The EU’s Corporate Sustainability Reporting Directive (CSRD) took effect in January 2023 and marked a step forward in strengthening and modernising of regulations governing the reporting of social and environmental information by companies. But, will it result in a change of your reporting practices?
Under the new rules, a wider range of large companies, as well as listed small and medium-sized enterprises (SMEs), will be required to report on their sustainability practices, totalling around 50,000 companies. Increased transparency will enable investors and other stakeholders to assess the potential investment risks associated with climate change and other sustainability issues.
Overall, the implementation of the CSRD represents an important step forward in creating a more sustainable and responsible business environment, one that is increasingly focused on the needs of society and the planet, in-line with economic success.
What standards will companies have to report to?
Companies subject to the CSRD will need to report their sustainability practices using the European Sustainability Reporting Standards (ESRS). These standards, currently in draft form, have been developed by an independent body called the European Financial Reporting Advisory Group (EFRAG).
The first set of standards is expected to be adopted by the Commission by mid-2023, based on the draft standards that were published by EFRAG in November 2022. This will provide companies with clear guidelines on what they need to report and how they should do it.
Will you have to change how you currently report?
It depends.
When it comes to sustainability reporting, the main focus is on providing information regarding the three key areas:
- Environment
- Social
- Governance
Often referred to as ‘E’, ‘S’, and ‘G’. This is also the case with the ESRS.
However, different reporting frameworks, such as CDP have their own set of questions or disclosure requirements relating to these pillars, which can highlight certain aspects (such as environmental) while missing others.
The good news is that many disclosure requirements are so crucial to stakeholders that they can be found in almost all reporting frameworks, such as the TCFD and GRI. Many companies will be able to continue reporting with their chosen framework and fulfil the requirements of the EFRS.
Nevertheless, there are still frameworks where this might not be the case. In these situations, you may need to adjust your current reporting process to align with the requirements outlined by the ESRS.
If within scope for the CSRD, you should speak with your existing framework or standards provider and learn how they are aligning within the CSRD / ESRS regulations.
What about reporting on double materiality?
The notion of materiality in sustainability reporting has evolved to include a more comprehensive perspective known as “double materiality”. This approach requires companies to report not only on how sustainability issues affect their business from an external perspective, but also on how their activities impact society and the environment from an internal viewpoint.
The CSRD is the first regulation that requires companies to report on double materiality.
The good news is that many sustainability reporting standards, such as the GRI and the SASB, are already beginning to adopt the approach to assessing sustainability issues. Rather than only considering how these issues impact the company, they’re now considering how the company impacts the planet.
Depending on your framework of choice, you may already have this aspect covered.
European standards vs globalised standards
Both the ESRS and the International Sustainability Standards Board (ISSB) are progressing towards creating much-needed consistency in sustainability reporting. With both as frontrunners, a common question that comes up is whether companies operating in Europe will be required to report twice – once for each of the standards.
The answer is not really.
Firstly, the approach to each standard differs in scope and focus.
- The ISSB takes a more global perspective
- The ESRS concentrates on EU regulations
Both standards also cater to slightly different audiences.
- The ISSB mainly caters to the information needs of investors, creditors, and lenders.
- The ESRSs prioritise the needs of a broader set of stakeholders, including investors, customers, suppliers, employees, local communities, and regulatory bodies.
The ESRS and the ISSB standards have some noteworthy differences due to their different audiences. However, the European Commission has expressed that there is now a “very high level of alignment” between the two, as finalised at the end of July. This alignment aims to prevent unnecessary double reporting by companies operating on a global scale.
“From a general standpoint, the goal is that the undertakings which comply with ESRS are also considered as complying with the ISSB standards to avoid unnecessary multiple reporting.” states a EFRAG cover letter.
Based on this, and while there are several differences between the standards, companies should be able to retrieve equivalent disclosures and overlaps to avoid duplication of work and allow greater focus on major differences.
Conclusion
The CSRD represents a significant leap forward in terms of producing sustainability reports that are both clear and relatable. While the ESRS will become mandatory for many companies as part of the CSRD, those already using established frameworks such as GRI or SASB may find that their reporting processes relatively unchanged.
If you are not using an established reporting framework, now is the time to start planning by learning about the reporting requirements for 2024 and beyond,
Here are some specific things you can do to get started:
- Identify the reporting requirements that apply to your business. This may include government regulations, industry standards, or internal requirements.
- Choose a reporting framework that meets your needs. There are many different frameworks available, so take some time to research and find one that is right for you.
- Gather the data you need to prepare your reports. This may include financial data, customer data, or operational data.
- Create and maintain your reports. This should be a regular process, so make sure you have a system in place to keep your reports up-to-date.
- Review your reports regularly. This will help you identify any areas where you need to improve.
