The most immediate concern for companies operating in the EU space is the EU’s Corporate Sustainability Reporting Directive (CSRD), which went into effect in January 2023.

The Corporate Sustainability Reporting Directive (CSRD) is a directive by the European Commission to enhance and standardize sustainability reporting requirements for companies operating within the European Union (EU), in a similar line to corporate financial reporting. It aims to improve the transparency and consistency of corporate sustainability reporting to enable better decision-making and comparability of data.

ESG reporting is evolving rapidly with the release of major proposals in the European Union, the United States and globally by the International Sustainability Standards Board. These proposals have the potential to affect companies worldwide, but as intended, these directives are aimed at driving change in the business behavior of companies that operate in the EU. These include EU companies above a certain threshold size of operations, US companies with EU subsidiaries that meet certain criteria and global companies meeting certain criteria that operate in the EU. As the CSRD is rolled out and gets consolidated, more and more companies will gradually come within its scope. Given the complexity of the directive, companies that come within the ambit of the directive would do well to take proactive steps towards compliance.

CSRD will significantly expand the scope and content of the EU’s existing non-financial reporting regulations under the Non-Financial Reporting Directive (NFRD). Another key objective of the CSRD is that the new rules will introduce a mandatory audit and assurance regime to ensure the reliability of data and avoid greenwashing and/or double accounting.

The main objectives of the CSRD include:

Expanding the scope: The CSRD aims to extend the reporting requirements to large and medium-sized entities, regardless of their stock exchange listing status. This broader application is intended to ensure that sustainability information is reported by a wider range of organizations.

Harmonizing reporting standards: The CSRD seeks to establish a single set of standards for sustainability reporting. It intends to align sustainability reporting with existing international frameworks, such as the Global Reporting Initiative (GRI) Standards and the Sustainability Accounting Standards Board (SASB) and integrate them into European legislation.

Enhancing transparency and comparability: The CSRD aims to improve the quality, reliability, and comparability of sustainability information reported by companies. It intends to introduce specific reporting requirements, including mandatory reporting on environmental, social, and governance (ESG) matters. The directive may also require the use of digital reporting formats, such as Inline XBRL, to facilitate accessibility and analysis of reported data.

Ensuring assurance and oversight: The CSRD proposes to introduce assurance requirements for sustainability reports to enhance the credibility of reported information. It may also establish a centralized European Sustainability Reporting Board (ESRB) responsible for setting reporting standards, overseeing compliance, and ensuring the consistent application of reporting requirements across the EU.

Which companies fall within the ambit of CSRD; Who needs to comply?

A company will need to consider applicability at multiple levels within its organization to ensure all reporting obligations are identified. The directive will generally apply to three types of companies:

• All companies with securities listed on an EU-regulated market: This includes both EU and non-EU entities with listed debt or equity securities (with some exceptions).
• “Large” EU companies that are not listed: Large is defined as companies that exceed certain asset, revenue, and workforce size thresholds. An EU subsidiary of a US company would be required to report if it exceeds those thresholds.
• EU companies that are part of a “large group” and not listed: Reporting is required for an EU entity (including an EU subsidiary of a US company) if it is the parent of a group that exceeds a certain threshold in terms of assets, revenue, or workforce.
• Additionally, consolidated sustainability reporting will be required for non-EU headquartered companies at a global level if a company generates a certain amount of revenue in the EU and has at least one EU subsidiary or branch that meets certain criteria.

The directive outlines exemptions that depend on how your company consolidates its sustainability reporting. Also, as the CSRD takes hold first among bigger companies, gradually it’s intended to bring most companies, save a few small businesses, into its sphere. 

What needs to be reported?

The CSRD introduces a comprehensive set of disclosure requirements that cover a wide range of sustainability topics. These requirements are outlined in 12 newly developed European Sustainability Reporting Standards (ESRS) by the European Financial Reporting Advisory Group (EFRAG). The proposed standards address environmental, social, and governance aspects and aim to provide detailed information about a company’s sustainability impacts, risks, and opportunities. This includes aspects such as sustainability strategy, targets and progress, products and services, business relationships, and incentive programs.

Importantly, the CSRD expects companies to go beyond reporting only on their own operations and extend their disclosures to encompass direct and indirect business relationships throughout the value chain. This expansion poses challenges, as it relies on obtaining information from third party entities outside the company’s control.

The CSRD also embraces the concept of “double materiality.” This means that companies must report information that helps understand how sustainability issues impact their business development and performance, as well as the broader sustainability matters they influence. Additionally, the directive introduces a mandatory assurance obligation for all reported sustainability information. This differs from the proposed climate disclosure rule by the US Securities and Exchange Commission, which includes a different type of assurance requirement.

Given the complexity of the CSRD, it is recommended that companies involve their CFO (Chief Financial Officer) and CSO (Chief Sustainability Officer) in leading the sustainability reporting process. Additionally, including legal counsel in the reporting process can be beneficial due to the intricate nature of the directive.

The Intent behind CSRD:

The implementation of the Corporate Sustainability Reporting Directive (CSRD) is well-intentioned. Some of the key reasons and objectives for introducing the CSRD include:

• Enhanced transparency and accountability: The CSRD aims to improve the transparency of corporate sustainability practices and their impact on the environment, society, and governance. By requiring companies to disclose relevant sustainability information, stakeholders such as investors, consumers, employees, and regulators can have a clearer understanding of a company’s performance and its commitment to sustainable practices.
• Improved decision-making: The CSRD intends to provide investors and other stakeholders with reliable and comparable information on ESG (environmental, social, and governance) factors. This enables better-informed decision-making, as stakeholders can assess a company’s long-term sustainability and the potential risks and opportunities associated with its operations.
• Facilitated risk management: By mandating sustainability reporting, the CSRD aims to help companies identify and manage ESG risks more effectively. This can include environmental risks like climate change impacts, social risks like labor practices and human rights, and governance risks like board composition and ethical standards. Improved reporting can lead to better risk assessment and proactive mitigation measures.
• Promotion of sustainable business practices: The CSRD encourages companies to integrate sustainability considerations into their core business strategies. By reporting on ESG factors, companies are incentivized to develop and implement sustainable practices, which can contribute to long-term value creation, innovation, and competitiveness.
• Consistency and comparability: The CSRD seeks to establish a standardized reporting framework that aligns with international reporting standards. This ensures consistency and comparability of sustainability information across different companies, sectors, and regions. It facilitates benchmarking, analysis, and evaluation of sustainability performance, allowing stakeholders to make meaningful comparisons and assessments.
• Strengthened credibility and assurance: The CSRD proposes to introduce assurance requirements for sustainability reports, which can enhance the credibility and reliability of reported information. Independent assurance by qualified professionals adds a level of confidence for stakeholders, ensuring that the reported data is accurate and consistent with established standards.

Overall, the CSRD aims to drive greater corporate accountability, promote sustainable practices, and provide stakeholders with the necessary information to make informed decisions regarding companies’ ESG performance. By establishing a common reporting framework, it seeks to facilitate a more sustainable and resilient economy in the European Union.