In a time of increasing environmental crises, European Union’s “Corporate Sustainability Reporting Directive” (CSRD) heralds a new era in the realm of corporate accountability and sustainability.
Enacted as a key element of the European Green Deal, this is new rule aims to transform the landscape of sustainability reporting across the EU. In simpler terms, the CSRD updates and expands an older rule known as the Non-Financial Reporting Directive (NFRD), which was a set of guidelines that required certain large companies in the EU to include non-financial information in their annual reports.
This “non-financial” information includes things like how the company affects the environment, treats its employees, and contributes to society. The idea was to make companies more transparent about the impact of their activities beyond just making money, covering aspects like sustainability and social responsibility. However, the NFRD covered only a limited number of large companies, leaving out a vast number of smaller ones and those outside the EU with significant operations within it. This is where the CSRD steps in, applying these rules to a much larger group of companies. This includes not only the big players but also smaller companies that are publicly traded (listed SMEs) and even some non-EU companies if they do a significant amount of business in the EU.
The main goal behind this expansion is to make sure more companies are open about how their operations impact people’s lives and the environment. Whether it’s how they’re addressing climate change, ensuring fair treatment of workers, or engaging with the communities they operate in, the CSRD wants companies to share this information publicly. This move towards greater transparency is designed to empower everyone, from investors and customers to the general public, to make informed decisions. For example, if you’re deciding where to invest your money or which products to buy, this information can help you choose companies that align with your values on sustainability and social responsibility.
One of the most significant changes brought about by the CSRD is the substantial increase in the number of companies obligated to report on sustainability. Approximately 50,000 entities across the EU are now required to publish detailed sustainability information, a figure that far exceeds those covered under the NFRD. This expansion seeks to elevate the quality and scope of sustainability reporting to a level of standardisation comparable to financial reporting. Beginning with the financial year 2024, the first reports under this new directive are expected in 2025.
At the heart of the CSRD are the European Sustainability Reporting Standards (ESRS), which set forth comprehensive requirements for reporting on a variety of sustainability issues. These standards encompass a wide range of concerns, from climate change and pollution to biodiversity, social well-being, and beyond. They mandate both qualitative and quantitative disclosures, encompassing retrospective and forward-looking information, and require companies to consider their entire value chain over short, medium, and long-term horizons. Furthermore, the CSRD introduces a phased approach to the assurance of sustainability disclosures. Initially, companies will be required to obtain limited assurance for their sustainability information, a requirement that will evolve to a standard of reasonable assurance by 2028. This phased approach demonstrates the EU’s commitment to gradually enhancing the rigour and reliability of sustainability reporting.
The directive’s impact extends well beyond the borders of the EU. Non-EU companies with significant market presence in the EU or those listed on EU-regulated markets will also be subject to compliance with the CSRD. These companies will need to adhere to standards specifically tailored to their circumstances, ensuring the directive’s global influence on sustainability reporting practices.
Central to the CSRD is the principle of double materiality, which compels companies to report not only on how sustainability issues impact their financial performance but also on their wider societal and environmental effects. This dual focus necessitates a comprehensive approach to materiality, considering the full extent of a company’s influence on both fronts.
The implementation of the CSRD will require companies to undertake significant strategic, governance, risk management, and operational adjustments. Firms will need to embed sustainability into the core of their business operations, developing robust systems for data collection and reporting. They will also need to assess their impact across their value chains and ensure that their sustainability objectives are fully integrated into their overall business strategies. As companies prepare for the first reporting cycle under the CSRD, it becomes imperative to understand the detailed requirements set forth by the ESRS. These standards not only specify the information to be reported but also outline how it should be structured within the management report. This includes detailed guidelines on assessing materiality, ensuring that disclosures accurately reflect the company’s sustainability performance and impact.
On the other hand, ESRS cover a broad range of specific topics within the environmental, social, and governance domains. For example, on environmental matters, companies will be expected to provide detailed disclosures on their greenhouse gas emissions, energy consumption, and the impact of their operations on biodiversity. Social topics will require disclosures on labor practices, human rights, and community engagement, among others. Governance disclosures will focus on the company’s internal controls, ethics, and compliance mechanisms related to sustainability.