Corporate Sustainability Reporting Directive (CSRD) Implementation
Europe has been at the forefront of implementing sustainability reporting regulations to promote transparency and accountability in corporate practices. The regulations aim to provide investors and stakeholders with reliable and comparable information on company performance on environmental, social, and governance (ESG) criteria and to encourage the transition toward a more sustainable economy.
The Corporate Sustainability Reporting Directive (CSRD) is the cornerstone sustainability disclosure regulation adopted by the European Commission (EC) and it entered into force in January 2023. The CSRD requires comprehensive sustainability reporting requirements and obligations. This directive significantly expands the scope and content of existing nonfinancial reporting obligations, encompassing a broader range of entities and requiring more detailed reporting on ESG topics. The CSRD applies to European Union (EU) companies and to public and private non-EU companies that meet specific thresholds.
The EC adopted the first set of European Sustainability Reporting Standards (ESRS) as prepared by the European Financial Reporting Advisory Group (EFRAG) in July 2023. Those standards establish a framework and methodology for reporting sustainability information, including environmental and social impacts, risks, and opportunities.
Key Requirements of the CSRD
Under the CSRD, companies are required to report their impacts and to provide a comprehensive overview of their sustainability performance. The reporting obligations include:
· Cross-cutting Reporting: Companies must include a separate section in their management reports dedicated to general principles, strategy, governance, and materiality. Companies are required to conduct materiality assessments to determine which sustainability topics are most relevant to their business and stakeholders.
· Environmental Reporting: Companies are required to disclose their environmental impacts, including greenhouse gas (GHG) emissions, energy consumption, biodiversity, water usage, and waste management. Companies must align their reporting with established frameworks.
· Social Reporting: Companies must report on social aspects, such as employee health and safety, labor practices, human rights, and diversity and inclusion. This includes information on workforce composition, employee training, and measures to ensure fair and ethical treatment.
· Governance Reporting: Companies must disclose information on their corporate governance practices, risk management practices, internal controls, and business conduct. This aims to enhance transparency and accountability in corporate decision-making.
· Materiality Assessment: Companies are required to conduct materiality assessments to determine which ESG topics are most relevant to their business and stakeholders. The CSRD incorporates a double materiality standard—financial materiality and impact materiality—which requires reporting on significant impacts from both an investor perspective and a societal stakeholder perspective.
Companies In Scope for the CSRD
It is estimated that CSRD will apply to approximately 50,000 companies. In a nutshell, covered companies include EU companies and non-EU companies that meet certain criteria within the EU borders:
· All companies (EU and no-EU) with EU-listed securities, with limited exceptions
· “Large” unlisted EU companies, defined as companies that meet two of the following: (1) balance sheet (€25mm); (2) net revenue (€50mm); and (3) workforce threshold (250 employees) in two consecutive years (EU subsidiary of US companies required to report if threshold met), with specific rules for financial services companies
· Non-EU headquartered global companies with EU-subs or branches that exceed a specific revenue threshold will be required to perform consolidated “group level” reporting, with certain exceptions
Compliance Timeline for the CSRD
The CSRD introduces a phased implementation approach to allow companies sufficient time to adapt to the new reporting requirements. EU member states must transpose the CSRD into their respective national laws by July 2024. In December 2023, France codified the CSRD into its national law. This marked the first European Union member state to do so.
The first compliance deadline is 2025 to report on FY2024 data for companies that are already subject to the Non-Financial Reporting Directive (NFRD) with a phased timeline for the remainder of in-scope companies. On February 14, 2024, the European Council and European Parliament announced a provisional agreement to delay reporting requirements for certain sectors and third-country companies by two years. That provisional agreement must be formally endorsed and adopted by both the European Council and European Parliament. Under new regulatory regimes, it is not unusual for implementation timelines to be adjusted, particularly where there are newly established reporting standards.
Recommendations for Businesses
The business community is preparing to meet the CSRD requirements in adherence with the ESRS while the standards continue to be rolled out. To ensure compliance with the CSRD and to effectively meet the sustainability reporting requirements, businesses should consider the following recommendations:
Develop a Compliance Strategy in Advance
Establish Clear Board Oversight and Governance of Sustainability/ESG Matters
Assign a Responsible Officer and Review Internal and External Sustainability Expertise
Assess Data Collection Infrastructure, Align Reporting Efforts, and Build Capacity
Establish a Protocol to Conduct the Double Materiality Assessment
Collaborate and Respond to Sustainability/ESG Diligence Requests and Questionnaires
Continuously Monitor Regulatory and Reporting Requirements, Integrate Jurisdictional Requirements, and Update Management and Board on Developments
The CSRD and accompanying EU sustainability reporting regulations mark a significant milestone in promoting transparency and accountability in corporate sustainability practices and companies must prepare to comply with the comprehensive reporting requirements. By implementing best practices, businesses can navigate the evolving landscape of sustainability reporting and disclosure requirements and contribute to a more sustainable future.
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