CSRD: The next era of sustainability reporting
Beyond reporting: How companies can use the CSRD as an accelerator of their sustainability agenda
The future of corporate sustainability reporting is taking shape. At the end of November 2022, the European Union Council gave its final approval to the Corporate Sustainability Reporting Directive (CSRD)1 and the European Financial Reporting Advisory Group delivered the first set of draft European Sustainability Reporting Standards (ESRS) to the European Commission.2 With these measures, the EU aims to accelerate the transition to a sustainable economy.
Under the new CSRD regulation, companies will soon be required to publish detailed information on sustainability matters. This will increase a company’s accountability for its impacts on the environment and society, and provide financial institutions with comparable, verified information on sustainability performance that should facilitate allocation of finance to sustainable activities.
The measures should also equip companies for implementing their own sustainability agenda. They can only make progress if they know where they stand – relative to their ambitions as well as their peers – and where they can improve.
What does CSRD compliance entail?
CSRD extends the scope and detail of the current Non-Financial Reporting Directive (NFRD). It will apply to all large EU and non-EU companies (listed and non-listed) operating within the EU market.3 Companies subject to CSRD will need to:
- Disclose principal actual or potential impacts related to the company’s own operations and the implementation and outcome of the due diligence process of the company’s value chain
- Describe the role of management boards and supervisory boards regarding sustainability matters
- Disclose set time-bound targets on sustainability matters and report on the progress of achieving such targets (KPIs)
- Assess and report both impacts of the company’s activities on sustainability matters and on sustainability matters affecting the company (the double-materiality principle)
- Obtain limited assurance opinion by a statutory auditor of reported sustainability information.
However, CSRD is about much more than just reporting
Preparing for CSRD compliance will force companies to revisit their strategic focus and bring a greater systematic approach to corporate sustainability, using common standards and frameworks. The required double-materiality assessment, for instance, can identify important topics that have previously been overlooked in corporate strategy and risk management. Target setting, as prescribed by the regulation, often kicks-off a process of redesigning performance management, defining new KPIs and setting up new systems and processes for measuring and monitoring progress.
CSRD compliance is a multi-year journey
Companies need to start planning their journey to becoming fully compliant by the time the Directive is mandatory to them, ranging from between 2024 to 2026. That may appear like a lot of time, however getting all the required elements in place will be a significant exercise for many companies.
Fortunately, many elements of the CSRD build on existing standards, including the GRI framework and the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, and there is an increasing body of experience of how to apply these robustly.
Even with existing guidance, much of the detail is still to be defined. Experience suggests that general, cross-industry standards need industry-specific guidance to account for sectoral differences.
Assessing the impacts of business activity will be very different in sectors where assets are mostly intangible, in comparison to in an industry that has substantial tangible assets. Appropriate governance structures in highly competitive industries may not be suitable for regulated industries. There is also a steep learning curve in creating standards for linking sustainability performance metrics to accounting metrics like CAPEX, OPEX and turnover, as prescribed by the EU Taxonomy.
Figuring all of this out will take time and close collaboration between companies and regulators, value-chain partners and industry bodies. It will get easier as practice builds, with companies benefiting from the learning experience of early adopters.
An historic opportunity
CSRD will be challenging to implement at pace within corporations and across value chains. It is also an historic opportunity to lean-in and tool-up for a more sustainable future.
Importantly, companies should look beyond regulatory compliance when preparing for CSRD. Next to gathering information for providing accountability externally, companies must create decision-ready data that guides a shift in corporate practices, and in turn delivers real-world impact.
What does this mean in practice?
- The assessment of material sustainability issues, risks and opportunities is fully integrated into business strategy and risk management processes, and is not a paper exercise for reporting purposes only
- Targets come with execution plans that lay out the journey of meeting them, in realistic, practical steps
- Communication internally to employees is as important as communication to external stakeholders. Employees are the primary agents that will deliver sustainable business in practice, and many are eager to do so.
Approached with this mindset, preparation for CSRD can be an accelerator for delivering corporate sustainability goals, rather than a time-consuming distraction. Done correctly, it will help large companies secure the long-term resilience of their business and of the environment that it depends on.
How Simply Sustainable can help
Our growing team of expert sustainability and ESG consultants are here to enable your company to adapt at pace to the changing landscape of sustainability legislation and transformational plans towards our shared goal of net-zero.
Book a call back to discuss your strategy here
3. A company is considered ‘large’ and subject to the CSRD if it meets two out of three criteria: (1) revenue over EUR 40 million; (2) total assets over EUR 20 million; (3) more than 250 employees.
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