6 things every business should know about the Corporate Sustainability Reporting Directive (CSRD)
On the 21st April 2021, the European Commission presented their proposal for a Corporate Sustainability Reporting Directive (CSRD) which will replace the current Non-Financial Reporting Directive (NFRD). The CSRD is being produced by the European Financial Reporting Advisory Group (EFRAG) in accordance with the European Green Deal and will support the EU’s sustainable development progress. Companies affected by the CSRD will be required to publicly disclose their impact on people and the environment as well as sustainability indicators that affect their own business.
So, what are the reasons behind the change and what will this entail for businesses in Europe?
1. Why is the NFRD being replaced?
The main goal of the NFRD was for investors, stakeholders and other consumers to have an insight into the non-financial indicators of large companies. Non-financial indicators include environmental indicators such as emissions, as well as diversity indicators such as gender equality. Although the NFRD reporting requirements meant that important principles such as a double materiality perspective (assessing internal and external impacts) were established, many investors and stakeholders felt that the level of information that companies must report on was insufficient.
The aim of the CSRD therefore, is to bring sustainability reporting on a par with the current financial reporting system and make the reported information more reliable and comparable between companies.
2. What is different than the standards expected for the NFRD?
The proposed CSRD builds upon the requirements of the current NFRD but there are some key differences that businesses need to be aware of:
Around 50,000 more companies will be required to report under the new CSRD requirements than under the current NFRD reporting system.
Third party assurance will be mandatory
Additional reporting requirements such as an increased focus on double materiality, alignment towards meeting the Paris Agreement (1.5° - 2°C limit), social considerations, and risk management
Reporting in line with the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation
3. Will it apply to my company?
The CSRD will apply to all large companies within the EU that meet two of the following three criteria:
More than 250 employees
Net turnover exceeding €40 million
Net assets (total balance sheet) exceeding €20 million
Additionally, the CSRD will apply to Small and Medium-sized Enterprises (SMEs) with securities listed on regulated markets, an exception applies to listed micro-enterprises. This means that around 50,000 companies in the EU will be required to report to the CSRD standards, a huge increase when compared to the approximately 11,000 companies currently required to report under the NFRD.
4. What information will I need to report on?
The proposal of the CSRD stated that they will follow the guidelines of the Task Force on Climate-Related Financial Disclosures (TFCD) for which topics should be disclosed when reporting. It is also likely that companies will have to disclose their emissions in line with the Greenhouse Gas (GHG) Protocol.
One of the main conceptual guidelines of the CSRD will be double materiality, requiring both impact materiality and financial materiality perspectives to be considered separately and their interactions to be taken into account:
Impact materiality: Sustainability matters that are classed as material based on the severity, scale, scope and likelihood of actual positive and negative impacts of a company’s own operations and value chain on people and the environment.
Financial materiality: All sustainability matters that are reasonably likely to affect the financial performance of a company other than what is currently recognised in financial reporting.
The second main conceptual guideline will be quality of information. To reach the same standards as financial reporting, sustainability information will have to have certain necessary characteristics such as:
Relevance
Faithful representation
Comparability
Understandability
Reliability / verifiability
Third party ‘limited’ assurance will also be mandatory for CSRD reporting to ensure that all information is accurate and reliable. Companies can also expect a potential move towards mandatory ‘reasonable’ assurance – a more demanding level of assurance – in the future.
5. When will the CSRD be released?
The exact date for the release of the finalised CSRD is still unknown, however companies can expect the first set of CSRD standards to be released mid-2022, with the second set of standards being published in mid-2023.
6. When will I have to comply?
From the 1st January 2023, companies will have to comply with the first set of CSRD standards released mid-2022. The first CSRD-compliant reports must be published in 2024, meaning that all CSRD measuring and reporting requirements will be mandatory throughout the financial year of 2023. Companies will need to comply with the second set of standards (released mid-2023) from January 2024, with the second CSRD compliant reports published in 2025.
SMEs with securities listed on regulated markets will need to start producing CSRD-compliant reports 3 years later, from January 2026. Although they must not be compliant before 2026, many SMEs can expect to receive requests for CSRD related information from larger companies needing to report on their supply chains, meaning they will be indirectly impacted.