Corporate sustainability reporting is gaining prominence across the world, with rising demands from shareholders and stakeholders for better transparency and accountability on environmental, social and governance (ESG) concerns.
Addressing this need for the European Union, the European Commission has put forward the Corporate Sustainability Reporting Directive (CSRD).
In this article, we will delve into the essential elements of CSRD, examine its key requirements, benefits and challenges.
Overview of the CSRD
Corporate Sustainability Reporting Directive (CSRD) is a crucial step towards promoting sustainable practices and ensuring transparency in reporting for companies operating in the EU.
- A net turnover of over €40 million
- Or balance sheet assets greater than €20 million
- Or more than 250 employees
will be required to comply with CSRD.
This directive will apply to all major and publicly traded corporations on EU-regulated marketplaces, except for micro-enterprises.
Small and medium-sized enterprises (SMEs) listed on the EU-regulated markets will also have to comply with CSRD but on an extended schedule.
Non-EU-based corporations with subsidiaries in the EU and companies with securities listed on EU-regulated markets will need to meet additional CSRD compliance requirements.
The proposed audit requirement aims to enhance the credibility of sustainability data submitted by companies operating in EU-regulated marketplaces.
The European Commission has allowed for a gradual approach to the audit requirement.
Initially, auditors will provide an opinion based on a "limited assurance" involvement with the sustainability reporting's compliance with the CSRD's criteria, including relevant reporting standards.
This will help companies adapt to the new sustainability reporting requirements and ensure compliance.
The audit requirement will evolve to a "reasonable assurance" at a later date.
After the publication of the sustainability criteria and a review by the European Commission within three years of the CSRD taking effect, the "limited" guarantee will be changed to a "reasonable assurance".
This will provide companies with greater clarity and accountability in their sustainability reporting practices.
CSRD aims to enhance the credibility and reliability of sustainability data disclosed by companies operating in EU-regulated marketplaces.
Digitising Sustainability Information
Companies will also need to digitise and identify their sustainability information to make it accessible via the EU's European Single Access Point (ESAP) database.
This will improve the accessibility of sustainability data for stakeholders and assist in promoting transparency and comparability.
Tagging and Digital Labelling
To enhance the efficiency of sustainability reporting practices, companies will need to tag important data and give it a digital label.
This will enable algorithms to read the data more quickly and allow stakeholders to evaluate and compare data across different companies.
Information that should be disclosed by companies
The CSRD requires companies to disclose information on:
- Business model and strategy
- Primary risks regarding sustainability issues and dependencies
- Management and supervisory bodies' roles in relation to sustainability
- Due diligence procedures for operations and the supply chain
- Policies addressing sustainability factors
- Sustainability targets
- Indicators pertinent to measuring all of the above
- Progress toward meeting targets
Under CSRD, companies are expected to provide information at three different levels, for comprehensive and meaningful reporting:
1. Mandatory industry-agnostic disclosures:
These disclosures have already been specified by the European Financial Reporting Advisory Group (EFRAG) in the cross-cutting European Sustainability Reporting Standards (ESRS). They cover a range of ESG factors, including climate standards that are mandatory for all companies.
2. Mandatory industry-specific disclosures:
Companies will be required to report on a series of mandatory standards based on their sector of activity. These standards are currently being defined and will be published as a Delegated Act in June 2024.
3. Company-specific information:
This level of reporting allows companies to disclose information on issues they consider important but have not been covered in the rest of the sustainability report.
The CSRD encompasses a wide range of environmental, social, and governance (ESG) criteria that companies are required to report on.
In particular, the first set of European Sustainability Reporting Standards (ESRS) reviewed on November 2022 address the following 10 ESG topics:
- Climate change
- Water and marine resources
- Biodiversity and ecosystems
- Circular economy and resource use
- Own workforce
- Workers in the value chain
- Affected communities
- Consumers and end-users
The CSRD offers guidance on several crucial concepts that companies must consider when reporting. These guidelines cover various areas, such as
- Information quality: how to ensure the quality of sustainability data, including requirements for truthful representation, comparability, verifiability, and more.
- Double Materiality: to consider both the financial impacts of sustainability issues on their operations (i.e., financial materiality) and the external impacts of their activities on society and the environment (i.e., impact materiality). The EFRAG is tasked with developing a methodology for identifying material issues.
- Time horizon: to be in line with the same reporting period used for financial statements, and include both retrospective and forward-looking information.
- Boundaries and value chain: to report on sustainability factors that encompass their entire value chain, including direct and indirect business relationships in both the upstream and downstream.
The ESRS, which detail disclosure requirements, were finally approved by EFRAG in November 2022.
This final version has significantly reduced the number of disclosure requirements from 136 to 84 and the number of quantitative and qualitative data points from 2,161 to 1,144.
Implications for Businesses
The CSRD will require companies to adopt more robust sustainability reporting practices and may have implications for business strategy and operations.
Companies will need to collect and manage sustainability data, establish stakeholder engagement processes, and provide regular updates on sustainability performance.
This may require significant investments in resources and infrastructure.
The CSRD may be challenging for companies to comply with, particularly smaller companies with limited resources.
There are also concerns about the potential cost of compliance and the burden of reporting.
But CSRD has the potential to improve transparency and accountability, enhance risk management, and increase stakeholder engagement.
It will also make it easier for investors to compare the sustainability performance of different companies and encourage companies to adopt more sustainable practices.
If your company must comply with the CSRD, you should begin immediately.
The deadline is rapidly approaching, and the consequences of noncompliance can be significant.
At Apiday, we understand the complexities and challenges involved in the reporting process.
That's why our platform is designed to simplify and streamline it by:
- Identifying your specific reporting requirements
- Pre-populating ESRS templates
- Highlighting any data gaps that need to be addressed
- And providing you with a fully compliant CSRD reporting pack, complete with digital tagging and EU Taxonomy alignment, ready for audit and seamless integration into your annual reporting.
So you can focus on what matters the most: driving change in your company rather than fetching and crunching data!
Take the first step towards CSRD compliance now!