In order to make sustainability reporting more stringent and to meet the stakeholder’s expectations, the European Commission decided to bring in a new directive, Corporate Sustainability Reporting Directive (CSRD).
CSRD came into force on 5th January 2023, and this new rule will be applied to the first set of companies in their Financial Year 2024 for the reports to be published in 2025.
The first set of companies are the large public interest companies with 500 employees or companies that were already subject to Non-Financial Reporting Directive (NFRD).
Subsequently, in FY2025, companies with more than 250 employees or generating revenue exceeding €40 million will come under the purview of CSRD, followed by small and medium-sized enterprises (SMEs) listed on the stock exchange.
What was the need for CSRD?
Prior to CSRD, the large public interest entities in the EU were subject to NFRD, which included around 11,700 companies.
These companies had to report their sustainability information based on five key factors:
- Environmental
- Social matters and treatment of employees
- Respect for human rights
- Anti-corruption and bribery
- Diversity on company boards
On December 11, 2019, The European Commission in its communication on European Green Deal announced to conduct a comprehensive review of the NFRD. This review aimed to reinforce the fundamental framework supporting sustainable investment.
As per the EU’s inception impact assessment of January 2020, the text and implementation of NFRD suffer from various deficiencies.
NFRD was quite flexible in its approach as it does not mandate the utilization of any particular non-financial reporting standard or framework.
Moreover, it did not impose stringent disclosure requirements, such as the inclusion of sector-specific indicator lists.
Therefore, there was a need to revise NFRD and to have more streamlined regulation to achieve the following objectives:
- To ensure investors have access to the Non-Financial information of the companies which enables them to consider sustainability-related risk, opportunities, and impact when making investment decisions.
- To enable civil society organizations, trade unions, and other stakeholders to access non-financial information from companies, empowering them to hold companies accountable for their societal and environmental impacts.
- To reduce unnecessary Non-Financial Reporting burden on the businesses.
In July 2020, Commission assigned the European Financial Reporting Advisory Group (EFRAG) to develop the recommendations for a potential forthcoming European non-financial reporting standard.
In 2021, a new directive in the form of CSRD was framed to replace the NFRD, or we can say that CSRD is an evolved form of NFRD.
The key elements added to CSRD are:
- Scope of reporting
- Disclosure requirements
- Audit
- iXBRL tagging requirements
Companies subject to CSRD will have to report their non-financial information as per the European Sustainability Reporting Standards [ESRS]. As of now, ESRS has been in the draft form, which is being developed by EFRAG.
EFRAG in November 2022 has developed drafts ESRS, which consists of 12 standards, including :
- 2 Cross-cutting standards, and
- 10 Topical standards
On June 09, 2023, the Commission initiated 4 week of public feedback window on the first set of draft ESRS. Subsequently, these standards will be finalized as delegated acts and will also be submitted to European Parliament and Council for scrutiny.
As the CSRD commences, everyone will have their own experience of their sustainability journey.
The first set of large public interest companies, previously subject to NFRD, will be preparing their sustainability reports first time for FY2024 while the rest of the companies will have some more time to prepare and report. The journey promises to be an exciting one.
We reached out the industry leaders in the sustainability reporting space to gather their thoughts on CSRD. We asked them, “What’s one thing that excites you the most about the CSRD?”
Here are their responses, arranged in alphabetical order of their name.
Over to the thought leaders!
I think what I am most excited about when it comes to CSRD is consistency. I am by nature a logical thinker, and I like the idea of everyone being on the same page. Between the time that I have spent in the corporate world and the time I spend assisting our clients now, I know that sustainability efforts can feel daunting and inconsistent for companies that don’t have previous impact experience. With companies beginning to align themselves with the European Sustainability Reporting Standards, it will be easier for the private sector to collectively track progress, reach milestones, and make an impact.
I’m glad I get to be a part of our clients’ CSRD journeys. Helping them grow and change to uphold the CSRD standards using the processes that my partner Skadi Mobius and I have created has been inspiring. With the recent launch of our CSRD digital tools and expanding our consulting services, we can’t wait to grow our network and continue working with companies on their CSRD efforts.
Embracing the CSRD, companies transcend mere financial reporting and embrace the bigger picture, integrating ESG factors. By incorporating environmental and social reporting and adopting the double materiality principle, companies shift their gaze, understanding the impact they have and the impact they face. This transformative approach inspires new outlooks on social and environmental factors, driving compliance, transparency, and a newfound prioritization.
The CSRD is a pivotal statement to establishes sustainable business practices as the prevailing standard. As a pivotal cornerstone of the CSRD, the ESRS provides unprecedented breadth and clarity that will undoubtedly reshape the market landscape, fortified by seamless integration of XBRL tagging.
In Celsia, we’re excited about how the CSRD will drive comparability of sustainability. It’ll get easier for banks, investors, business partners and other stakeholders to understand the sustainability performance of Company A vs Company B. With the CSRD, we’ve got a great starting point for more accurate, comprehensive and comparable sustainability disclosures – an essential component of the green transition that we’re currently undertaking.
CSRD is changing the way both, industry and leaders, are understanding Corporate Sustainability. It should shape our mid- and long-term goals and path the way towards a more accountable and transparent future.
From a technology point of view, it improves disclosure dramatically. It aims to liken financial and sustainability data, opening the door to a more comprehensive reporting and a deeper information system strategy.
The application of CSRD would mean that the companies would have to apply the concept of double materiality – this means that the companies would have to look at the impacts that they make on the world and the impacts that the ESG topics make on them. This changes the whole discussion about which type of materiality should be chosen for the report – as both impact and financial materiality are expected to be applied in CSRD.
To avoid duplication of efforts, CSRD has many overlaps with the existing standards and frameworks.
To highlight a few examples, the financial materiality concept aligns with the IFRS Sustainability Standard, and the impact materiality concept aligns directly with the GRI Standards (even to the extent that the 4-step guidance on impact materiality from GRI is included in CSRD). There is alignment of the 4-pillars from TCFD (Governance, Strategy, Risk Management and Metrics & Targets) with the ESRS 2 in CSRD.
Although there is no official mapping document between the GRI Standards and CSRD, there are huge overlaps in disclosures and concepts, so companies who have the systems in place for GRI reporting are in an advantageous position to apply CSRD. Since the launch of the (draft) European Sustainability Standards, there seems to be a lot of demand from companies to learn how to apply CSRD. Earth Academy has provided 3 trainer-led courses in the last 3 months and has launched a self-paced course on CSRD. I am excited to support the companies in this journey.
Conclusion
The quotes from thought leaders about CSRD are about the multifaceted benefits of CSRD, including consistency, transformative approaches, improved comparability, and an accountable and transparent future. These insights reflect the growing excitement and anticipation surrounding CSRD and its potential to help investors, stakeholders, and civil society organizations to evaluate the ESG performance of the companies.
