4 days ago3 min read
6 days ago4 min read
Dec 113 min read
Nov 244 min read
Nov 183 min read
Oct 299 min read
Understanding the New CSRD Law: Compliance Essentials
Updated: Apr 2
The Corporate Sustainability Reporting Directive (CSRD) is a transformative move in the European Union’s approach to corporate sustainability. This comprehensive guide explores the CSRD’s scope, its impact on businesses, and the intricacies of compliance.
The Genesis of CSRD
The Corporate Sustainability Reporting Directive (CSRD) is a pivotal evolution in corporate transparency and accountability. Building on the Non-Financial Reporting Directive (NFRD), its purpose is to provide stakeholders with a comprehensive and reliable view of a company's sustainability practices.
What sets CSRD apart is its alignment with global sustainability frameworks and standards. It is designed to be in harmony with aspects of the:
Organization for Economic Co-operation and Development (OECD) guidelines
UN Global Compact and Principles
International Integrated Reporting Council (IIRC)+Carbon Disclosure Project (CDP)
Sustainable Finance Disclosure Regulation (SFDR) and many other standards and frameworks.
This alignment ensures a more integrated, comprehensive approach to sustainability reporting, fostering a universal language for sustainability performance and encouraging businesses to adopt a more holistic view of their social, environmental, and economic impact.
CSRD Compliance - Scope and Applicability
Under the CSRD Compliance, all large companies and all companies listed on regulated markets (except listed micro-enterprises) are required to comply, effectively increasing the number of companies subjected to sustainability reporting requirements from around 11,000 under the NFRD to nearly 50,000.
This expansion not only includes large companies based on defined criteria such as balance sheet totals and net turnover but also integrates small and medium-sized enterprises (SMEs) that are listed on regulated markets, making the directive more inclusive.
The CSRD applies to large companies, which are identified based on the following criteria:
A balance sheet total exceeding EUR 25 million
A net turnover exceeding EUR 50 million or
A headcount of more than 250 employees.
Additionally, the CSRD covers all companies, regardless of size, that are listed on regulated markets, except micro-enterprises.
For small and medium-sized enterprises (SMEs), the directive is expected to introduce specific standards by 2024, providing a tailored approach to sustainability reporting that acknowledges the unique challenges and capacities of smaller businesses.
This SME standard under the CSRD aims to balance the need for transparency and accountability with the administrative and financial burdens that comprehensive reporting can impose on smaller entities.
The inclusion of SMEs in this directive is a significant step in broadening the sustainability reporting landscape, ensuring a more holistic representation of the market’s impact on environmental, social, and governance (ESG) factors.
The CSRD, therefore, not only extends its reach to a wider range of companies but also emphasizes the importance of sustainability reporting across the entire spectrum of business sizes and types within the EU, aligning with the region's broader sustainability objectives.
Key Reporting Changes
The detailed reporting changes under the Corporate Sustainability Reporting Directive (CSRD) are significant and encompass several key aspects:
Comprehensive Information on Social and Environmental Challenges: The CSRD mandates that companies provide detailed reporting on how they manage a wide array of social and environmental challenges.
Alignment with European Sustainability Reporting Standards (ESRS): The CSRD introduces a requirement for companies to align their sustainability reports with European sustainability reporting standards. This ensures a consistent and standardized approach across the European Union, making it easier to compare and assess sustainability reports from different companies.
Audit Requirement: Under the CSRD, sustainability reports must be audited to ensure their reliability. This requirement enhances the credibility of the sustainability information disclosed by companies.
Digital Format for Reporting: The directive mandates the use of a digital format for reporting, making it easier to access and analyze sustainability information.
Inclusion of Forward-Looking Information: Companies are required to include forward-looking sustainability information in their reports. This aspect is crucial for understanding the future impacts of the company's activities and plans on sustainability matters.
Reporting Domains
The Corporate Sustainability Reporting Directive (CSRD) necessitates detailed reporting across three primary domains: Environmental Impact, Social Responsibility, and Governance.
Here's a more elaborate overview of what each domain encompasses:
Environmental Impact
Energy Use: Companies are required to report on their energy consumption, including the use of renewable and non-renewable energy sources. This includes energy efficiency measures, initiatives to reduce energy consumption, and transition to greener energy sources.
Emissions: Reporting on greenhouse gas emissions is a critical aspect. This includes direct emissions from the company's operations (Scope 1), indirect emissions from purchased electricity or other forms of energy (Scope 2), and emissions in the value chain (Scope 3).
Resource Conservation: Companies need to disclose information on their use of natural resources, such as water usage, waste management practices, and measures taken to reduce resource consumption. This also includes efforts in recycling, reusing materials, and sustainable sourcing practices.
Biodiversity and Environmental Stewardship: Reporting on impacts on biodiversity, including policies and practices to minimize negative impacts on natural habitats and ecosystems.
Social Responsibility
Labor Practices: This includes information on employment practices, such as workforce diversity, inclusion initiatives, working conditions, employee rights, and fair labor standards.
Human Rights: Companies must disclose how they address human rights issues, both within the organization and in their supply chains. This involves measures to prevent discrimination, forced labor, and child labor, and ensure workers' rights are protected.
Community Engagement: Reporting on the company’s engagement with local communities, including corporate social responsibility initiatives, community development programs, and stakeholder engagement strategies.
Customer Responsibility: This involves ensuring the safety and quality of products or services, responsible marketing practices, and protecting customer data privacy.
