Corporate Sustainability Reporting Directive (CSRD) a guide for businesses
New year, new legislation. January 2024 will see the EU enforce a new reporting directive with the intent of evaluating the sustainability performances of companies to bring the EU closer to its 2050 net-zero target.
What is CSRD and why is it important
As of January 5th, 2024, the European Union (EU) will enforce the CSRD, a groundbreaking piece of legislation for businesses. The CSRD sets a new standard for global sustainability reporting. The report involves companies sharing details about the risks and opportunities related to social and environmental issues, as well as the impact of their activities on people and the environment.
The CSRD enhances the evaluation of companies' sustainability performance as part of the European Green Deal, benefiting investors, civil society organisations, consumers, and other stakeholders. It builds upon the Non-Financial Reporting Directive (NFRD) from 2014, aiming to promote transparency and informed decision-making regarding sustainability information.
CSRD expands the NFRD's scope by increasing the number of reporting companies from 11,000 to over 50,000. Additionally, the amount of non-financial information companies must report under CSRD may have increased.
The NFRD rules remain in effect until companies transition to the new CSRD rules. Once enforced, companies under the CSRD will report according to European Sustainability Reporting Standards (ESRS).
What does CSRD mean for your business
The new EU law mandates large and listed companies (excluding listed micro-enterprises) to follow European Sustainability Reporting Standards (ESRS). The European Commission allows companies to slowly start meeting certain disclosure requirements.
For example, many companies can postpone reporting financial impacts related to sustainability risks and opportunities for the first 1-3 reporting years. Also, companies or groups with 750 or fewer employees may skip disclosures about green house gas emissions, biodiversity, and social matters for the first 1-2 reporting years.
If you do have to report as soon as possible then the reporting in 2025 will use data collected in the 2024 calendar year.
What needs to be reported for CSRD
The European Sustainability Reporting Standards include 12 different standards covering various aspects:
Cross-cutting: general requirements and disclosures
Environmental: climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use, and circular economy
Social: workers (direct and supply chain), local communities, consumers, and end-users
Governance: business conduct
Additionally, there are upcoming standards expected to be released in mid- to late-2024:
- Sector-specific standards: for certain sectors like mining, quarrying, coal mining, oil and gas, road transportation, agriculture, farming, and fisheries.
- SME standards: for SMEs reporting by January 2027, to be adopted by the European Commission by June 2024.
- Non-EU standards: for entities not headquartered in the EU but falling under the scope.
What steps do companies need to take
Companies complying with CSRD should follow the steps below to meet the higher standards effectively.
Firstly, companies should hire legal counsel to carefully check if their operations fall under CSRD. They should consider factors like company turnover, workforce, and jurisdiction.
Next, a company might conduct a gap assessment, preferably with help from an external technical consultant. This evaluation examines the company's internal controls and data collection processes to ensure they meet the higher standards outlined by the CSRD.
Lastly, companies should conduct a thorough double materiality assessment, examining their operations and supply chain. This assessment helps identify the relevant sustainability standards for the company's specific situation, ensuring that reporting is not only compliant but also reflects the broader social and environmental impact of the company's activities. Following the steps will allow for ease into the new reporting style.