The EU’s Corporate Sustainability Reporting Directive explained

Key points:

• The Corporate Sustainability Reporting Directive (CSRD) strengthens and extends the scope of the existing EU reporting requirements.
• CSRD values sustainability metrics alongside environmental performance, paying particular attention to the “S” in ESG, such as employee health, human rights, bribery, anti-corruption and diversity.
• There are several data-intensive disclosures within the European Sustainability Reporting Standards (ESRS) covering greenhouse gas emissions, energy, waste, water, recycling and social metrics.
• CSRD will be mandatory for all large European companies and companies listed on the EU regulated markets, including EU subsidiaries of non-EU parent companies.
• Companies that are already subject to the NFRD will need to report on 2024 data (reporting year 2025).
• CSRD requires a third-party assurance and external auditing, whereas it was optional for most businesses under NFRD.

CSRD on track to enter into force in 2024

The Corporate Sustainability Reporting Directive (CSRD) reached a provisional political agreement in June 2022, signaling it will take effect in January 2024 for all relevant companies. This move aims to achieve more complete and transparent sustainability reporting across the region. The new EU legislation is poised to impact approximately 50,000 companies, an indicator of the speed at which increased sustainability reporting requirements and standards are sweeping across all sectors.

Organizations impacted by the EU’s CSRD announcement should not just take note but action, and start building their data foundations in anticipation of upcoming reporting and disclosure requirements. In this article, we explore the reporting requirements of the CSRD and how organizations can harness existing solutions to prepare their sustainability data for CSRD reporting obligations.

What is the EU CSRD?

The EU CSRD prescribes rules for organizations to report sustainability disclosures across several topics pertaining to environmental and social issues. Organizations will be required to detail how their business strategy will mitigate the risks associated with these environmental and social issues and publish these disclosures publicly.

This isn’t the first time a framework such as CSRD has existed in the region. In fact, the CSRD aims to strengthen and extend the scope of the existing EU reporting requirements from its predecessor, the Non-Financial Reporting Directive (NFRD). It values sustainability metrics alongside environmental performance, paying particular attention to the “S” in ESG by looking at matters such as employee health, human rights, bribery, anti-corruption and diversity across management.

Not only do these disclosures need to be made publicly available and easily accessible, but the CSRD now also mandates independent auditing. This shift towards independent auditing of sustainability data also seen in other ESG and sustainability reporting frameworks sends a strong signal to organizations that claims relating to ESG metrics and sustainability initiatives must be backed by the data to match.

NFRD vs. CSRD: Key differences explained

The EU CSRD builds on the existing NFRD to make reporting more thorough and relevant. The key differences are that CSRD:

• applies to over 49,000 organizations, compared to 11,700 reporting on NFRD;
• is a requirement for all publicly-listed companies and those with greater than 250 employees, EUR 40M+ turnover, or EUR 20M+ total assets (two of three criteria met), NFRD applies to large public interest entities with over 500 employees;
• requires a third-party assurance and external auditing, while it was optional for most businesses under NFRD;
• is included in a management report, while NFRD was part of an annual report; and
• requires a broader scope of reporting, including targets, risk and opportunity management, with a focus on forward planning.

For more information on the exact CSRD reporting requirements and changes to the current draft, visit EFRAG.

Why was CSRD introduced?

NFRD, which CSRD replaced, applied to a smaller number of organizations in comparison to CSRD, which has a much larger criteria for inclusion. CSRD addresses a number of known shortcomings of NFRD, such as the vagueness of reporting requirements, resulting in inconsistent data, absence of climate disclosures, non-compliance and a general lack of transparency.

On a larger scale, this facilitates a more equitable EU financial system as stakeholders will be able to make more informed decisions based on easily accessible and standardized sustainability data.

Longer term, the intended outcomes of CSRD will contribute to Europe’s 2050 climate-neutrality target, and European Green Deal objectives, such as providing a “globally competitive and resilient industry, renovated energy efficient buildings and cleaner energy and cutting-edge clean technological innovation.”

