Why change?

The Corporate Sustainability Reporting Directive (‘CSRD’) was created with the goal of bringing publicly available sustainability information to a new level. The European Commission (‘EC’) found that improving transparency on the impacts that undertakings cause to people and the environment would be highly beneficial for many actors.

In particular, investors and asset managers should have a better understanding of the sustainability-related risks and opportunities which affect the value of their investment and, in turn, how their investment affects society and the environment. This will allow them, as well as the undertakings themselves, to make better decisions. Civil society and organisations would moreover be able to hold these undertakings accountable for their damages.

In fact, it was also found that the market for this kind of sustainability information was rapidly growing, with many investors purchasing it from third-party data providers. It seems that market players are aware of the financial implications of non-financial risks, especially climate-related events. Currently, more and more investors and customers are on the look for products that explicitly meet certain sustainability standards.

Want to find out whether the CSRD applies to your company, how and/or when? Check this article.

‍

What changed?

Before the CSRD, the Non-Financial Reporting Directive (‘NFRD’) applied only to public-interest entities, such as listed companies, banks, or insurance companies, with more than 500 employees. The CSRD expands the scope of these reporting requirements to a broader set of large companies, as well as to listed SMEs.

Moreover, under the NFRD, companies were able to report according to any standard. Up until now, the most used international standards were the Global Reporting Initiative (‘GRI’) standards. The CSRD made it mandatory to report according to the European Sustainability Reporting Standards (‘ESRS’), which harmonise the indicators used for measuring sustainability impacts across the EU.

Luckily, the EU made sure to align both frameworks (GRI and ESRS) to achieve a smooth transition and interoperability between them. Nevertheless, the ESRS introduced the ‘double materiality’ assessment. Previous standards did not pay as much attention to how sustainability affects the financial position, financial performance, cash flows, access to financial resources, or capital costs of the reporting company.

Therefore, while the methodology to measure impact materiality is essentially the same, the transition will not be entirely seamless. ESRS are binding and require an additional effort which companies may find difficult to adapt to. The GRI-ESRS Interoperability Index may be useful in this regard.

Want to know more about the ESRS? Check this article.

‍