The Corporate Sustainability Reporting Directive (CSRD): Another Step Towards Standardization

Despite decades of growing focus on sustainability, ESG, and impact, the private sector is still flooded with instances of greenwashing – “the process of conveying a false impression or misleading information about how a company’s products are environmentally sound. Greenwashing involves making an unsubstantiated claim to deceive consumers into believing that a company’s products are environmentally friendly or have a greater positive environmental impact than they actually do.” This concept also applies to financial products, as well as social issues.

In 2018, the European Commission introduced its European Action Plan on Sustainable Finance, composed of 10 legislative workstreams meant to create standards and taxonomy to measure and communicate on sustainability.

Two major pillars affecting financial organizations came out of the European Action Plan these past years (among others):

  1. Sustainable Finance Disclosure (SFDR) and
  2. EU Green Taxonomy

These pillars require organizations to harmonize their sustainability practices, reporting and communication. Their implementation is not complete and will likely be ongoing for years to come, but the regulators have put an emphasis on their fight against greenwashing, while evaluating what has been published over the past months.

The European Action Plan also has something in store for the companies, key actors in the transition to a sustainable economy – with the Corporate Sustainability Reporting Directive (CSRD). The Plan’s objective is to align reporting practices between financial and corporate players. Indeed, the SFDR, Green Taxonomy and CSRD are closely intertwined.

Sustainability issues are thus placed at the heart of European regulations and no economic actors can ignore them. A colleague at Cority recently posted a longer explanation.

The CSRD, which will be fully implemented in, revises the former NFRD (Non-Financial Reporting Directive) and shakes up the extra-financial reporting practices of European companies and moves towards greater transparency.

This revision project is ambitious and far-reaching, targeting four times as many companies as the previous regulation. It aims to homogenize and standardize the sustainable development reports of European companies, to better guide investors, and fight greenwashing.

Progressive entry into force: 2024 for EU-based companies already subject to the NFRD (large public interest companies with > 500 employees, > 20M€ balance sheet or 40M€ turnover) : the first sustainability reporting will be published in 2025 for the 2024 fiscal year ;  2025 for large companies listed on European regulated markets and EU-based companies meeting 2 criteria > 250 employees, > 40M€ turnover > 20M€ balance sheet ; 2026 for SMEs listed on European regulated markets ; 2028 for large non-EU companies meeting the reporting thresholds > 150M€ turnover in the EU.

What's Changing

Creating consistency

This harmonization includes the use of standardized reporting standards “ESRS” (European Sustainability Reporting Standards). The first set of these ESRS standards has been proposed by EFRAG to the European Commission in November 2022.

These reporting standards include KPIs from recognized standards such as the he ESRS also list  the PAI (Principal Adverse Impact) indicators required by SFDR, justifying the desire to harmonize reporting standards between financial and corporate players on a European scale.

Governance and oversight

Beyond listing quantitative and qualitative information, companies will also have to describe the sustainability issues governance, review their materiality matrix as well as present their business model and associated risks. The latter will have to integrate the principle of double materiality, a concept aimed at jointly studying the impact of the sustainability factors (environmental, social, human rights…) on companies (i.e.: sustainability risks) and the impact of the company on these factors (i.e.: principal adverse impacts).

Here’s an example:

  • Imagine a shoe company starts using a new type of plastic in their sneakers. There is one type of materiality that looks at the impact of the new plastic on the company itself – can they afford to use this plastic in the long term? What is the financial impact to the stock value?
  • Double materiality looks at the impact on elements outside of the company. Does the manufacturing of the plastic harm the workers producing it? Does this plastic biodegrade? What is the company’s plan for waste management? If someone wears the sneakers for 1-2 years, how many sneakers does the company expect to end up in a landfill throughout the lifecycle of the product?

These strategic and sustainability reporting elements will have to be published in a dedicated section of the management report, which companies will have to make public on their website. This will require the inputs from all departments, involving not only the CSR departments, but also the financial, accounting (companies must publish their taxonomy-alignment in their sustainability reporting), purchasing, and human resources departments, to sustainably modify the organization and value creation of companies.

12 draft ESRS requiring companies to identify their sustainability risks, mitigation policies and practices and report data on a list of mandatory KPIs based on the most material sustainability issues for each company. These sector-agnostic standards cover the following topics: climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy, own workforce, workers in the value chain, affected communities, consumers and end-users, business conduct (beyond general requirements and disclosures). Sector-specific standards will be added in 2023 and 2024. More information here.

Subsidiaries will be exempt from reporting if they are included in the parent company’s consolidated reporting.

Reporting tools.

Companies will need to have robust internal reporting processes, as 50% of the published data (both qualitative and quantitative) will be audited.

For companies already subject to the NFRD, the main task will be to integrate the CSRD requirements (in particular, considering the principle of double materiality in their business model, monitoring new indicators etc.). For companies reaching the new CSRD thresholds, the main task will be to set up new processes to identify and mitigate sustainability risks and adverse impacts, formalize policies and initiatives, and monitor and consolidaterequired KPIs.

How we can help.

Reporting 21 can help your organization focus on the essentials. Reporting 21 already assists many corporate clients – from listed large organizations to small companies new to the exercise – with sustainability advisory and reporting software implementation.

Contact us to learn more about our customized support based on the challenges and the level of maturity of your company.

Progressive transition to the reasonable assurance required by the CSRD (50% of audited published) compared to the DPEF in France which required moderate assurance (20% of audited published data). The reliability of the data will be guaranteed by the audit committee in place in the companies (if the governance in place includes such a committee). Shareholders (5%) may request an audit by an accredited ITO. Reflection is underway to also give lawyers the possibility to audit the data.