The EU has long been a proponent of progressive sustainability and climate policies, with the CSRD accelerating this further within the ecosystem of existing policies, frameworks and directives.

Who needs to report on CSRD?

CSRD is mandatory for all large European companies and those listed on the EU-regulated markets, including EU subsidiaries of non-EU parent companies. This directive includes listed SMEs, however “micro” companies—companies with less than 10 employees or below EUR 20M in turnover—are currently excluded from the mandatory sustainability reporting.

Specifically, CSRD applies to organizations with over EUR 20 million in total assets, a net turnover of EUR 40 million and/or 250+ employees. These entities are referred to as ‘large undertakings’ within the CSRD and include both EU companies and EU subsidiaries of non-EU companies.

Sustainability reporting will also be required of non-European companies that generate an annual net turnover of EUR 150 million in the EU and that have at least one subsidiary or branch in the EU. Non-EU companies will have to comply from 2028.

This means that approximately 49,000 organizations are expected to participate in CSRD’s reporting requirements once it is completely rolled out.

CSRD reporting requirements

In 2022, the European Financial Reporting Advisory Group (EFRAG) released its long-awaited draft of the European Sustainability Reporting Standards (ESRS), which will fall under the CSRD. The 13 ESRS are a key element to achieving the CSRD’s goal of improved sustainability reporting across the region.

These 13 draft European Sustainability Reporting Standards outline requirements across numerous four broad categories as outlined below:

• Cross-cutting: General principles, general, strategy, governance and materiality assessment.
• Environment: Climate change, pollution, water and marine resources, biodiversity, resource use and circular economy
• Social: Own workforce, workers in the value chain, affected communities, consumers and end-users
• Governance: Governance, risk management, internal control and business conduct

Of the many requirements outlined in the standard, the ESRS requires organizations to digitally tag reported information, so that it is machine-readable, easily searched and comparable.

In mid-2022, IBM Envizi reported on the growing rise of AI-driven data scraping by ESG ratings tools used to evaluate an organization’s ESG performance. The practice is on an upward trend and is now tangibly reflected in the new ESRS as a reporting requirement. This tagging approach is one of the ways organizations can adopt specific approaches to regain control of their data from automated ESG valuations undertaken by agencies, with alternate options outlined in this guide.

Some reporting standards will be required of all organizations, while others will be sector-specific standards. Organizations are also subject to reporting on double materiality, ensuring disclosures are made about both issues that impact the wider community and issues that are financially relevant to the company itself. These categories and the reporting approach reflects a move towards more holistic sustainability reporting, looking at factors beyond traditional environmental metrics, to include social performance indicators.

CSRD key dates for organizations

It’s critical to note that while key dates are a few years away for some, organizations subject to the new directives must start preparing their data foundation and sustainability reporting processes now to avoid any risk of non-compliance.

• Late 2022: CSRD expected to become EU law
• By June 30, 2023: EU Commission to adopt the first set of reporting standards
• From 2024: Requirements will be phased in after EU law is implemented into the national law of EU member states
• January 1, 2024: companies that are already subject to the NFRD will need to report on 2024 data (reporting year 2025)
• January 1, 2025: other large companies not previously subject to the NFRD must start reporting
• January 1, 2026: SMEs are required to commence their reporting
• January 1, 2028: CSRD applies for third-country companies

Preparing sustainability data to satisfy CSRD reporting requirements

IBM Envizi ESG Suite can support an organization’s CSRD reporting requirements by providing finance-grade data within an auditable system.

CSRD will support investors, consumers and policy makers to review vital non-financial information in line with sustainability reporting standards. It will push organizations to increase their disclosure on environmental and social risks and opportunities and ensure that investors are fully informed about the ESG performance of their respective investments.

The CSRD standards also encourage a recognition and mitigation plan for the sustainability-related risks that organizations are exposed to, backed by a solid corporate strategy to address any of these risks so that tangible progress is made across sectors.