Understanding the Corporate Sustainability Reporting Directive (CSRD)

The Corporate Sustainability Reporting Directive (CSRD) represents a significant shift in how companies report their environmental and social impacts. This comprehensive EU legislation, which entered into force on January 5, 2023, sets new standards for sustainability reporting and transparency. It builds upon its predecessor, the Non-Financial Reporting Directive (NFRD), and aims to provide more detailed and standardized information on how companies affect and are affected by their social and environmental ecosystems. By expanding the scope and requirements of reporting, the CSRD seeks to enhance corporate accountability and foster sustainable development across the European Union and beyond.

Who Needs to Comply?

The CSRD applies to a broader range of organizations than its predecessor, including:

• Large EU-based companies with €150 million+ annual turnover

• Companies meeting two of these criteria:

  • €50 million in net turnover

  • €25 million in assets

  • 250+ employees

• Listed SMEs (with some exceptions)

• Non-EU companies with significant EU operations

By broadening the scope, the CSRD aims to capture a more comprehensive set of economic activities within the EU, thereby ensuring a consistent approach to sustainability reporting. This inclusion of non-EU companies with substantial operations within Europe reflects the EU’s commitment to ensuring that all significant economic actors contribute to the Union’s sustainability goals. These guidelines mean that businesses, regardless of their location, must be transparent about the sustainability of their operations if they wish to do business in the European market. For SMEs, while some leniencies are applied, such as an optional delay for compliance, the inclusion marks a shift towards involving all sizes of businesses in sustainability initiatives.

Key Reporting Requirements

Companies must now provide detailed information about their sustainability strategy in business practices. The reporting framework includes:

• Environmental impact assessments

• Social responsibility measures

• Governance structures

• Double materiality considerations

• Value chain sustainability best practices

The CSRD mandates a holistic approach to sustainability reporting. Environmental impacts comprise assessing direct and indirect greenhouse gas emissions, resource usage, waste management, and biodiversity impacts. On the social front, companies should disclose their effects on employees, communities, and supply chains, including diversity, respect for human rights, and social infrastructure. Governance reports should encapsulate board diversity, anti-corruption practices, and the alignment of executive pay with sustainability goals. Additionally, the ‘double materiality’ perspective ensures that companies evaluate both how sustainability issues affect them and how their operations impact the environment and society. Together, these reports provide stakeholders with a comprehensive view, enabling better investment decisions and promoting trust through transparency.

Implementation Timeline

The CSRD follows a phased implementation approach:

• 2024: Large public-interest companies (reports due 2025)

• 2025: Other large companies (reports due 2026)

• 2026: Listed SMEs (reports due 2027)

• Optional delay until 2028 for SMEs

This gradual roll-out allows companies ample time to adapt to new reporting standards. Large public-interest entities, already accustomed to the NFRD, will be the first to comply, aiding in setting a precedent for best practices. The staggered schedule provides businesses the opportunity to integrate necessary reporting processes, systems, and practices incrementally, minimizing the risk of disruption to operations. Additionally, allowing SMEs an optional delay until 2028 acknowledges the challenges smaller entities might face with the more resource-intensive requirements of the CSRD, thereby promoting a fair transition within different economic sectors.

European Sustainability Reporting Standards (ESRS)

The CSRD ESRS framework provides detailed guidelines for sustainability reporting. These standards ensure consistent and comparable reporting across companies, covering environmental, social, and governance aspects. Developed by the European Financial Reporting Advisory Group (EFRAG), the ESRS aims to offer detailed insights into a company’s sustainability impacts, risks, and opportunities. It also promotes the creation of a uniform language and criteria for assessing sustainability performance, thereby empowering investors, customers, and stakeholders to reliably compare corporate sustainability efforts across industries and borders. The ESRS is an evolving directive that will be periodically reviewed to ensure they remain aligned with technological advances, climate science, and policy changes.

Impact on Business Operations

The directive significantly affects how companies operate and report their sustainability efforts:

• Enhanced data collection requirements

• Mandatory third-party auditing

• Digital reporting format implementation

• Integration with GHG emissions measurement systems

Organizations will need to enhance their data collection mechanisms to meet these comprehensive reporting demands. This may involve adopting new technologies or processes to accurately capture relevant data points. The mandatory third-party audits are intended to improve the credibility of the reports and promote transparency. Adopting a standardized digital format for reports allows for easier comparison and data integration with global standards, facilitating investment and risk assessment processes. Furthermore, the emphasis on integrating GHG emissions measurements underscores the directive’s alignment with international climate goals and commitments such as the Paris Agreement’s targets.

Preparing for Compliance

To ensure successful CSRD implementation, businesses should:

1. Start early with data collection systems

2. Invest in sustainability reporting tools

3. Train relevant staff members

4. Engage with sustainability experts

5. Review and update existing reporting processes

Companies will benefit significantly from an early start in aligning their current systems with CSRD requirements. Utilizing advanced sustainability reporting tools can streamline data collection and processing, optimizing resource use. Training relevant personnel ensures that everyone from top management to junior staff comprehends the significance and methodology of effective reporting. Collaborating with sustainability professionals provides external perspectives and expertise to fine-tune existing practices. Continually reviewing and updating processes ensures compliance with evolving standards and paves the way for more sustainable business operations.

The Role of Technology

Modern carbon footprint software and sustainability platforms can help streamline CSRD compliance. These tools can automate data collection, analysis, and reporting processes, making it easier for companies to meet their reporting obligations while reducing costs and improving accuracy. Technology integration reduces the manual workload, providing more accurate and timely data for sustainable decision-making. Advanced analytics enable companies to predict environmental impacts and test scenarios for improving performance. With a centralized data repository, companies can efficiently track progress towards sustainability goals and dynamically adjust their strategies in response to new insights and regulatory changes.

Conclusion

The CSRD represents a significant step toward greater corporate accountability and transparency in sustainability reporting. While compliance may seem challenging, it provides an opportunity for companies to strengthen their commitment to sustainable practices and demonstrate their environmental and social responsibility to stakeholders. For more information on corporate sustainability best practices and reporting requirements, explore our ABC of sustainability guide or contact our experts for personalized assistance with your CSRD compliance journey. Embracing the CSRD not only aligns companies with EU directives but also positions them as leaders in the global movement towards sustainable and responsible business practices, ultimately contributing to a more sustainable world.