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Are you ready to navigate the rapidly evolving landscape of sustainability reporting? The recently introduced Corporate Sustainability Reporting Directive (CSRD EU) is set to revolutionise the way companies disclose their sustainability information. In this blog post, we will explore the ins and outs of the CSRD EU, its implications for businesses, and practical steps to ensure compliance as you contribute to a more sustainable future.
In Brief
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The EU Corporate Sustainability Reporting Directive (CSRD) is designed to unify and advance sustainability reporting for businesses.
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The CSRD applies to a wide range of organisations, including large listed companies, SMEs and non-EU companies.
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Companies should assess current reporting practices and develop robust data management systems in order to comply with the CSRD’s requirements.
Table of Contents
- Understanding the EU Corporate Sustainability Reporting Directive (CSRD)
- Scope of the CSRD: Who Needs to Comply?
- Key Components of CSRD Reporting Requirements
- Compliance Timeline and Phased Implementation
- Auditing and Assurance under the CSRD
- Leveraging CSRD Compliance for Strategic Advantage
- Preparing for CSRD Compliance: Practical Steps
- Summary
Understanding the EU Corporate Sustainability Reporting Directive (CSRD)
In a world that is increasingly conscious of the environmental and social impacts of business activities, the European Union (EU) has taken a bold step to standardise and enhance sustainability reporting. The Corporate Sustainability Reporting Directive (CSRD) aims to:
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Unify and advance sustainability reporting for businesses
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Supersede the Non-Financial Reporting Directive (NFRD)
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Conform to the EU’s wider sustainability objectives, including the sustainable finance disclosure regulation.
The CSRD is designed to support Europe’s 2050 climate-neutrality target and European Green Deal objectives. These objectives include:
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Promoting a competitive and resilient industry
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Energy-efficient buildings
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Clean energy
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Technological innovation
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A sustainable economy
By implementing mandatory reporting standards, the CSRD ensures that stakeholders and investors have access to reliable and comparable sustainability information, enabling them to make informed decisions.
The evolution from NFRD to CSRD
The Non-Financial Reporting Directive (NFRD) was a stepping stone in the world of sustainability reporting, requiring large public-interest entities to disclose their sustainability performance since 2018. However, the NFRD had its limitations, such as voluntary reporting directives and a lack of uniformity in reporting.
The CSRD builds upon the NFRD, addressing these limitations and expanding the scope of reporting requirements to provide more comprehensive and comparable sustainability information. This is achieved through the introduction of mandatory European Sustainability Reporting Standards (ESRS), developed by the European Financial Reporting Advisory Group (EFRAG).
The role of EFRAG and ESRS
The European Financial Reporting Advisory Group (EFRAG) plays a crucial role in developing the European Sustainability Reporting Standards (ESRS), which will guide companies in their CSRD reporting. The ESRS aim to standardise and improve sustainability reporting requirements for companies, ensuring that the reported information is both comprehensive and comparable across industries.
In turn, this will enable investors and stakeholders to make more informed decisions based on the companies’ sustainability performance and alignment with the EU’s broader sustainability goals.
Scope of the CSRD: Who Needs to Comply?
The CSRD applies to a wide range of organisations, from large and listed companies to certain SMEs and non-EU companies with significant EU operations, covering approximately 50,000 companies within the European Union. This broad scope ensures that a significant portion of the EU market is held accountable for their sustainability performance, promoting transparency across industries and encouraging all companies to take their environmental, social, and governance (ESG) responsibilities seriously.
The CSRD is an important step in the right direction for the EU, as it provides an important step in the right direction.
Large and listed companies
Large and listed companies, excluding micro-enterprises, are required to comply with the CSRD. These organisations must:
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Report on sustainability-related matters
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Generate periodic reports on sustainability related risks
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Incorporate sustainability into risk deliberations
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Acquire assurance from a third-party verifier
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Incorporate sustainability information into their management report.
By holding these companies accountable for their sustainability performance, the CSRD ensures that the largest players in the market contribute to the EU’s sustainability objectives.
SMEs and non-EU companies
SMEs and non-EU companies with a net turnover of €150 million and at least one subsidiary in the EU are also subject to CSRD reporting requirements. These companies must report on sustainability-related matters in accordance with the European Sustainability Reporting Standards (ESRS).
By extending the directive’s reach, the EU ensures that a larger number of companies are held accountable for their sustainability performance, further advancing the region’s sustainability goals and contributing to limiting global warming.
Key Components of CSRD Reporting Requirements
The CSRD reporting requirements emphasize two key components: the double materiality principle and a broad range of environmental, social, and governance (ESG) factors. The double materiality principle requires companies to report both on the impact of their activities on the environment and society, as well as the impact of environmental and social factors on their business.
ESG factors covered under CSRD include:
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Climate change
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Resource use
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Human rights
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Corporate governance
These components ensure that companies provide comprehensive and relevant sustainability information, enabling investors and stakeholders to make informed decisions.
Double materiality principle
The double materiality principle is at the heart of the CSRD reporting requirements. It mandates that companies must disclose both the effects of their operations on the environment and society, as well as the influence of environmental and social factors on their business. This principle acknowledges that corporate information can be significant for both its financial value and its impact on environmental and social factors, ensuring a holistic view of a company’s sustainability performance.
The double materiality principle is an important tool for companies to understand and report on their sustainability.
