The EU’s CSRD: let’s break down the basics

The world of sustainability reporting has been all systems go. Across the globe, we’re seeing an influx of new reporting regulations and proposals. All of which aim to increase and standardise reporting requirements for in-scope organisations. The UK has the upcoming SDR, the US has disclosures set by the SEC, and globally we’re still awaiting confirmation of the ISSB’s first two draft disclosures. And this is just scratching the surface; it’s a real alphabet soup.

But today, we want to turn our attention to the EU’s Corporate Sustainability Reporting Directive (CSRD). Published in December 2022, it looks to build the bigger picture of an organisation’s sustainability performance. Despite being EU-based, it has the potential to impact companies worldwide, starting as early as next year.

Forming part of the European Green Deal, the CSRD expands on the previous Non-Financial Reporting Directive (NFRD). It has the primary goal of making sustainability reporting more transparent and consistent across all businesses and industries.

Today, we’re going to take you through the basics. So keep reading for the who, what, when, and so what about the upcoming CSRD. 

Who?

The CSRD has a much wider scope than the NFRD it’s replacing.

In total, it will require more in-depth, transparent sustainability reporting from around 50,000 EU-based companies and subsidiaries.

All large companies headquartered in the EU who meet two of the following criteria will need to comply:

• More than 250 employees
• A turnover of over €40 million
• Over €20m in total assets

Companies listed on regulated EU markets will also need to report, except those considered as micro-enterprises (fewer than 10 staff, a net turnover below €750 thousand, and/or a balance sheet below €377 thousand). And organisations outside the EU will have to comply if their net turnover surpasses €165 million for two consecutive years and one of the following applies:

• They have an EU subsidiary that meets the above requirements for EU companies
• They have a branch in the EU that generated more than €40 million in the preceding financial year

It’s also worth noting that, for in-scope non-EU companies, reporting will need to cover the entire organisation, not just the in-scope branch.

When?

Although the CSRD became law at the beginning of this year, reporting is being phased over a four-year period to allow organisations to fully prepare for and adjust to the increased requirements.

2025 → The 11,700 businesses already covered under the NFRD will need to submit reports, based on 2024 data. 

2026 → All large businesses under the CSRD scope will submit reports based on 2025 data.

2027 → Listed SMEs, small and non-complex credit institutions, and captive insurance undertakings will report on 2026 data (there is the possibility to opt out until 2028).

2029 → In-scope non-EU companies will submit reports, based on 2028 data.

What?

The CSRD is a lot more ambitious than any disclosures that have come before it. So, to support its introduction, the ESRS will be introduced – a set of standards that organisations will have to meet.

The first set of these standards has recently been published and is undergoing a four-week consultation period until July 7th 2023. After this point, providing there are no objections, the final standards will be formally adopted. You can read more about the ESRS here.

Key takeaways from the CSRD will be the introduction of mandatory third-party assurance of reported information, scope 3 emissions disclosure, and the principle of double materiality.

Moving forward, in-scope organisations will have to disclose scope 3 emissions from across their value chain, including that of their suppliers, distributors, and customers. This will mean a lotmore emissions data to capture, manage, and publish on a regular basis. All of which must also be robust enough to meet the standard of third-party auditors. 

Other than a selection of general disclosures which remain mandatory, companies will also have to identify which disclosures are most relevant to their operations. To know what to report on, a business must assess and demonstrate to auditors both the inward impact that sustainability matters have on their operations (financial materiality), as well as the external impacts their operations have on the planet and society.

So, what does it all mean?

For in-scope organisations, the CSRD will mean a huge increase in the volume of data to be analysed. Companies will have to report on social and environmental impacts they might never have even considered before, and strengthen internal processes to ensure fully compliant, reliable data at every stage. It’ll be a big challenge. Which is why it’s predicted that six in ten UK companies won’t be ready to meet the January 2024 deadline for capturing scope 3 emissions data.

To remain compliant as your reporting requirements grow, it’s not just about scaling up your existing processes to include additional topics. Changes such as double materiality and scope 3 emissions will likely require a complete upgrade of your reporting system. 

They’ll require a complete rethink about your organisation’s current impact and where you’re able to make the greatest difference. Communication will have to improve across your supply chain to enable the seamless delivery of data from suppliers. And you’ll need to tighten all data management to ensure no unreliable, out-of-date data is left to dilute your reporting.

If you’re in scope, the more you can do to prepare now, the better. Even if you’re not, we only expect more requirements and proposals to trickle in over the coming months and years, so it’ll still be worth keeping in the know and improving processes where you can.

Why not use Impact to truly embed ESG reporting into your organisation? By simplifying and streamlining all reporting requirements, we make it easier to adapt to any and all future legislation or guidance. To find out more, schedule a demo or get in touch with the team on 0161 532 4752.