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What changes to expect with the European Corporate Sustainability Reporting Directive

Updated: Aug 9, 2022

Article by Susan T. Jackson


Image by Alexandre Lallemand via Unsplash



Sustainability reporting encompasses how companies report on and communicate their plans, actions and progress (or not) toward managing social and environmental risks and related operations. There is a growing call for more rigorous and transparent sustainability reporting and common standards for reasons of comparability and effective risk assessment. At the same time, the increase in regulation in sustainability reporting poses challenges to all types of business processes. Of the large and mid-sized companies that do sustainability reporting, only about 40% acknowledge climate-related financial risks in some way, and reporting on the UN Sustainable Development Goals (SDG) remains unbalanced and disconnected from business goals.


Within this context, the European Council proposed the corporate sustainability reporting directive (CSRD) in April 2021. In June of this year, the European Council and European Parliament announced that they have reached a provisional political agreement on the CSRD, with the proposed changes expected later this year.


This directive introduces rule changes for improving sustainability reporting and supporting the transition to the just and sustainable economic and financial system envisioned in the European Green Deal and the UN Sustainable Development Goals (SDGs). The aim is to help stakeholders evaluate company performance beyond the traditional balance sheet view and to encourage companies to develop sustainable business models. These rule changes have important implications for businesses large and small, even those not directly impacted by the proposed changes.



Which companies and what disclosures?


To start with, the CSRD widens which companies are required to conduct sustainability reporting and it increases transparency. These changes modify the 2014 Non-Financial Reporting Directive (NFRD), the current EU standard for sustainability reporting.


Is your company covered?


The CSRD builds on the NFRD by expanding the list of companies required to report from 11,000 under the NFRD rules to nearly 50,000 under the CSRD, with as many as 15,000 of those companies located in Germany. The new rules cover all large public and private European companies with 250 or more employees and/or a minimum €20m balance sheet and/or at least €40m in turnover. The CSRD also covers non-EU companies with net sales of at least €150m and with at least one subsidiary or branch office in the EU.


Listed SMEs are also included, in part because of the growing demand for sustainability information from investment portfolios, supply chain stakeholders and endpoint customers. These SMEs likely will have modified reporting standards due to a higher threshold for small companies to meet data requirements. However, even without requirements, listed and non-listed SMEs have been receiving more requests for information on their sustainability activities and impact and are encouraged to volunteer to follow the new standards even if not required to do so.


Disclosure transparency


By bolstering reporting rules that support the NFRD’s “double materiality perspective,” the CSRD also aims to increase disclosure transparency. Double materiality moves beyond the one-way notion that companies can experience climate-related impacts that are material. Double materiality includes the material impacts companies can have on the environment, people and their company’s own governance. This perspective covers current and potential effects for all relevant stakeholders, including along supply chains and across different time horizons. Often companies do not present in their reporting enough information and quality data that make it possible for stakeholders to compare between companies and to evaluate sustainability-related risk exposure, thus the proposed changes introduced by the CSRD. The directive is expected to increase data comparability and harmonize standards with the added aims of improving data provider practices, increasing expertise in this area, and creating jobs.



Notable reporting requirements


There are several notable implications in the reporting requirements. Companies will be responsible for having their sustainability reporting independently certified as well as including the sustainability reporting in the management reports thereby improving information accessibility. The CSRD further improves transparency by requiring companies to digitally tag their sustainability information so it is easier to find.


The CSRD would require more detailed information on the existing NFRD subject areas, including:

  • Environmental matters,

  • Social matters such as the treatment of employees and respect for human rights,

  • Issues around anti-corruption and bribery, and

  • Diversity on company boards, in particular regarding gender, age, education and professional backgrounds.

The Global Reporting Initiative (GRI) and the European Reporting Advisory Group (EFRAG) are collaborating to develop the European Sustainability Reporting Standards (ESRS). These standards will set the mandatory disclosure requirements covered by the CSRD, as well as provide a basis for how a global disclosure system could look. The recent GRI technical opinion maps the current drafting of the standards, giving a snapshot into the standards development process.



Time frame


If you haven’t already begun, the time to start preparing is now; implementation is just around the corner. While implementation is staggered, the draft timeline includes:

  • FY starting on or after 1 January 2024, for companies already covered by the NFRD,

  • FY starting on or after 1 January 2025, large companies not already covered, and

  • FY starting on or after 1 January 2026, listed SMEs (but excluding listed micro-enterprises).


Some small businesses can petition to delay their implementation until 2028.




What can you do?


Sustainable leadership is an important component for innovation in any business. For CSRD compliance, this can mean understanding the challenges of collecting the necessary data as well as communicating it. The best case scenario regarding integrating sustainability into your business models entails a thorough analysis of how you already contribute to sustainable development and where and how you can do better. The next step is to build both internal capacities and develop proper sustainability strategies with specific targets that can be measured and turned into Key Performance Indicators (KPIs). Part of this strategy should be digitally transforming sustainability information flows so that data is accessible, comparable and part of your business’s story. If you want to unleash the innovation potential of sustainability, it is essential that you not only comply with current regulation, but use policies such as the CSRD as a way to start an open innovation process on how to future-proof your business model and do good for your organization and the world at the same time.



References

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“European Parliament and Council Reach Provisional Agreement on CSRD.” Deloitte IAS Plus, 22 June 2022, https://www.iasplus.com/en/news/2022/06/provisional-agreement-on-csrd.


European Parliament. New Social and Environmental Reporting Rules for Large Companies. 21 June 2022, https://www.europarl.europa.eu/news/en/press-room/20220620IPR33413/new-social-and-environmental-reporting-rules-for-large-companies.


Frost, Lucy. “Primer: The EU Corporate Sustainability Reporting Directive.” IFLR, 8 Dec. 2022, https://www.iflr.com/article/2a647e1ubbp4gemb2f75s/primer-the-eu-corporate-sustainability-reporting-directive.


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