The directive aims to increase the quality of information and transparency about sustainability matters of companies, and thereby support the transition to a sustainable economy following the Paris climate agreement and EU Green Deal. For many organisations, the proposed CSRD timeline means they need to start preparing in order to be ready by 2023 and meet the CSRD obligations. What does this mean for your company?
Who does the CSRD apply to?
The CSRD is an extension of the existing European directive on sustainability reporting: the Non-Financial Reporting Directive (NFRD). This NFRD came into effect in 2018 and requires public interest companies (such as banks, insurers and publicly traded companies) with more than 500 employees to report on how they deal with issues such as environmental pollution, social responsibility, human rights and diversity.
The CSRD significantly broadens the scope of entities that have to report: The CSRD applies to all listed entities, as well as to large entities that meet 2 of the following 3 criteria:
- More than 250 employees.
- More than 40 million turnover.
- More than 20 million on the balance sheet.
In line with the NFRD, about 100 Dutch companies (12,000 in Europe) were already required to report on their sustainability performance; With the CSRD, this obligation will apply to around 50,000 organisations in Europe.
What obligations apply under the CSRD?
In addition to requiring more companies to report, there will also be additional reporting requirements under the CSRD. The format and exact criteria for reporting are still under development. In any case, the reporting must contain the following components:
- Data based on the double materiality principle: 1) Which sustainability risks and opportunities may result in financial materiality for the organisation (e.g. raw materials scarcity or production disruptions due to extreme weather conditions, but also transition risks such as reputational damage). And 2) Which material impacts the company has on people and environment (such as loss of biodiversity or human rights violations in the value chain).
- Forward-looking information: Information about the company's long-term sustainability goals, and progress toward those goals (as opposed to just results in a given year).
- Results on environmental impact (where relevant in line with the EU Taxonomy Regulation) as well as social impact, at minimum about: social and employee matters, diversity, anti-bribery and corruption and human rights.
- Linking reporting in line with other recent European regulations: the Sustainable Finance Disclosure Regulation (SFDR) and EU Taxonomy.
In addition to substantive requirements, a limited assurance on the report by an accountant is required as well as making the report available in electronic (XHTML) format. These requirements are expected to make an important contribution to increasing the quality and comparability of sustainability reports.
CSRD must contribute to achieving the goals of the Paris Climate Agreement
The regulations, linked to the EU Green Deal, should provide more relevant and comparable information on sustainability policy and results. This will provide more insight into the progress of Europe and European companies towards the goals of the Paris Climate Agreement (net zero emissions, and keeping global warming below 1.5 degrees). Integration of financial and non-financial data within company reporting is important to ensure that companies can better focus on broader value. The CSRD does not stand alone in this. Earlier this year, the Sustainable Finance Disclosure Regulation and EU Taxonomy came into effect, and a guideline on Sustainable Corporate Governance is expected later this year. These laws and regulations offer more and more frameworks around and vision on the responsibilities of companies in a more sustainable economy.
How do you prepare?
Although the first reporting obligation under the CSRD will apply from 2023, many companies already have to prepare or update their sustainability strategy on which the reporting is based in the run-up to this. As well as setting up processes and systems for data collection based on sustainability indicators and guaranteeing the quality of that data.
Would you like to know more about the CSRD, what it means for your company, and how you can prepare for it? Contact our specialists.
