By now we can definitely say the EU is on top of its game when it comes to sustainability reporting.
With this legislation, the EU Taxonomy and the Sustainable Finance Disclosure Regulation- the EU makes sure companies disclose all necessary information on how they operate and manage their environmental and social challenges.
And to help investors and other relevant stakeholders make the best possible decisions based on this sustainability-related data- the EU Corporate Sustainability Reporting Directive (CSRD) was introduced.
So- what does this new directive entail?
What is the Corporate Sustainability Reporting Directive?
The CSRD proposal was released on April 1st this year and is meant to replace the current Non-Financial Reporting Directive (NFRD). The NFRD explains the rules on disclosure of non-financial and diversity information by certain large companies- including sustainability reporting. The NFRD applies to approximately 12.000 organizations within the EU region.
The new proposed CSRD, however, takes this sustainability reporting up a notch. It aims to ensure that a larger scope of companies (about 50.000 companies more) across all sectors publicly disclose even more detailed and transparent information on how sustainability issues:
(1) Affect their own business (risks and opportunities – outside in perspective). But it also wants them to disclose the impacts they have on (2) both people and our environment (inside-out perspective).
Now, this type of reporting is also called a ‘double materiality perspective’, because it reflects both the inwards and outwards impacts of a company. (Company/financial materiality=inwards, societal & environmental impact/impact materiality=outwards). A great development in reporting which was introduced earlier in other standards such as TCFD.
The CSRD emphasises the use of ‘real world’ sustainability targets. It wants companies to disclose how their sustainability/business strategies align with limiting global warming to 1.5C and how they contribute to the EU’s own climate goals.
Quick summary of the Goals of the CSRD:
- Ensure (especially) investors, consumers, policy makers, civil society organisations and other stakeholders are provided with all financial and non-financial data they need to assess companies’ societal and environmental impacts.
- Help companies (SME’s) become more attractive to investors and other stakeholders through better disclosure requirements.
- Provide more accessible, in-depth and verifiable non-financial data to investors that will allow for improved informed (ESG) decision making.
The 6 main things businesses should know about the new CSRD:
1. To which companies does the new CSRD apply?
The CSRD applies to all large companies that are governed by the EU law or established in an EU member state. Making it a drastic directive with 50.000 companies that will be required to report compared to the current 11.600. It also applies to all European stock exchange listed companies (except micro companies) and global businesses that have operations/securities in Europe.
Here the directive defines a large company as one that meets at least two out of the three following requirements:
- €40 million in net turnover;
- €20 million on the balance sheet;
- 250 or more employees.
2. When will companies have to comply with the new CSRD?
All 27 EU member states are expected to adopt the CSRD by 31st of December in 2022. Complying to the new directive will come in two waves with two sets of Sustainability Reporting Standards to be released separately.
Companies will have to comply with the first set of Sustainability Reporting Standards from the 1st of January 2023 onwards. And with the second set from October 23rd, 2023 onwards.
However, affected companies will not have to start reporting in line with the CSRD immediately. They have time to prepare the reporting until it becomes mandatory three years after; from the 1st of January 2026.
3. What will change in reporting requirements?
These extra reporting requirements show an increased focus on reporting on the double materiality (inward and outward impact), alignment to the Paris Agreement (1.5°C-2°C limit) and forward looking sustainability information. For example, companies will have to report on:
- Their strategy & business model and its resilience towards sustainability-related risks and climate scenarios. This includes aspects such as; stakeholder engagement, strategy fit with climate targets (Paris Agreement), and a description of sustainability policies;
- Sustainability targets & indicators set and progress towards achieving them;
- All environmental-related matters that are affected by (e.g supply chain)- or affect their business. This includes aspects such as; greenhouse gas emissions, energy efficiency, environmental footprint results and dependencies;
- Social considerations (working conditions, human rights, equal opportunities, etc.) and culture and approach to business ethics;
- Governance processes;
- External and internal control & risk management.
4. Is third-party assurance over the reported information mandatory?
For the new CSRD, ‘limited’ third party assurance on the reported information will become mandatory. This external assurance should come no later than 3 years after the CSRD is adopted (2023 onwards).
5. Where do companies need to report the new directive?
The CSRD will have to be reported on in the management report– instead of a separate sustainability report. Therefore, financial and sustainability information will be disclosed at the same time. Companies also need to tag their sustainability information digitally to make it available in the upcoming European Single Access Point (ESAP) database.
6. Does the reporting directive need to align with other EU legislation?
Yes, it does. The reported information should, of course, be consistent with EU regulations, including the EU Taxonomy* and the EU Sustainable Finance Disclosure Regulation (SFDR)**. The Sustainability Reporting Standards also take into account existing frameworks (e.g. TCFD) and sustainability standards (e.g. GRI).
*The EU Taxonomy is a classification tool aimed at investors, companies, and financial institutions to define the environmental performance of economic activities. It also sets requirements corporate activities must meet to be considered sustainable. The Taxonomy highly emphasizes the use of Life Cycle Assessments (LCA) to help fulfill companies with its environmental data requirements.
** The EU SFDR is a set of EU rules aiming to make sustainability profiles of funds more comparable and understandable for end-investors.
Preparing for the CSRD
The CSRD is just one more step in an increasing amount of sustainability legislation that companies have to prepare for. With the extra information required- it would be wise for companies to start preparing for the new directive as soon as possible (2022 onwards).
The EU Taxonomy and CSRD emphasize the use of Life Cycle Assessments (LCA) for measuring environmental-and carbon footprints. You can find more information on LCA’s below.