tools for the Production of the Report
· Ensure Continuous Learning on Latest Sustainable Finance Regulations