Governance
Corporate Governance Structures: Detailed information on the company's governance structures, including board composition, roles and responsibilities, and how governance practices align with sustainability goals.
Risk Management: Reporting on how the company identifies, assesses, and manages sustainability-related risks, including environmental, social, and governance risks.
Compliance with Laws: Companies are required to disclose their compliance with relevant laws and regulations, including anti-corruption and bribery laws, and how they ensure ethical business practices.
Ethical Business Conduct: Information on the company's ethical guidelines, codes of conduct, and policies to ensure integrity and ethical behavior in all business dealings.
These detailed reporting requirements under the CSRD aim to provide a comprehensive view of a company's performance and impact in these crucial areas, promoting transparency and accountability, and enabling stakeholders to make informed decisions based on a company’s sustainability practices.
The Assurance Requirement
How Assurance Works Under CSRD Compliance
Scope of Assurance: The audit covers the entire spectrum of sustainability reporting, including environmental, social, and governance (ESG) aspects. It involves verifying the accuracy of data related to carbon emissions, energy usage, labor practices, corporate governance, etc.
Methodology: The audit is conducted by independent third parties, typically professional audit firms with expertise in sustainability and financial reporting. These auditors use established standards and methodologies to evaluate the accuracy and completeness of the reported data.
Levels of Assurance: Similar to financial audits, sustainability assurance can be of different levels, such as reasonable assurance (high level of assurance) and limited assurance (moderate level of assurance). The choice depends on the company's objectives and stakeholder expectations.
Report and Opinion: Post-audit, the auditors provide a report that includes an opinion on the sustainability information. This report is a critical part of the company’s sustainability disclosures and is often included in annual reports or sustainability statements.
Continuous Improvement: Regular assurance processes encourage companies to continuously improve their sustainability reporting practices, data collection methods, and overall ESG performance.
Alignment with Standards: The CSRD is aligned with globally recognized sustainability reporting standards, such as the Global Reporting Initiative (GRI), making it easier for companies operating in multiple jurisdictions to maintain consistent reporting practices.
Challenges and Considerations
Complexity of ESG Data: Unlike financial data, ESG data can be more qualitative and varied, making the assurance process more complex.
Evolving Standards: As sustainability reporting standards evolve, companies and auditors must stay updated and adapt their practices accordingly.
Cost Implications: The assurance process involves additional costs, which might be significant, especially for smaller companies.
In summary, the assurance requirement under the CSRD compliance is a critical step towards more transparent, reliable, and standardized sustainability reporting. It not only enhances the credibility of the information disclosed but also plays a significant role in the broader context of sustainable development and corporate accountability.
Timeline and Implementation
The phased implementation of the Corporate Sustainability Reporting Directive (CSRD) is designed to gradually introduce the new reporting requirements, allowing different categories of companies to adapt to the changes over time.
Here's a detailed look at the timeline and implementation process:
Phase 1: Companies Subject to NFRD - 2024
Start Date: The first phase begins in 2024.
Applicability: This phase targets companies that are already subject to the Non-Financial Reporting Directive (NFRD).
Scope: These companies are typically large public-interest entities with more than 500 employees. This includes listed companies, banks, and insurance companies.
Objective: The goal is to extend the existing NFRD requirements, incorporating more detailed and stringent reporting standards as outlined in the CSRD.
Preparation: These entities are likely to have existing frameworks for sustainability reporting under NFRD, which they would need to expand and align with the CSRD requirements.
Phase 2: Large Companies Not Subject to NFRD - 2025
Start Date: The second phase is set to commence in 2025.
Applicability: This phase includes large companies that are not currently under the NFRD mandate.
Criteria: The size criteria for these companies typically include meeting at least two of the following: a balance sheet total above a certain threshold, a net turnover exceeding a specific amount, and employing several staff above a set figure.
Challenges: Since these companies might not have established sustainability reporting practices, this phase could involve a significant adaptation process, including setting up new reporting systems and internal controls.
Phase 3: SMEs and Other Entities - 2026
Start Date: The final phase is scheduled for 2026.
Applicability: This phase includes listed SMEs, small and non-complex credit institutions, and captive insurance undertakings.
Voluntary for SMEs: For SMEs, compliance with the CSRD is voluntary, which means they can opt-out of the requirements if they find them too burdensome.
Significance: This phase is crucial in extending sustainability reporting to a broader spectrum of the market, capturing a more comprehensive view of the corporate impact on sustainability matters.
Impact on Businesses
The CSRD is set to significantly impact how companies approach sustainability reporting. Businesses will need to invest in better data collection and reporting systems, and possibly adjust their operational practices to meet the new standards.
While it poses challenges, it also offers opportunities for businesses to innovate, enhance their sustainability performance, and position themselves as responsible and forward-thinking entities in the global market. The directive is not just about compliance; it's about integrating sustainability into the core of business operations and strategies.
Stay Informed: For businesses in the EU, understanding and preparing for the CSRD is essential in the journey towards a sustainable future.
As we navigate the complexities of ESG, it’s clear that the journey is one best undertaken together.
We invite you to join our vibrant ESG community, a collective force driving positive change. This is your opportunity to be part of a dynamic network where knowledge, best practices, and innovative ideas are shared freely, empowering you to make impactful decisions.
Together, we can amplify our efforts to shape a sustainable future.
Join us and become a catalyst in the global movement towards a more equitable, environmentally responsible, and socially conscious business landscape.
🌍 Subscribe Now and Join the ESG Community 🌍
Comments