The EU is expanding corporate sustainability reporting, as the Corporate Sustainability Reporting Directive (CSRD) comes into force.
This new framework will bring sustainability reporting in line with financial reporting.
Environmental, Social and Governance (ESG) is now entering the annual reporting process.
Companies will be required to report on how sustainability issues, such as climate change, impact their business, and how their operations affect people and planet.
This is designed to help investors, consumers, policy makers and other stakeholders evaluate companies’ non-financial performance, which will encourage businesses to be more responsible.
The legislation aims to increase trust in ESG reports and bring greater transparency to sustainability performance.
What is the Corporate Sustainability Reporting Directive?
The Corporate Sustainability Reporting Directive is a piece of EU legislation that establishes Environmental, Social and Governance (ESG) reporting requirements for companies.
The Corporate Sustainability Reporting Directive (CSRD) strengthens the previous Non-Financial Reporting Directive (NFRD), which some companies are already complying with.
It is designed to establish a reliable and comparable reporting standard, based on common criteria, in line with the EU’s climate goals.
To ensure companies are providing reliable information, they will be subject to independent auditing and certification.
As a result of the CSRD, sustainability information will needed to be treated with the same rigour as financial information.
Who does the Corporate Sustainability Reporting Directive apply to?
The new EU sustainability reporting requirements will apply to all large companies, whether listed on stock markets or not.
Non-EU companies with substantial activity or subsidiaries in the EU (with a turnover over €150 million euro in the EU) will also have to comply.
SMEs will also be covered, but they will have more time to adapt to the new rules.
In total, around 50,000 organisations will need to comply with the CSRD.
The rules will start applying between 2024 and 2028:
- From 1 January 2024 for large public-interest companies (with over 500 employees) already subject to the non-financial reporting directive, with reports due in 2025;
- From 1 January 2025 for large companies that are not presently subject to the non-financial reporting directive (with more than 250 employees and/or €40 million in turnover and/or €20 million in total assets), with reports due in 2026;
- From 1 January 2026 for listed SMEs and other undertakings (with the exception of micro enterprises), with reports due in 2027. SMEs can opt-out until 2028.
Public organisations will also need to include an assurance report for sustainability disclosures—but not right away.
What will companies have to report on?
Companies within scope of CSRD will have to report on a whole range of sustainability issues. Sustainability information will cover environmental, social and governance factors, such as:
- Gender equality and equal pay
- Inclusion of people with disabilities, and diversity
- Working conditions, secure employment, adequate wages and workers rights
- Human rights
- Compliance with regulatory and supervisory bodies
- Business ethics and corporate culture
- Lobbying activities and engagement to exert political influence
- Payment practices – especially with regards to late payment to SMEs
- Internal control and risk management systems
- Environmental protection
As well as disclosing the company’s impact on social and environmental issues, they will also need to report how these are likely to affect the business going forward – a concept called ‘Double materiality’
CSRD will call for disclosure of Scope 3 carbon emissions. These are the indirect CO2 emissions produced by all other companies connected to the organisation throughout the whole supply chain.
Companies will be required to measure impact to date and report targets, strategies and risk assessments looking forward.
A major aim of the CSRD is to bring together the E, S and G of ESG reporting in a more cohesive manner.
Reporting will be in line with mandatory EU sustainability reporting standards (ESRS) that are being developed by the Commission.
The European Financial Reporting Advisory Group responsible for developing the reporting standards has published technical recommendations and a roadmap for their development, and submitted the first set of draft reporting standards to the Commission in November 2022.
The EU Commission will now consult EU bodies and Member States on the draft standards, before the final standards are adopted in June 2023.
The CSRD is an important step towards improving corporate reporting and will allow stakeholders to better understand and compare corporate sustainability performance.
It sets consistent reporting requirements across the EU, which will lead to a more level playing field for companies across Europe.
What are the next steps?
Companies should start taking action now to prepare for the new rules. You should understand whether the CSRD will apply to your company, and what timescale you will be working towards.
From there, you will need to understand what you’re currently reporting on, what targets you have in place, and how robust they are. Key employees will need to be trained on CSRD, and data collection should start early to make the reporting process easier.
181st Street have an expert team of regulatory affairs specialists, analysts, sustainability experts and communications leaders who can help. Please contact us to discuss your requirements – hello@181street.com
This article has been prepared for general informational purposes only and is not intended as legal advice.
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