The Corporate Sustainability Reporting Directive (CSRD)

What is the Corporate Sustainability Reporting Directive (CSRD)? 

‍

The Corporate Sustainability Reporting Directive (CSRD) is a European Union regulation aimed at standardizing and enhancing sustainability reporting across companies operating within the EU. CSRD mandates companies to provide transparent disclosures on environmental, social, and governance (ESG) impacts, delivering stakeholders comparable and reliable sustainability insights. 

This directive replaces the Non-Financial Reporting Directive (NFRD) and introduces double materiality, requiring businesses to report both their impact on the environment and society and the potential impact of these factors on the company itself.

CSRD compliance aligns with the European Sustainability Reporting Standards (ESRS), a framework that establishes specific guidelines for reporting ESG metrics.

‍

Who is affected by the CSRD?

‍

CSRD expands the scope of companies required to report on sustainability metrics. It applies to:

• Large, EU-based public-interest companies subject to the EU Non-Financial Reporting Directive (NFRD), current reporting law applicable to public-interest companies > 500 employees
• Other large EU companies meeting two of the three conditions will be required to report under the CSRD, even if previously not subject to the NFRD:
  ‍
  1. €50 million in net turnover
  2. €25 million in assets
  3. 250 or more employees

• Non-EU companies that have achieved a net turnover above €150 million in two consecutive years, with an EU branch annual net turnover of €40 million

• Listed European SMEs will be required to report using simplified standards
• Under proposal by the Commission: separate voluntary standards for non-listed SMEs
  ‍

Current timeline around CSRD

‍

CSRD implementation is rolling out in phases:

• 2024: Applies to companies already subject to the Non-Financial Reporting Directive (NFRD), covering fiscal year 2023.
• 2025: Expands to all large companies, with reporting for fiscal year 2024.
• 2026: Extends to listed SMEs and select small and non-complex financial institutions, with reporting for fiscal year 2025.‍
• 2028 and Beyond: Companies with a significant presence in the EU but headquartered outside the EU.

‍

Double materiality assessment example

‍

Double materiality is the centerpiece of the CSRD, defining the scope of information and areas that need to be disclosed. There are two materiality dimensions that enterprises must assess: financial materiality and impact materiality. 

For example, let’s consider a manufacturing company that produces packaging materials. A sustainability matter is material from a financial perspective if it has the potential to significantly affect the company’s finances and future value. In this case, a shift in regulation that imposes taxes on high carbon emissions could impact the company’s cost structure, influencing future cash flows and enterprise value. Since increased emissions taxes could reduce profitability, this is a financially material issue.

On the other hand, a sustainability matter is material from an impact perspective if the company’s activities have significant impacts on people or the environment. For the packaging manufacturer, this might include environmental impacts from high plastic use or waste generation. If the company’s production processes contribute to plastic pollution in surrounding communities, it’s an impact materiality issue, as the business significantly affects the environment. Addressing and disclosing these impacts would align with CSRD’s requirements for transparency on how the company’s operations affect society and the planet.

This dual approach evaluates how external factors impact your business and how your business impacts the environment and society, capturing the risks and opportunities for your business and the effects your company has on the world. This approach means to promote transparency, accountability, and more informed decision-making that considers both financial and societal impacts.

‍

Operational changes for companies

‍

To meet CSRD requirements, companies need to establish systems for ESG data collection across their operations and supply chains. To comply with the double materiality concept, companies must report on both ESG impacts and how environmental and societal factors affect business resilience.

Mandatory audits of sustainability information are also required, so companies must ensure data accuracy and establish traceable reporting practices. Internal training and accountability frameworks will also be essential for maintaining compliance.

The financial impact of CSRD compliance includes several aspects. First, companies may face upfront costs related to investing in new data management systems, training, and audit preparation. Operational expenses may increase due to ongoing data collection, reporting, and audit requirements. However, CSRD compliance also mitigates financial risks, reducing exposure to potential non-compliance penalties, reputational damage, and access limitations to capital, as investors are increasingly prioritizing ESG transparency.

‍

Emissions calculation methods

‍

CSRD requires companies to follow the ESRS standards for ESG reporting. The European Sustainability Reporting Standards (ESRS) contains 10 topical standards and two cross-cutting ones.

‍

‍

Among these standards, E1 is the environmental standard that comprises nine disclosure requirements, all related to climate change.

• E1-1: outlines a company’s transition plan towards carbon neutrality and alignment with global climate targets.
• E1-2: reports on climate change mitigation efforts and initiatives to reduce greenhouse gas emissions.
• E1-3: assesses climate change adaptation strategies to address physical risks and enhance resilience.
• E1-4: discloses overall gross greenhouse gas emissions across all operational scopes.
• E1-5: presents Scope 1 greenhouse gas emissions directly from the company’s owned or controlled sources.
• E1-6: details Scope 2 greenhouse gas emissions from purchased electricity, heat, and cooling.
• E1-7: covers Scope 3 greenhouse gas emissions indirectly generated from upstream and downstream activities.
• E1-8: evaluates the intensity of greenhouse gas emissions relative to specific business activities.
• E1-9: reviews energy consumption, sourcing, and efforts to increase renewable energy use across operations.

Even though the ESRS E1 climate related disclosures are subject to a materiality assessment, most companies will likely determine that climate change is a material topic.

‍

What is a climate transition plan?

‍

One key requirement of ESRS E1 reporting is that companies must disclose whether they have or are preparing a climate transition plan. This plan should include short and long-term targets for greenhouse gas emissions, identifying levers for decarbonization, and a net-zero strategy for decarbonization efforts across the company.

While climate change mitigation is a crucial aspect of this standard, ESRS E1 also requires companies to disclose information on their management of energy-related topics and climate adaptation.This includes, for example, data points like how much fuel is consumed from fossil fuel sources, and how companies are preparing for potential climate-related impacts to their supply chain.

‍

Benefits of using a CSRD reporting solution

‍

A CSRD-compliant reporting platform offers multiple benefits. It streamlines data collection across business units and supply chains, reducing the need for manual effort. It ensures that reports are aligned with ESRS standards, thus helping companies meet audit requirements.

By using automated tools, internal resources can be focused on strategic sustainability initiatives rather than data processing. Additionally, transparent and reliable reporting strengthens trust among initiatives, customers, and regulators, reinforcing the company’s reputation and commitment to sustainability.