The European Parliament adopted mid-December 2022 the final CSRD text, which will require multinationals with business in the E.U. to publicly disclose detailed information around material ESG matters.
Corporations will be required to provide extensive disclosures on how they deal with several Environmental, Social and Governance topics, including climate-related financial impact and corporation-related impacts on nature, and how these topics are managed, reported and monitored internally.
To help you prepare before this directive takes effect, we have gathered answers to the most frequently asked questions on the CSRD.
1. What is the CSRD?
The CSRD (Corporate Sustainability Reporting Directive) is the new EU regulation requiring large and medium companies to report on their environmental and social impact as well as their mitigation targets and progress on reaching these targets. Its goal is to encourage companies to develop more responsible and sustainable approaches to business, while making it easier for investors to assess sustainability information and compare it with peers. The CSRD contributes to the European Green Deal, a package of policy initiatives set to allow the EU reach climate neutrality by 2050.
It will replace the existing NFRD (Non-Financial Reporting Directive) set in 2014.
The CSRD will extend the scope of the NFRD while aligning it with financial disclosure and worldwide accepted sustainability disclosure standards, especially the TCFD.
In a nutshell, the CSRD will spur some significant changes:
· ESG is now fully part of the annual reporting process, alongside financial information
· The amount of data to be collected and monitored will increase significantly
· The number of people involved in the process within the company will also increase
· Reporting companies will need to define and implement a roadmap aligned with limiting global warming to 1.5C and achieve net zero emissions by 2050, and report their progress on these targets
· Sustainability data will be audited
2. Who will it apply to and when?
The CSRD will apply to all companies listed on regulated markets (with the exception of micro-enterprises with revenue below 2m€ or a headcount of less than 10 employees) and to all large public-interest companies which meet at least 2 of the following 3 criteria:
· At least 250 employees
· At least 40m€ in net revenue
· At least 20m€ in assets
Furthermore, the CSRD will apply not only to companies based in the EU but also to EU subsidiaries of companies headquartered outside the EU but with significant operations in the EU (at least 150m€ of revenue in Europe).
It is estimated that about 49,000 companies will have to comply with the CSRD.
SMEs in this scope will follow some specific rules. See question 8 below.
Keep in mind that the first companies reporting in 2023 and 2024 will likely trigger a ripple effect on their suppliers to provide CSRD-compliant information and action plan, even if these latter companies are not obliged yet to comply with the CSRD.
3. What are CSRD’s key features?
One of the main concepts in the CSRD is Double Materiality:
- Financial materiality: Disclosing all sustainability issues which trigger or may trigger significant financial effects on companies, i.e., it generates or may generate significant risks or opportunities that influence or are likely to influence the future cash flows and therefore the enterprise value in the short-, medium- or long-term.
- Impact materiality: Actual or potential significant impacts by the company on people or the environment over the short-, medium- or long-term. This includes impacts directly caused or contributed to by the company in its own operations, products or services and impacts which are otherwise directly linked to the company’s upstream and downstream value chain, and not limited to contractual relationships.
Other key concepts are:
Quality of information: To ensure high quality and trustworthy data, the CSRD requires companies to disclose information in a consistent, relevant, comparable, reliable and verifiable way.
Materiality: All sector-agnostic and all sector-specific disclosure requirements are deemed material for an entity. Entities can use rebuttable presumption when they consider such disclosure requirements are not relevant for them, but need to support it with reasonable evidence.
4. What sustainability information will need to be disclosed?
The reporting standards (ESRS – European Sustainability Reporting Standards) follow a 3x3 architecture, nicknamed “the rule of three”:
Ø 3 levels of information:
· sector-agnostic,
· sector-specific
· entity-specific standards
Ø 3 reporting areas:
· Strategy: corporate strategy and business model, governance, assessment of risks, opportunities & impacts (cf. double materiality)
· Implementation (objectives, action plans, allocated resources and management)
· Performance measurement (indicators to monitor progress against set objectives)
Ø 3 ESG topics (environmental, social and governance).
Its requirements encompass the following topics:
Environmental: These five environmental impacts align with the EU Taxonomy.
Social:
Governance:
5. How can I report on the CSRD?
The CSRD aims at bringing sustainability reporting to a similar level of quality as financial reporting. Companies will have to report annually on how they assess and manage their ESG-related challenges.
The reporting will need to include qualitative & quantitative data, address short-, medium- and long-term horizons and cover the reporting company’s whole value chain. Mitigation pathways must be consistent with the latest climate science.
The CSRD requires including sustainability information in a dedicated section of their management report. As with financial reporting, the company’s governance will be responsible for the sustainability reporting. It also requires verification of annual and consolidated sustainability reporting by the statutory auditor that audits the respective financial statements or another third third-party auditor.
