From 2023, all large organisations in the EU will be required to report on their sustainability policy and performance. In April 2021, the European Commission presented the proposal for a Corporate Sustainability Reporting Directive (CSRD). The directive sets forth requirements for mandatory reporting on the environmental and social impact of business activities, and independent assurance on the information presented.
The directive aims to increase the quality of information and transparency about sustainability matters in companies, and thereby supports the transition to a sustainable economy following the Paris Climate Agreement and the EU Green Deal. For many organisations, the proposed CSRD timeline means they need to start preparing in order to be ready by 2023 and meet the CSRD obligations. What does this mean for your company?
Who is affected?
The CSRD is an extension of the European directive on sustainability reporting: the Non-Financial Reporting Directive (NFRD).
The NFRD came into effect in 2018 and requires public interest companies (such as banks, insurers and publicly traded companies) with more than 500 employees to report on how they deal with issues such as environmental pollution, social responsibility, human rights and diversity.
The CSRD significantly broadens the scope of entities that have to report. It applies to all listed entities, as well as to large entities that meet two of the following three criteria:
More than 250 employees;
More than €40 million ($40.4 million) turnover;
More than €20 million on the balance sheet.
In line with the NFRD, about 12,000 companies in Europe were required to report on their sustainability performance. Under the CSRD, this obligation will apply to around 50,000 organisations in Europe.
What obligations apply?
In addition to requiring more companies to report, there will also be more reporting requirements under the CSRD. The format and exact criteria for reporting are still under development. In any case, the reporting must contain the following components:
Data based on the double materiality principle: (1) which sustainability risks and opportunities may result in financial materiality for the organisation (for example, scarcity of raw materials or production disruptions due to extreme weather conditions, but also transition risks such as reputational damage), and (2) what material impacts the company has on people and the environment (such as loss of biodiversity, or human rights violations in the value chain);
Forward-looking information: information about the company's long-term sustainability goals, and progress towards those goals (as opposed to just results in a given year);
Results on environmental impact (where relevant, in line with the EU Taxonomy Regulation), as well as social impact; at a minimum, about social and employee matters, diversity, anti-bribery and corruption, and human rights; and
Linking reporting in line with other recent European regulations, such as the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation.
In addition to substantive requirements, a limited assurance on the report by an accountant is required, as well as making the report available in electronic (XHTML) format. These requirements are expected to make an important contribution to increasing the quality and comparability of sustainability reports.
The Paris Climate Agreement
The regulations, linked to the EU Green Deal, should provide more relevant and comparable information on sustainability policy and results. This will provide more insight into the progress of Europe and European companies towards the goals of the Paris Climate Agreement (net zero emissions, and keeping global warming below 1.5 degrees).
The integration of financial and non-financial data within company reporting is important to ensure that companies can better focus on broader value.
The CSRD does not stand alone in this. The SFDR and the EU Taxonomy Regulation came into effect in 2022, and a guideline on sustainable corporate governance is expected before the end of the year. These laws and regulations offer more and more frameworks around, and a vision on, the responsibilities of companies in a more sustainable economy.
How do you prepare?
Although the first reporting obligation under the CSRD will apply from 2023, many companies already have to prepare or update their sustainability strategy on which the reporting is based in the run-up to this. This is in addition to setting up processes and systems for data collection based on sustainability indicators and guaranteeing the quality of that data.
