Navigating the EU's Sustainable Business Revolution: The Impact of the CSRD

The European Union’s ambitious climate regulations are transforming the landscape for businesses, compelling them to prioritize sustainability to meet the demands of banks, investors, and consumers. There’s a lot of information out there on the CSRD and this can be overwhelming. In this short piece, we’re going to focus on providing a high-level overview of some of the key concepts and provide links to help companies delve deeper into the CSRD and what it might mean to them.

The EU Sustainability Reporting Framework

The EU’s reporting framework revolves around three pillars: the Corporate Sustainability Reporting Directive (CSRD), the EU Taxonomy, and the Sustainable Finance Disclosures Regulation (SFDR). The SFDR has sustainability assessment and disclosure obligations for financial products and financial entities, setting out the information that investors need to collect from their investee companies to avoid greenwashing.

If you are a non-EU company but offer (or have European subsidiaries that offer) products or financial services in the EU, then you are impacted by the SFDR. This means your company must apply the EU Taxonomy, which helps determine which economic activities can be classed as environmentally sustainable.

Non-financial companies are subject to the NFRD and the CSRD.

Why has the EU implemented the Corporate Sustainability Reporting Directive (CSRD)?

The purpose of the CSRD, like the SFDR, is to enable investors to have access to the information they need to assess the investment risks from climate change and other sustainability issues. It seeks to create a culture of profound transparency about the impacts of companies on people and the environment as well as the impact they face because of climate change.

The CSRD replaces the Non-Financial Reporting Directive (NFRD) and extends its reach beyond the 3,000 large public companies with over 500 employees which have so far reported under NFRD since 2014. As of January 2023, large European companies meeting two of the three thresholds (over 250 employees, EUR 40 million net turnover, and EUR 20 million balance sheet total) fall under the CSRD’s scope. Non-EU companies with a net turnover of EUR 150 million which have subsidiaries or branches in the EU that have over EUR 40 million in net turnover, are also impacted.

Whereas before companies were allowed to choose their reporting standard (for example, GRI) going forward companies that fall under the scope of the CSRD are obliged to report according to the European Sustainability Reporting Standards (ESRS).

What must be disclosed and when?

Under the CSRD, companies must report on a wide range of ESG topics including climate change mitigation (including Scope 1, 2, and 3 GHG emissions), climate change adaptation, water and marine resources, biodiversity and ecosystems, resource use, and the circular economy covering each of the EU Taxonomy environmental objectives. Reporting on social impacts include diversity, equity, and inclusion, human rights, working conditions, employee relations, pay gaps, workers in the value chain, affected communities, end-users, and consumers. In the governance space, companies must disclose policies, risk management, ownership transparency, responsible business practices, and anti-corruption measures, among others.

Companies must also conduct a double materiality analysis, examine their business model and strategy to assess resilience to sustainability risks, produce a climate transition plan that is compatible with the 1.5C global warming target, with time-bounded targets and engage in a sustainability due diligence process with an exploration of the company’s value chain.

The first wave of CSRD reporting is set to begin in 2025 for fiscal year 2024.

What does the CSRD mean for your company?

To prepare for CSRD compliance, companies must begin by assessing their exposure and determining whether they meet the specified thresholds for inclusion, irrespective of their EU-based status. Early preparation becomes crucial given the extensive reporting requirements that are coming into force, and it also helps to mitigate the risk of non-compliance penalties. Engaging in cross-functional collaboration, with active involvement from departments like HR and sustainability working groups, plays a pivotal role in gathering non-financial data promptly and accurately.

The CSRD further introduces the concept of limited assurance for the first time, with the potential for transitioning to reasonable assurance in the future. This necessitates engaging with auditors and other third parties. As the legislation is in constant evolution, staying vigilant and closely tracking developments becomes imperative for companies. Employing the expertise of a sustainability consultant can prove invaluable, offering a well-structured roadmap to ensure companies are CSRD-ready and adeptly navigate the complexities of this ever-evolving regulatory landscape.