Understanding the Corporate Sustainability Reporting Directive (CSRD) and its impact on businesses

November 1, 2023

The Corporate Sustainability Reporting Directive (CSRD) is a pivotal framework that has redefined ESG reporting in the European Union (EU). Enacted by the European Commission in November 2022, CSRD marks a significant step towards enhancing corporate sustainability reporting and bringing about greater transparency and accountability.

The latest report from Diligent shed some light on the key aspects of CSRD, its significance, and what it means for businesses.

CSRD is not optional; it’s mandatory. The framework necessitates that companies disclose various ESG aspects, including their greenhouse gas (GHG) emissions. This disclosure requirement extends to all publicly-traded and non-listed companies. Large companies are subject to CSRD if they meet two of the following criteria:

More than 250 employees and/or
More than €40m turnover and/or
More than €20m in total assets

While small to medium-sized companies currently have some reprieve, they too will have to comply with CSRD, starting in 2026, where they will be forced to submit reports on their data in the following year (2027).

But this rest-bite is not widespread across the board. In fact, by January 2024 companies should have a process in place for collecting the required CSRD data. Organisations already subject to the previous Non-Financial Reporting Directive (NFRD) will submit reports on 2024 data in 2025.

For large companies that are not subject to NFRD, they will be expected to submit their first CSRD reports in 2026, covering 2025 data.

While these CSRD deadlines might seem distant, preparation is essential, as there are many key considerations for firm’s which could make or break their CSRD reporting abilities. They are as follows:

Impact and Financial Materiality: CSRD introduces the concept of double materiality, requiring companies to cover both their impact on people and the environment and its financial repercussions. This entails more time and effort in preparing CSRD reports.
Progress Towards Targets: Establish ESG targets and outline progress and future plans within your CSRD reports.
Value Chain Integration: Integrate data from your entire value chain to provide comprehensive information that covers existing operations and future forecasts.
External Assurance: Prepare for third-party verification of your reports, as external assurance is mandatory under CSRD.
Management Report Integration: As of 2024, your CSRD reports will be part of your Management Report. Ensure that your Management Report aligns with CSRD requirements.

Embracing CSRD compliance early can provide businesses with a holistic view of sustainability’s impact on operations and finances. This, in turn, instills confidence in shareholders and equips boards with valuable insights for future decision-making. The comprehensive CSRD checklist can be a valuable tool for businesses to prepare for the 2024 reporting cycle effectively.

Addressing Shortcomings of NFRD

NFRD served as a precursor to CSRD, and the need for this transformation became apparent due to several challenges. Many companies were falling short in compiling ESG reports that met regulatory and shareholder expectations. This lack of consistency across companies made it challenging to make meaningful comparisons.

The adoption of CSRD aims to rectify these issues by fostering greater transparency for investors and holding companies more accountable through clear and credible reporting. It achieves this by imposing more detailed and specific reporting requirements compared to NFRD.

To meet these stringent guidelines and become CSRD-compliant, companies must:

Include the CSRD report in their Management Report.
Adhere to specified reporting principles.
Follow designated reporting format and timing.
Complete an independent evaluation, starting in 2024.

Within these reports, CSRD mandates that companies disclose their ESG activities using measures such as:

Business model, strategy, and policies.
Key Performance Indicators (KPIs) for existing ESG efforts.
Targets for future ESG efforts.
Sustainability governance.
Materiality assessment and due diligence.
ESG risk management.

Companies covered by CSRD must report on areas related to the environment, social responsibility, governance, and sector-specific standards.

If you wish to accurately prepare for the 2024 reporting cycle brought about by these regulatory tweaks, you can utilise Diligent’s CSRD checklist to respond appropriately now.

If you wish to read the full blog by Diligent, click here.

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