The path to corporate sustainability in the EU and beyond
In a pivotal move towards enhancing corporate transparency and accountability, the European Union has introduced sweeping changes to its sustainability reporting framework. The adoption of the Corporate Sustainability Reporting Directive (CSRD) signifies a significant evolution from the preceding Non-Financial Reporting Directive (NFRD). It aims to propel businesses towards more comprehensive and standardised reporting on environmental, social, and governance (ESG) factors.
Here is what companies need to know about the key provisions and implications of this groundbreaking directive.
Expanding scope
One of the fundamental shifts under the CSRD is the expansion of its scope, encompassing a broader array of companies than its predecessor.
Businesses that will now fall under the purview of sustainability reporting requirements include:
Companies required to report under NFRD
Public interest entities (PIEs) that are large (i.e. they are not SMEs, as defined in the Accounting Directive) and have more than 500 employees, including:
- Listed companies
- Banks
- Insurance companies
- Others designated by national authorities as PIEs
These include about 11,700 companies.
Large EU companies and parents of large EU groups
- Undertakings which on their balance sheet dates exceed at least two of the three following criteria:
- Balance sheet total: EUR 20 million
- Net turnover: EUR 40 million
- Average number of employees (during the financial year): 250
These were not previously covered by the NFRD. They include about 50,000 companies.
Listed small and medium-sized EU enterprises (SMEs)
Businesses whose securities trade on an EU-regulated market but do not meet the definition of a large company above.
Content, format and standards
The ESG directive specifies both the content and format of reporting, emphasizing the importance of accurate and complete disclosure. Standardised formats facilitate comparison and enhance the credibility of the data.
The European Sustainability Reporting Standards (ESRS) provide detailed guidelines for reporting under the CSRD. The first set of ESRS includes ESRS 1, which covers general sustainability requirements, and ESRS 2, which mandates general sustainability disclosures for all companies that fall within the scope.
Additionally, there are ten topical standards that companies must report on, subject to a materiality assessment. These ten standards include five environmental standards (aligned with the EU Taxonomy), four social standards, and one governance standard.
It is important to note that climate change disclosures (ESRS E1) are mandatory for all companies, regardless of the materiality assessment outcome and that, in the future, sector-specific standards will be introduced that will complement ESRS 2 and the topical standards.
Assurance and compliance phases
The CSRD introduces a phased approach to compliance, recognising the need for companies to adapt gradually to the new reporting standards. Initially, companies are required to provide limited assurance on their sustainability reports, with a subsequent transition towards reasonable assurance.
This phased implementation allows organisations the necessary time to refine their reporting processes and systems, ensuring compliance while minimising disruptions to their operations.
Roadmap
To facilitate a smooth transition, the CSRD outlines a phased implementation timeline for different categories of companies:
- Companies previously subject to the NFRD must report from 1 January 2024 and publish in 2025
- Large EU companies and parent companies of large EU groups from 1 January 2025
- Listed SMEs from 1 January 2026
Listed SMEs will have to comply with simplified ESRS reporting standards and have the option to opt out of sustainability reporting for the first two years but they must explain why.
Companies must stay informed about the evolving regulatory landscape, including developments from the European Financial Reporting Advisory Group (EFRAG), to ensure timely compliance.
(EFRAG has also developed a voluntary sustainability reporting standard for non-listed SMEs, known as the VSME.)
Double materiality and reporting
Central to the CSRD framework is the concept of double materiality, which underscores the interconnectedness between sustainability issues and business operations. Companies are not only expected to assess how sustainability factors impact their business (financial materiality) but also how their activities affect the environment and society at large (impact materiality).
The ESRS offer companies a structured framework to navigate the complexities of double materiality and effectively communicate their sustainability performance.
Under the CSRD, sustainability reporting will be integrated into annual accounts and must be available in digital format. This integration underscores the inseparable link between financial and non-financial performance, providing stakeholders with a comprehensive understanding of a company’s overall value creation and long-term sustainability.
Final thoughts
The introduction of the CSRD heralds a new era of sustainability reporting in the European Union, signalling a clear commitment to advancing corporate transparency and sustainability. By mandating comprehensive reporting on ESG factors and embracing the concept of double materiality, the directive aims to drive meaningful change towards a more sustainable and resilient future.
Companies must proactively adapt to the evolving regulatory landscape, leveraging standardised reporting frameworks and embracing transparency as a cornerstone of corporate stewardship in the 21st century.
To learn how we can help your businesses integrate the ESG factors for both strategic and compliance purposes:
