As the EU takes significant strides towards building a more sustainable and responsible economy, the CSRD emerges as a game-changing regulation that will shape the way businesses disclose their Environmental, Social, and Governance (ESG) performance. In this blog, we aim to provide you with insightful analysis, updates, and practical advice to help your organization navigate the complexities of the CSRD.
What is the EU Corporate Sustainability Reporting Directive (CSRD)?
The European Union's Corporate Sustainability Reporting Directive (CSRD) mandates that large enterprises (more than 250 employees, net turnover of EUR 40 million or total assets exceeding EUR 20 million), listed companies, and some non-EU companies operating within the EU must annually disclose their ESG performance. The European Council approved on November 28, with the CSRD being published in the Official Journal of the European Union (OJEU) on December 16, 2022. The directive will take effect 20 days post-publication, after which member states have an 18-month window to incorporate the new rules into their national ESG regulations.
The CSRD aims to enhance transparency and accountability about corporate ESG performance. This enhancement will enable investors and other stakeholders to better understand how companies tackle ESG concerns, ultimately facilitating more informed decision-making. Additionally, the CSRD strives to promote the integration of ESG factors into corporate business strategies, thus fostering a more sustainable and inclusive economic landscape.
Superseding the Non-Financial Reporting Directive (NFRD), the CSRD expands the compliance requirements to approximately four times the number of companies (from close to 12,000 to 50,000). Companies falling under the directive's scope must produce a non-financial statement that reveals information on their ESG-related policies, risks, impacts, and outcomes. This statement must undergo an independent third-party audit and be incorporated into the company's yearly financial report.
What was the rationale for adopting the CSRD?
The CSRD emerged as a component of the European Green Deal, a collection of policies and initiatives aimed at transitioning the EU towards a more sustainable, responsible, and digitally-driven economy. To support the financing of the Green Deal, the EU introduced the Action Plan for Financing Sustainable Growth, which proposes reforms in three key areas:
- Redirecting capital flows towards sustainable investments.
- Integrating sustainability into risk management.
- Promoting transparency and sustainability in economic activities.
The CSRD serves as a crucial element within this plan. By obligating companies to include finance-grade information about their ESG performance in their yearly reports, the directive enhances such data's transparency, credibility, and comparability. As a result, investors and other stakeholders can make well-informed decisions when engaging with companies, directing more capital toward sustainable businesses and investments. Additionally, the CSRD promotes greater corporate accountability by motivating companies to incorporate ESG factors into their business practices.
Adherence to the CSRD: What do the ESG disclosure requirements entail?
To comply with the CSRD, companies are required to create a non-financial statement containing details about their ESG policies, risks, and outcomes. The specific content will differ based on the company's size and nature but may encompass policies and performance data related to:
- Environmental aspects such as greenhouse gas emissions, energy usage, waste management, and natural resource utilization.
- Social matters including employment practices, working conditions, diversity, health and safety, supply chain management, and community involvement.
- Governance structures and practices, covering aspects like board composition and diversity, executive compensation, and risk management.
Companies must adopt a "comply or explain" approach, meaning they are obliged to disclose the requested ESG information or provide a justification for their inability to do so. Regardless of the approach taken, the statement must be approved by the board of directors and incorporated into the annual financial report. An independent third party must also audit the statement to ensure its accuracy and credibility.
How to get ready for the EU CSRD?
- Establish governance and policies. Ensure your organisation has the right governance and policies in place to manage sustainability and more specifically the EU CSRD requirements. A dedicated team with in-house or (partially) externally sourced sustainability expertise should be considered, especially for larger enterprises.
- Define scope and targets. Determine the business segments subject to the CSRD and the specific ESG information that must be disclosed. Initiate a discussion with the management board in order to set targets about ESG and sustainability reporting.
- Conduct assessment(s). Ensure double materiality assessments are performed. This crucial step forms the foundation for crafting a sustainability strategy that takes all stakeholders into account.
- Resolve gaps. Based on the assessment(s), ensure that gaps are identified, discussed, tracked and resolved in line with business objectives.
- Establish data gathering processes. Ensure you structurally retrieve ESG data from internal entities, suppliers, vendors and other business partners.
- Select tooling. Choose for fit-for-purpose monitoring and due diligence technology to facilitate the data collection and reporting process.
- Start and integrate reporting. Compile your ESG disclosure non-financial statement in compliance with the CSRD requirements within your management reporting.
When do businesses need to adhere to the EU CSRD?
Companies that meet the specified requirements must commence reporting according to the following schedule:
- January 2025 for companies previously under the purview of the NFRD, utilizing data from the 2024 fiscal year.
- January 2026 for all other companies, drawing upon data from the 2025 fiscal year.
- January 2027 for listed small and medium enterprises that apply for an extension, using data from the 2026 fiscal year.