The Corporate Sustainability Reporting Directive (CSRD) is recent legislation that legally obligates many companies to report on their ESG matters in the near future.
Affected companies will be required to report in alignment with the European Sustainability Reporting Standards (ESRS), which lays out in detail how companies will be required to collect data and disclose against a variety of environmental, social and governance (ESG) related issues.
One of the core elements of the ESRS is the double materiality reporting standard, which outlines how companies define the issues relevant to them and that they must disclose against. Issues are selected based on two basic criteria – those matters that are financially material in influencing business value, those where the company impacts environment, society and other business through its activities. It is sufficient that a topic fulfils one of the two criteria for it to be disclosed in CSRD-compliant reporting.
Who will be affected?
It is estimated that 49.000 European companies will be subject to the CSRD and therefore required to issue CSRD-compliant reports. The CSRD applies to all listed companies on the EU regulated market, including SMEs, and large companies regardless of whether they are listed, granted that they meet two of the three following criteria:
- Revenues exceeding 40 million EUR in the financial year
- Assets exceeding 20 million EUR in the financial year
- Over 250 employees
Importantly, non-EU companies with substantial activity, i.e. turnover of over 150 million euro in the EU, will need to comply as well as small and non-complex financial institutions and captive insurance and reinsurance undertakings.
What will I need to report?
The ESRS offers guidance for companies as to what information they need to disclose in their reports according to the CSRD, and how to report it. It requires companies to report on the impacts of its operations and its value chain on the environment and people. In addition, companies must indicate how issues related to sustainability impact cash flow, financial position, and financial performance.
There are 11 topic standards that fall under the three ESG areas:
- Environmental Climate change, pollution, water and marine sources, biodiversity and ecosystems, resource and circular economy.
- Social Workforce, workers in the value chain, affected communities, consumers and end users.
- Governance Governance, risk management, and internal control; business conduct.
Proportionate standards for listed small and medium enterprises (SMEs), as well as sector-specific standards are currently under discussion at EFRAG, the European Union’s Accounting Advisory Committee, and will be issued in the future.
I already report sustainability – how am I affected?
Even companies that already report under current rules will feel the impact of the CSRD and ESRS and need to prepare. The CSRD is not only aiming to multiply the number of companies that are required to report and introduce the obligation to report according to a double materiality standard, but also expanding the scope of what ESG information needs to be reported.
Companies reporting under GRI will be able to utilize their processes for gathering ESG data, but will have to add additional layers of granularity for their ESG line items and will also have to adapt to ESRS’ disclosure requirements which tend to be very technical and strict.
When will the rules come into effect?
The CSRD will first apply to large, listed companies that are already subject to the NFRD (the CSRD’s predecessor) from 1 January 2024 (requiring them to report in 2025 on 2024 data). Next in line will be large companies that are not subject to the NFRD. They will be subject to the Directive starting in 2025 and must include relevant disclosures about the 2025 financial year data in their 2026 reports. Small and medium enterprises and captive insurance undertakings will then follow suit, reporting in 2027 on 2026 data and finally, third-country undertakings will be obligated to report in 2029.
In the coming years, more companies will be required to better understand their ESG obligations and related data. The first step is to familiarize yourself with the draft ESRS and how they will affect your organization.
Contact us and let’s discuss how Sustainserv can help you implement the CSRD and ESRS. We can help you find out where you stand in terms of sustainability, when you are affected and what you need to do to comply with the CSRD and ESRS regulations.