Learn about CSRD reporting, a critical directive shaping corporate sustainability reporting in the EU, including its requirements and impact on businesses.
The landscape of sustainability regulation has evolved significantly over recent years, with the European Union (EU) leading the revolution.
The EU's effort to create a sustainable economy has been supported by enhancing a set of regulations covering many aspects of business compliance, such as carbon tax, due diligence, and reporting.
Among the most important directives, the EU has enforced several legislative measures to harmonize the disclosure of financial and non-financial information with legislative acts, including the 2014 Non-Financial Reporting Directive (NFRD) and the more recent Corporate Sustainability Reporting Directive (CSRD).
With the Corporate Sustainability Due Diligence Directive (CSDDD) just being approved on 24/05/2024, which clarifies the Due Diligence process for an organization’s sustainability performance, understanding CSRD and its implications has become of utmost importance.
But what is the CSRD, and what are its implications for businesses?
Let’s find out.
The Corporate Sustainability Reporting Directive (CSRD)
The Corporate Sustainability Reporting Directive (CSRD) is an EU regulation that mandates detailed sustainability reporting from companies with the goal of providing clarity that will help stakeholders to better evaluate EU companies’ sustainability performance and the related business impacts and risks.
The directive was introduced as part of the European Commission’s Sustainable Finance Package, and it notably expands the scope, sustainability disclosures, and reporting requirements of its predecessor, the NFRD.
Compared to the NFRD, CSRD broadened the scope and depth of reporting requirements and affected nearly 50,000 companies (an increase from the 11,700 companies under the previous NFRD) across various sectors, including those outside the EU with substantial operations within the union. [1]
The directive applies to all large companies and listed SMEs, as well as non-EU companies with significant EU activities.
Large companies are defined as those meeting at least two of the following criteria:
- over 250 employees
- €50 million in turnover
- €25 million in total assets
A key characteristic of the CSRD is the double materiality principle.
Double materiality is a fundamental principle in sustainability reporting requiring organizations to disclose both how ESG (environmental, social, and governance) issues impact their business and how their business activities impact the environment and society.
This dual perspective ensures a comprehensive understanding of sustainability from two critical angles. Impact materiality focuses on the effects of a company's operations on external ESG factors, such as carbon emissions, resource usage, and community impacts.
Financial materiality, on the other hand, addresses how these ESG issues influence the company's financial performance, including risks and opportunities arising from environmental regulations, market shifts towards sustainability, and climate-related financial impacts. Thanks to this dual focus, Double Materiality ensures comprehensive coverage of sustainability aspects and enhances transparency and accountability.
Reports must cover a wide range of topics, including environmental impact, social and employee matters, human rights, anti-corruption, and board diversity.
To ensure accuracy and reliability, reports must also be audited by an independent assurance service provider as well as provide forward-looking and retrospective information, ensuring a balanced view of sustainability efforts.
Effects on Businesses and Reporting Requirements
The implementation of the CSRD brings significant implications for businesses.
Companies are now required to collect and report extensive data on their sustainability practices, necessitating the integration of robust data collection and reporting systems that can involve substantial initial investments in technology and training but ultimately lead to more transparent and accountable business practices.
In alignment with the principle of Double Materiality, which considers both financial and non-financial impacts on the company and society, the disclosure requirements of the regulation span across three primary categories: environmental, social, and governance (ESG).
Environmental Reporting
Companies must provide detailed information on their environmental impact, including greenhouse gas emissions, resource use, pollution, water and marine resources, biodiversity, and circular economy practices. This includes both direct and indirect emissions (Scope 1, 2, and 3), usage of renewable and non-renewable resources, and measures taken to mitigate environmental impact.
In this context, businesses need to disclose their carbon footprint, water usage, waste management practices, and efforts in biodiversity conservation.
Social Reporting
This section covers the company’s impact on people, encompassing employee treatment, human rights, and community engagement. Companies must report on labour practices, such as working conditions, employee health and safety, diversity and inclusion initiatives, and human rights due diligence.
For instance, companies should disclose policies on fair wages, employee training programs, and measures to prevent human rights abuses in their supply chains.
Governance Reporting
Governance information includes the company’s governance structure, business ethics, and anti-corruption practices. This involves disclosing board diversity, executive remuneration, risk management strategies, and anti-bribery measures. Companies must report on the composition and functioning of their governing bodies, policies for preventing corruption, and systems for managing ESG risks.
An example is detailing the diversity of the board in terms of gender and expertise, and describing the procedures in place for ethical business conduct.
Together, these disclosures ensure that stakeholders have a comprehensive understanding of the company's sustainability performance, facilitating transparency and informed decision-making
Conclusions
The Corporate Sustainability Reporting Directive marks a transformative step towards more transparent and accountable corporate sustainability practices. By requiring detailed disclosures and third-party assurances, the CSRD enhances the quality and reliability of ESG information. For businesses, this directive not only presents compliance challenges but also offers opportunities for strategic alignment and market differentiation.
As companies navigate these new requirements, they must focus on integrating sustainability into their core operations and leveraging these changes to drive innovation and growth.
[1] https://www.europarl.europa.eu/news/en/press-room/20221107IPR49611/sustainable-economy-parliament-adopts-new-reporting-rules-for-multinationals
