To accelerate the transition toward a sustainable economy, the EU Council has recently announced its final approval of the Corporate Sustainability Reporting Directive (CSRD), marking a new era that will bring sustainability reporting closer to the requirements for financial reporting. Our team has participated in the discussion on the CSRD from the beginning. In this brief article we highlight the key takeaways from the CSRD, explain why companies must start to prepare now, and outline a number of steps to take.
Niels Ferdinand and Catrina Heider
Bringing sustainability reporting closer to financial reporting
On 28th November 2022, the EU Council gave the final green light on the CSRD, a new landmark legislation that greatly expands the scope of sustainability reporting requirements for companies operating within Europe.
Compared to the 2014 Non-Financial Reporting Directive (NFRD), the CSRD:
- Extends the number of companies that are required to report from 11,000 to nearly 50,000.
- Introduces the concept of double materiality, requiring companies to focus on sustainability matters related to their relevant impacts (inside-out) and relevant financial risks and opportunities (outside-in).
- Defines more detailed reporting requirements specified in the European Sustainability Reporting Standards (ESRS).
- Includes mandatory information on climate change, in line with the EU´s climate goals.
- Requires assurance on a company´s reported sustainability information and of the reporting process.
- Introduces digital accessibility and tagging, in accordance with the European Single Electronic Format (ESEF/XHTML) regulations.
The current version of the CSRD improves important shortcomings of the NFRD. It considers stakeholder feedback on previous draft versions, enhancing reference to existing standards such as the Global Reporting Initiative (GRI) and making the requirements easier to understand.
The introduction of the CSRD is a major step in fostering a more sustainable economy in the EU. Eligible companies are required to systematically measure and manage their social, environmental and economic impacts, identify related financial risks and opportunities, develop corresponding strategies and objectives, and report to stakeholders about their performance based on common requirements. This will lead to a better integration of sustainability into business models and to an increased consideration of sustainability information in stakeholder decisions. B2B customers, banks and shareholders increasingly ask for this kind of information. Through the CSRD, they will have access to more reliable information to evaluate and compare sustainability performance between different companies.
Application and implementation timeline
The application of the CSRD is dependent on the company type and size, and will be rolled out progressively in four stages between 2024 and 2028, as follows:
- Reporting in 2025 on the financial year 2024: Companies already subject to the NFRD.
- Reporting in 2026 on the financial year 2025: Large companies (>250 employees, > €40 million turnover and/or €20 million assets) not subject to the NFRD.
- Reporting in 2027 on the financial year 2026: Listed SMEs (except micro undertakings), small and non-complex credit institutions.
- Reporting in 2029 on the financial year 2028: International companies with net turnover > €150 million in the EU.
The specific reporting requirements are defined in the first set of the European Sustainability Reporting Standards, published by the European Financial Reporting Advisory Group (EFRAG) in November. They are expected to be adopted by the EU Council on June 30th, 2023.
Gearing up for the new rules
The timeframe of the introduction of CSRD could imply this is not a concern for today. However, from our experience and understanding of the significant new requirements the CSRD establishes, there are important reasons for companies to begin now.
A timely preparation will allow companies to implement and test their strategies, processes and structures internally before being required to publish the related information. Furthermore, several steps must be taken to prepare for reporting according to CSRD, including the following:
- Apply the materiality approach, including the financial perspective.
- Develop strategies, objectives and plans for the material matters identified.
- Implement controlling systems, gather existing data and generate additional information on disclosures defined by the European Sustainability Reporting Standards.
- Develop appropriate governance structures.
For the first step, the materiality assessment based on the double materiality approach, sustainability impacts as well as financial risks and opportunities must be considered. Due to that, it is crucial that a cross-functional team involving all relevant departments is engaged. This process should be well documented as it is part of the reporting requirements and can be subject to external assurance.
Ferdinand Consultants was one of the first consultancies to develop tools to help companies apply the double materiality concept. Our approach combines external stakeholder engagement with internal enquiry, scientific and public research, and an analysis of existing reporting standards. These insights serve as input for a materiality workshop with key corporate representatives, where our facilitation methodology ensures an efficient identification of the most relevant sustainability matters. Today, we can draw upon our vast experience in helping companies apply the materiality lens across their businesses, and with it build the foundation for a successful sustainability strategy and reporting.
For more information on our approach to double materiality, development of sustainability strategies and sustainability reporting, please contact Catrina Heider: firstname.lastname@example.org