The Corporate Sustainability Reporting Directive (CSRD), a new piece of legislation from the European Union (EU), aims to ensure that all large companies in the EU will need to disclose data on the impact of their activities in a management report. In this explainer, we break down how it came about, and what it means for businesses moving forward.
In November 2022, the CSRD was adopted after a vote in the European Parliament with 525 votes in favour, 60 votes against and 28 abstentions. The European Council adopted the proposal on November 28, with the directive entering into force 20 days after publication. The goal is where ‘transparency on environmental, social affairs and governance matters [are] to become the norm for large firms.’
What are the Corporate Sustainability Reporting Directive (CSRD) requirements?
The legislation, as one would expect, is extremely complex. Yet there are several indicators which are relatively easy to digest.
The management report needs to disclose both actual or potential impacts related to a company’s own operations, as well as across the value chain, including products, services, business relationships and supply chain. It needs to discuss any management or supervisory boards the company is utilising regarding matters of sustainability, and it needs to be wrapped up in a forward-looking, time-bound manner and provide progress on achieving environmental targets.
There is also an obligation for ‘double materiality’, meaning sustainable activities of the company and sustainability activities affecting the company need to be reported. Reports need to be freely available.
If this sounds rather like the way ESG reports are going, then you will understand why these moves are taking place.
Why has this come about?
The legislation aims to improve upon the current NFRD, the Non-Financial Reporting Directive – or ‘address shortcomings’, as the EU puts it. The CSRD looks not only to introduce more detailed reporting requirements, but puts it more in line with the EU’s climate goals and the European Green Deal, which includes no net emissions of greenhouse gases by 2050 among other metrics.
More widely, the evolution of ESG has helped precipitate this legislation. The European Commission has argued that NFRD was no longer sufficient in terms of the needs and language in which many organisations were now speaking. In a recent survey from Workiva, 98% of finance professionals in Europe said they were concerned about ESG metrics being added to their annual reports, with headaches coming about from more work within the same timeframes.
“We have learned a great deal about defining and measuring activities that impact social and environmental factors since the original drafting of the NFRD back in 2014,” a blog from Greenomy explains. For comparison, the Paris Agreement was in 2016. Which regulations should be complied with and how do they relate? Is the information measured correctly and effectively? In short, as ESG has become increasingly tied to financial metrics and performance, ‘corporate sustainability’ is in – and ‘non-financial’ is out.
What standards will the Corporate Sustainability Reporting Directive (CSRD) use?
The CSRD will use the European Sustainability Reporting Standards (ESRS), which were released in final form on July 31, 2023. The ESRS were developed by the European Financial Reporting Advisory Group (EFRAG), they are a set of common standards that the EFRAG say will “reduce reporting costs in the medium and long term, by avoiding the use of multiple voluntary standards as this is the case today.”
The key features of the ESRS include a double materiality component, reporting across a broad range of topics, and reporting on impacts, risks, and opportunities across the value chain. The ESRS are final, but they are subject to a two-month scrutiny period by the European Parliament and EU member states, who can only reject but not amend them.
Who will be impacted and when?
Compared with the current rules, there will be a near fivefold increase in companies affected – from approximately 11,700 to 50,000. This is how the CSRD breaks down in terms of who will comply and when:
- If your organisation is already subject to NFRD, the CSRD regulation will apply from January 1 2024, with reports due the following year. This applies to European ‘large public interest entities’ with more than 500 employees, such as credit institutions, insurers, and organisations with EU regulated market listed securities
- If you are a large organisation which is not already subject to NFRD, the CSRD regulation will apply from January 1 2025, with reports due the following year. This also applies to companies usually with more than 500 employees, or turnover exceeding €40 million (£34.4m), or a balance sheet total exceeding €20m
- If you are a smaller organisation listed on an EU-regulated market which is not already subject to NFRD, the CSRD regulation will apply from January 1 2026, with reports due the following year
“To ensure companies are providing reliable information, they will be subject to independent auditing and certification,” as the European Parliament explains. “Financial and sustainability reporting will be on an equal footing and investors will have comparable and reliable data. Digital access to sustainability information will also have to be guaranteed.”
What potential problems are there with CSRD?
Not everyone is happy with the legislation as proposed, with concerns from small business stakeholders. Luc Hendrickx, enterprise policy director at European association SMEunited, has said that there is a potential disparity between SMEs and large enterprises with the former struggling against the timeframes of the latter.
SME organisations, said Hendrickx, would ‘need sufficient time to raise awareness amongst their members on the new obligations, organise information sessions, train entrepreneurs and personnel, and develop tools.’ Hendrickx added that ‘some big companies [were] already cancelling their contracts with SMEs as they are not able to report.’
In terms of reporting, use cases will need to be ironed out along the way, as can be expected with any emerging legislation. As Tomas van der Heijden, co-founder and CEO of German startup Briink explained in a recent feature, many organisations will not so much find trouble in having the data, but collecting, organising and structuring it, and tying it back to the regulations. Sustainability data is ‘basically a large mess of unstructured documents.’
What do organisations need to do now?
To prepare, institutions should look to legal or professional services organisations who can assist. Getting the ball rolling with ESG reporting efforts – if not started already – will be beneficial. Deloitte, for example, has an ESG corporate reporting accelerator programme, while Marsh has a detailed ESG rating tool.
Existing reporting frameworks, such as the Global Reporting Initiative (GRI) and CDP, are already aligned with the CSRD and its ESRS standards. The GRI has stated that “most larger companies, in the EU and elsewhere, already report with GRI and will be reassured that their current GRI-based reporting practices should best prepare them for the ESRS. The topics and requirements in the ESRS will be expanded over time; using the GRI Standards means companies can be ready to comply with future requirements.”
