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Introduction to the CSRD

The Corporate Sustainability Reporting Directive (‘CSRD’) is the new EU sustainability reporting framework for non-financial undertakings. It serves as a replacement of the Non-Financial Reporting Directive (‘NFRD’), expanding its scope of application and introducing new reporting requirements.

For an overview of the most relevant changes, check this article.

Who does it apply to and from which year?

The CSRD only requires companies that fulfil any of the following criteria to report on sustainability:

• All listed companies on the EU regulated market, including listed SMEs (but not micro-enterprises).
• All large companies that exceed two of the three following criteria.
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1. Over 250 employees during the financial year.
2. Balance sheet of more than EUR 20 million.
3. Net turnover of more than EUR 40 million.
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• Non-EU companies generating a net turnover of more than EUR 150 million and having a subsidiary in the EU that follow the criteria applicable to EU companies or a branch in the EU generating more than EUR 40 million net turnover.

Companies established under public law are excluded, although they can still report voluntarily.

The European Commission adopted the CSRD in late 2022. The Directive entered into force in January 2023. The rules will start applying:

• From 1 January 2024 for large public-interest companies (with over 500 employees) already subject to the NFRD, with reports due in 2025. The rules introduced by the NFRD remain in force until then.
• From 1 January 2025 for large companies that are not presently subject to the NFRD (with more than 250 employees and/or €40 million in turnover and/or €20 million in total assets), with reports due in 2026.
• From 1 January 2026 for the rest, with reports due in 2027. Listed SMEs can opt-out until 2028.

Nevertheless, many EU Member States have failed to transpose the CSRD on time. The EC has brought infringement procedures against 17 Member States: Belgium, Czech Republic, Germany, Estonia, Greece, Spain, Cyprus, Latvia, Luxembourg, Malta, TheNetherlands, Austria, Poland, Portugal, Romania, Slovenia and Finland.

The lack of transposition does not waive the obligations imposed by the CSRD, but it does create legal uncertainty. In their transposition, Member States can adjust the scope of application of the CSRD, create exemptions, rules for groups of companies and other special cases and determine the sanctions in case of non-compliance, among other rules left to their discretion.

What must be disclosed?

The CSRD focuses on how an organisation manages its resources, treats its employees, engages with local communities and minimises its environmental footprint.

Undertakings must disclose how sustainability affects their value (financial materiality), as well as how the performance of their activities and the way they manage their business impact sustainability factors (impact materiality). They must report on both types of impacts and the interrelation between them. This exercise is known as the ‘double materiality’ assessment.

Such assessment goes beyond purely sustainability factors. It predicts how the business model, corporate strategy, organisational structure and operations of the company will behave in a changing climate or social background. The information assessed includes aspects related to human resources, the value chain, the capital of the company, etc. The information is of both qualitative and quantitative nature and covers short, medium and long-term impact scenarios.

To measure these impacts, undertakings must monitor a variety of indicators. To mention a few:

• Governance.
• Carbon footprint.
• Energy consumption.
• Use of natural resources.
• Waste management.
• Efficiency of materials.
• Toxicity of products.
• Innovation.
• Regulatory compliance.
• Transparency.
• Biodiversity.   

These indicators are measured with reference to the European Sustainability Reporting Standards (‘ESRS’), which specify the information to be disclosed. The ESRS include cross-cutting standards and topical standards on ESG matters, which apply to all sectors; and sector specific standards, which vary considering the business activity and its particular measurable impacts.

For more information on the ESRS, check this article.

How to disclose?

The Sustainability Report provides key information on an entity's sustainability practices, as well as its achievements, challenges and future commitments. The key points to take account of are:

• Presentation: The introduction provides context about the company, its vision, mission and values. It is important to include a description of the sectors in which the entity operates, as well as the main risks and opportunities of that business activity.
• Executive summary: A brief description of the most relevant aspects of the company's sustainability performance, achievements, challenges and future goals.
• Profile: Describes the organisational structure, business model, products and services offered and relevant markets, among other aspects.
• Standards: A reference to the ESRS reported, selecting those specific to the sector in which the company operates, together with the cross-cutting and topical standards. It must include references to other international standards or guidelines adopted in addition to the ESRS.
• Double materiality assessment: after reviewing the above mentioned standards, the company must provide an overview of the financial and sustainability impacts that its business causes and suffers as a result of its ESG practices.The resulting impacts shall be disclosed in the form of Key PerformanceIndicators (‘KPIs’).
• Performance assessment: The company must evaluate its own efforts according to the targets it was committed to achieve. It must infer conclusions from the materiality assessment results, explaining their historical evolution, actions taken, the factors that can be improved and how. This may cover aspects such as employment generation, contribution to local development, waste management, consumption of natural resources, among others.
• ESG Initiatives: The company must highlight the most relevant projects on ESG matters, such as social and corporate responsibility programs, investments in clean technologies, collaborations with local communities, among others.
• Risk and opportunity management: Identify and address the most crucial sustainability risks and opportunities, installing new policies to mitigate the risks and take on opportunities to innovate or improve sustainability performance.
• Stakeholder engagement: Include any consultations, surveys or meetings with employees, customers, suppliers, local communities and other stakeholders that may be relevant for assessing the impact and how the company’s sustainability efforts are perceived by external actors.
• Future actions and commitments: The targets must relate to reducing environmental impacts, strengthening stakeholder dialogue or implementing best practices.     

Conclusion

Complying with the CSRD can be a challenging task due to its novelty, complexity and correlation with other reporting requirements. The CSRD expanded the scope of application of non-financial reporting requirements and introduced stricter standards compared to previous regulations.

In defence of this directive, it solves an increasingly visible problem in ESG reporting:the lack of unified standards. Even though existing international standards were voluntary, their value for investors and shareholders was significant enough to achieve a high level of observance. Nevertheless, the fact that each company responds to a different framework made them impossible to compare. Investors were unable to make well-founded and informed decisions without harmonising the methodology used for measuring each company’s sustainability indicators.

Admittedly, the new framework is still very novel, which means that it will probably undergo several amendments to improve its practical application where experience points out its flaws. In a few reporting periods, common approaches to sustainability reporting will become apparent and all players will benefit from the standardisation outlined above. To better understand the benefits of standardisation, check this article.