Environmental, social, and governance (ESG) factors
ESG factors, including governance factors, form the backbone of the CSRD reporting requirements. These factors cover a wide range of issues, such as:
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Climate change
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Resource use
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Human rights
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Corporate governance
By addressing these factors, the CSRD ensures that companies provide a comprehensive view of their sustainability performance, enabling investors and stakeholders to assess their alignment with the EU’s sustainability objectives and make informed decisions.
The CSRD reporting requirements are designed to ensure that companies are transparent and accountable in their sustainability.
Compliance Timeline and Phased Implementation
The CSRD will be implemented in a phased approach, with a four-phase rollout and key dates for compliance starting in 2024. This phased implementation allows companies time to:
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Adapt to the new reporting requirements
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Develop the necessary systems and processes
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Ensure accurate and timely disclosure of sustainability information.
By understanding the timeline and key dates, companies can stay ahead of the curve and ensure timely compliance with the CSRD.
Four-phase rollout
The four-phase rollout of the CSRD ensures a gradual implementation process, with different types of companies required to comply at different stages. For instance, companies already subject to the NFRD will need to comply by 2024, while large companies not currently subject to the NFRD will have until 2025.
This phased approach recognises the varying levels of readiness among companies and allows them time to develop the necessary systems and processes to ensure compliance.
Key dates to remember
Companies should be aware of key dates, such as the entry into force of the CSRD in January 2023 and the start of mandatory reporting in 2024. By understanding these key dates, companies can plan their approach to CSRD compliance and ensure that they are well-prepared to meet the new reporting requirements.
Organisations should begin to consider the implications of the CSRD now, in order to ensure that the CSRD remains in effect.
Auditing and Assurance under the CSRD
To enhance the reliability and credibility of reported sustainability information, the CSRD introduces an audit requirement for sustainability information. Companies will need to have their sustainability information audited by an independent assurance provider, ensuring the accuracy and trustworthiness of the data.
In this section, we will discuss the different types of assurance available and the implications for companies.
Audit requirement for sustainability information
Companies will be required to have their sustainability information audited by an independent assurance provider, such as their statutory auditor, another auditor (as per the Member State’s discretion), or an independent assurance services provider. This audit requirement ensures the accuracy and trustworthiness of the reported sustainability information, ultimately enhancing the transparency and comparability of sustainability data across companies.
The assurance process will provide assurance on the sustainability information reported by the company, including the underlying sustainability information.
Limited and reasonable assurance
Under the CSRD, limited assurance will be the minimum standard for audits, providing a lower level of assurance than reasonable assurance. However, companies may opt for reasonable assurance if they wish to demonstrate a higher level of confidence in their sustainability reporting.
By offering limited and reasonable assurance options, the CSRD allows companies to choose the level of assurance that best suits their requirements and stakeholder expectations.
Leveraging CSRD Compliance for Strategic Advantage
By complying with the CSRD, companies can:
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Leverage enhanced transparency and comparability of sustainability information
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Align with broader EU sustainability initiatives
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Gain a competitive advantage.
In this section, we will explore the benefits of enhanced transparency and comparability, as well as the opportunities arising from alignment with broader EU sustainability initiatives and addressing sustainability issues.
Enhanced transparency and comparability
Enhanced transparency and comparability of sustainability data will enable investors and stakeholders to make more informed decisions, benefiting companies that demonstrate strong sustainability performance.
The CSRD’s standardised reporting framework and binding uniform EU standards ensure consistent and comparable sustainability reporting across companies, facilitating better evaluation and comparison of sustainability performance.
Aligning with broader EU sustainability initiatives
Aligning with broader EU sustainability initiatives, such as the European Green Deal and the EU Taxonomy, can help companies access new opportunities and contribute to the transition to a more sustainable economy. By demonstrating a commitment to environmentally sustainable economic activities and providing evidence of their sustainability performance, companies can attract investors and stakeholders who are increasingly focused on the environmental and social impacts of businesses.
This can open up new sources of capital, as well as new markets and customers.
Preparing for CSRD Compliance: Practical Steps
To prepare for CSRD compliance, companies should assess their current reporting practices and develop a robust data management system to ensure accurate and timely disclosure of sustainability information.
In this section, we will explore practical steps companies can take to prepare for CSRD compliance and ensure they are well-positioned to meet the new reporting requirements.
Assessing current reporting practices
Assessing current reporting practices, including the evaluation of annual reports and other relevant documents, is a crucial first step in preparing for CSRD compliance. By evaluating their existing sustainability reports and taking into account input from stakeholders and external sources, companies can identify gaps and areas for improvement.
This will enable them to develop a comprehensive and compliant sustainability reporting framework that aligns with the CSRD’s requirements and expectations.
Developing a robust data management system
A robust data management system is essential for collecting, analysing, and reporting the required sustainability information under the CSRD. Companies should invest in digital platforms and optimize internal processes to ensure accurate and timely data collection.
By implementing a comprehensive data management system, companies can facilitate informed decision-making by investors and stakeholders, ultimately contributing to a more sustainable future.
Summary
In conclusion, the Corporate Sustainability Reporting Directive (CSRD) represents a significant step forward in the world of sustainability reporting. It is essential for companies to understand the scope, key components, and requirements of the CSRD, as well as the timeline for compliance. By assessing current reporting practices, developing a robust data management system, and aligning with broader EU sustainability initiatives, companies can leverage CSRD compliance for strategic advantage and contribute to a more sustainable future.
