The Corporate Sustainability Reporting Directive, or CSRD, (EU 2022/2464) entered into force in January 2023. It amends the 2014 Non-Financial Reporting Directive (NFRD) and expands the scope of companies that must report on sustainability topics in a more regulated manner.
Overview of Key Features
The directive has introduced new obligations and strengthened rules concerning the mandatory annual reporting of social and environmental information. Here, we have summarized the key features that companies should be aware of:
- The CSRD itself does not provide detailed disclosure requirements; those are described in the European Sustainability Reporting Standards (ESRS) established by the European Financial Reporting Advisory Group (EFRAG). In developing these standards, the group’s objective was to build upon existing standards and frameworks to ensure a high degree of interoperability while remaining consistent with the ambitions of the European Green Deal and other EU regulations. On June 9, 2023, the European Commission published the first draft Delegated Act on the ESRS, with a feedback period through July 7, 2023.
- Double Materiality Assessment. The CSRD emphasizes the importance of a double materiality assessment, which requires companies to identify and report on the sustainability issues most relevant to their business and stakeholders. Previously, the ESRS drafts defined mandatory disclosures, such as all climate-related information outlined in the ESRS E1 Climate Change standard, regardless of the materiality assessment results. With the revised version released on June 9, only the General Disclosures Requirements of ESRS 2 remain mandatory.
- EU Taxonomy. Companies affected by the CSRD have to disclose information on how and to what extent their activities are associated with environmentally sustainable economic activities. This involves identifying their Taxonomy eligibility and alignment, as well as calculating their KPIs.
- Digitalization. Companies have to disclose their reports in XHTML format in accordance with the European Single Electronic Format (ESEF) Regulation. Reported sustainability information must be tagged so that it is machine-readable for use in the European Single Access Point (ESAP). These measures are expected to improve data quality and accessibility. They also streamline the reporting process and enable data aggregation at the EU level.
- External Assurance. The CSRD has introduced a requirement for limited assurance on sustainability information, aiming to move to reasonable assurance in the longer term. The assurance has to be performed by an accredited independent auditor.
- Integrated Reporting. The CSRD requires companies to report sustainability information in a clearly identifiable section of the management reports. Together with the requirements of a digitalized format and external assurance, the goal is to enhance the interplay of financial and sustainability information.
The CSRD’s Scope and Timeline
The CSRD extends the scope of the NFRD, as it will affect all large companies and all companies listed on EU-regulated markets. These companies are also responsible for assessing the information at the level of their subsidiaries. Currently, the timeline for the application of the regulation is divided into different stages:
- FY 2024 for companies already subject to the NFRD (reports to be published in 2025).
- FY 2025 for other non-listed, large companies above the thresholds (>250 employees, turnover of at least EUR 40 million or a balance sheet total of at least EUR 20 million) that are not presently subject to the NFRD (reports to be published in 2026).
- FY 2026 for listed small and medium-sized enterprises (SMEs), small and non-complex credit institutions and captive insurance undertakings. An opt-out will be possible for SMEs during a transitional period.
- FY 2028 for non-European companies. The requirement to provide a sustainability report applies to all companies listed in EU markets that generate a net turnover of EUR 150 million in the EU and have at least one subsidiary or branch in the EU.
Start Preparing for the CSRD Now
Given the more extensive scope of the reporting standards, it is highly recommended that companies start preparing now to comply with the CSRD. Forward-thinking organizations have already begun reviewing their sustainability reporting practices. To provide guidance, we have summarized key takeaways and action items in a three-phased approach:
1. Baseline Assessment
Companies should first understand the impact on their organization. They need to analyze group structure and the respective reporting obligations as well as exceptions. Ensure that the scope of consolidation used for the sustainability statement is the same as for the financial statement. Additionally, start raising internal awareness to evaluate the status of sustainability information. Identify gaps by comparing prior sustainability efforts with the ESRS.
2. Implementation
Companies are required to perform a Double Materiality Assessment, which will form the basis for strategic decision-making, risk assessments and annual reporting practices. Combining the results of the first Double Materiality Assessment with the gap assessment helps companies prioritize how to address identified material gaps.
Next, define a roadmap and timeline to start collecting and calculating relevant data and metrics. Here it will be crucial to engage with process owners, set roles and responsibilities and establish a governance framework accordingly for the coming years.
3. Reporting
While compiling the information (data points and disclosure requirements) for the ESRS, businesses must prepare in advance for the more general reporting specifications of the CSRD, such as the digitalization or third-party assurance requirements.
Compliance with the CSRD demonstrates a commitment to transparency and sustainability. This will enhance the organization’s reputation and be an advantage when seeking partnerships, attracting investors or accessing EU funding.
Overall, the new CSRD and related reporting requirements represent more than a regulatory reporting obligation. These can be an accelerator for businesses to improve their sustainability performance, resulting in action to drive the transition to a sustainable, low-carbon, circular economy.
How Sphera Can Help
Irrespective of the sector or size of your organization, we strongly recommend starting preparations early. Sphera’s sustainability consultants can guide your company through every step of the CSRD maturity process. Our expertise is based on more than 30 years of experience in delivering strategic sustainability and ESG projects.
We help you kick-start or accelerate your CSRD-related efforts with our modular project approach. By working with our experts, your company can avoid the risk of non-compliance and benefit from the opportunities associated with improved performance.