The CSRD wants companies to prepare their report in XHTML format (ESEF Regulation – European Single Electronic Format), as the reported information must be easily accessible to investors and other stakeholders in the European Single Access Point (ESAP) database.
Therefore, companies will have to ‘tag’ their reported sustainability information according to a new digital categorization system.
6. What benefits will the CSRD bring to my company?
Beyond sheer compliance with this new regulation, the CSRD can bring the following benefits:
· Attract investors
- Sustainability has become a key aspect of business, both in the short- and long-term.
- In particular, the EU Taxonomy requires companies in the NFRD’s or CSRD’s scope to disclose how environmentally sustainable their activities are, based on the environmental impacts listed in question 4.
- By complying with the CSRD, companies will also meet the EU Taxonomy requirements, thus providing valuable information for investors to make decisions regarding “green” investments.
· Improve brand attractiveness
- As an increasing share of consumers expect companies to have a positive impact on the environment,companies that move ahead on ESG will attract and retain consumers. Companies selling high value products and services can also often sell environmentally friendly products at a premium, when backed with sufficient evidence.
- Same goes for BtoB businesses: CSRD-compliant companies selling to large companies which already have or are building a sustainability strategy will get an edge on their competitors, as they will have a direct positive contribution to their clients’ own footprint.
· Collaborate across the value chain
- In most industries, the supply chain accounts for more emissions than a company’s own emissions. CSRD requirements will cascade down to suppliers and then to suppliers’ suppliers. This is a good opportunity to engage further with your suppliers to collaboratively improve products and services.
· Attract and retain employees
- In most industries, people are a company’s most valuable asset.
- 9 out of 10 millennials believe the success of a company should also be measured from an environmental and social life standpoint (source: G&A, Fast Company)
· Support strategic decisions
- CSRD puts a strong focus on assessing risks, opportunities, and impacts (cf. double materiality in question 3). Through the CSRD, companies will get an invaluable overview of their environmental &social impacts, and of the climate-related risks and opportunities for their business. It enables companies’ boards to make better strategic decisions to future-proof their business.
- The CSRD is based on the conviction that there cannot be lasting financial performance without environmental and social performance, and without taking into account related constraints.
7. I’m an SME. What does the CSRD mean for me?
SMEs which meet the criteria listed in question 2 will report starting January 1st 2027, instead of 2026 as initially forecasted.
Listed SMEs will follow a simpler standard, which will be specified in a second set of standards to be adopted by the European Commission by mid-2024.
Non-listed SMEs can choose whether they report according to the CSRD standard on a voluntary basis. However, SMEs will likely receive increasing requests from their large BtoB clients to at least provide additional information and even to comply with the CSRD (cf. collaboration across the value chain in question 6). Likewise, SMEs compliant with the CSRD will get an edge over competitors to get new markets from large companies.
8. I’m an international company. What does the CSRD mean for me?
International companies with significant operations in the EU (at least 150m EURO in revenue in Europe) and at least either one subsidiary which meets the criteria listed in question 2, or a branch that generated a net revenue of at least 40m EURO in the preceding year, will report starting January 1st 2028.
These companies will follow a specific standard, which will be specified in a second set of standards to be adopted by the European Commission by mid-2024.
The CSRD is designed to better align with international standards, such as TCFD, as long as these standards are aligned with European objectives and criteria. Keep in mind that the CSRD is overall more stringent than current international standards and covers a wider scope.
European subsidiaries of non-public companies headquartered outside of the EU may be allowed not to report to CSRD if their parent company already releases sustainability reporting compliant with the CSRD.
International companies may have to align simultaneously on several sustainability reporting standards, as the US SEC(Securities and Exchange Commission) and the IFRS Foundation’s ISSB(International Sustainability Standard Board) have both released standards for consultation in 2021 and 2022. The good news is the three sets of standards share a common foundation; the framework developed by the TCFD (Task force on Climate-related Financial Disclosure).
The CSRD is the most prescriptive at the moment and uniquely features the notion of double materiality (see question 3).
9. How do I start?
Start preparing now to make sure you will be ready to meet the expected disclosure timeline.
1. Appoint someone responsible for your sustainability compliance and performance
2. Measure your baseline: GHG and environment, if you have not done it yet
3. Assess your double materiality: risks &opportunities & impacts: environment, social, governance
4. Set targets and have the board approve them
5. Align internally on your baseline, your materiality and your targets: from the C-suite to employees
6. Onboard your main suppliers and partners on environmental and social considerations
7. Start the conversation with a third-party auditor to ensure alignment with assurance requirements: data, processes, monitoring
8. Set and start monitoring your KPIs
