Introducing the European Corporate Sustainability Reporting Directive (EU CSRD) and the European Sustainability Reporting Standard (ESRS)

The European Union is set to make significant changes in the world of corporate sustainability reporting. In this article, we will be discussing the European Corporate Sustainability Reporting Directive (EU CSRD) and the European Sustainability Reporting Standard (ESRS).

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The EU CSRD will replace the existing Non-Financial Reporting Directive (NFRD) and will require all large and listed companies in the European Union to report on their sustainability performance. The CSRD introduces new, mandatory disclosure standards, the ESRS. The ESRS will make sustainability reporting more consistent, comparable, and reliable across the European Union.

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What is the CSRD?

The CSRD replaces the existing NFRD in the European Union. It requires companies to report on a range of sustainability issues, including environmental, social, and governance (ESG) factors, such as greenhouse gas emissions, employee health and safety, and diversity and inclusion. The newly introduced reporting requirements will be mandatory, and companies will need to provide assurance on their sustainability reporting.

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Who does the CSRD apply to?

The CSRD applies to all listed companies (except micro-undertakings), and large companies that meet at least two of the following criteria: > 250 employees, turnover exceeding €40 million, and balance sheet total exceeding €20 million in assets. 

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What are the objectives of the CSRD?

The CSRD has several key objectives, including improving the consistency and comparability of sustainability reporting, increasing the quality and reliability of sustainability information, and promoting progress in the sustainability performance of EU companies.

The directive aims to enhance the relevance and reliability of sustainability information to help investors redirect capital towards sustainable investments, in support of the objectives of the EU Green Deal, and support other stakeholders, including consumers and civil society at large, to make informed decisions. It will also encourage companies to identify and address sustainability impacts, risks and opportunities, contributing to better management of sustainability matters.

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How is the CSRD different from the NFRD?

The CSRD is a more comprehensive and ambitious directive than the NFRD. The NFRD focused on a broader set of ESG issues and did not provide a set of clear, mandatory disclosure requirements. The CSRD, on the other hand, applies to a broader range of companies and requires mandatory reporting on a more extensive and detailed range of sustainability matters.

The CSRD also introduces several new obligations, such as the inclusion of the sustainability statement in the management report and the provision of assurance on sustainability reporting.

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What are Sustainability Reporting Standards and why are they important?

In general, sustainability reporting standards are guidelines that provide companies with a framework for disclosure on their sustainability performance. Different standards cover different ranges of social, environmental, and governance issues and are generally designed to make sustainability reporting more consistent, comparable, and reliable.

Sustainability reporting standards help companies to identify and manage sustainability impacts, and/or risks and opportunities, and support the communication of this information to stakeholders. They also provide a framework for investors to make informed decisions based on comparable data, and for companies to assess and improve their sustainability performance. Examples of widely used sustainability reporting standards include the Global Reporting Initiative (GRI) Standards and the standards of the Sustainability Accounting Standards Board (SASB).

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What are the European Sustainability Reporting Standards (ESRS)?

The European Sustainability Reporting Standards (ESRS) are reporting standards that will make sustainability reporting more consistent, comparable, and reliable across the European Union. The ESRS are aligned with existing standards and frameworks, including the Global Reporting Initiative (GRI) Standards and the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

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Moreover, the ESRS aim to encourage companies to disclose relevant and reliable sustainability information in a transparent and consistent manner. It provides a clear framework for companies to report on sustainability issues, including social and environmental impacts, risks and opportunities. The reporting requirements will be mandatory, and companies will need to provide assurance on their sustainability reporting. Here is an overview of the different European Sustainability Reporting Standards:

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Who Developed the European Sustainability Reporting Standards (ESRS)?

The European Financial Reporting Advisory Group (EFRAG) is responsible for the technical development of the European Sustainability Reporting Standards. The ESRS are submitted as technical advice to the European Commission, which will adopt the standards, following consultations with EU member states and relevant European bodies (including, for example, the European Securities and Markets Authority ESMA).

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What is the difference between the EU CSRD and the ESRS?

The EU CSRD and the ESRS go hand in hand to improve sustainability reporting in the European Union. In effect, the ESRS is a reporting standard that will be used to meet the requirements of the EU CSRD. The EU CSRD sets out reporting requirements and obligations, while the ESRS provide a framework and methodology for reporting on sustainability issues.

Both the CSRD and ESRS are legally binding. They are part of the same legal framework around corporate sustainability transparency. The CSRD is the overarching framework - the Directive itself. The ESRS spell out in more detail the requirements introduced by the CSRD, and will be adopted by the EU as delegated acts, alongside and as part of the CSRD. 

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What are the first steps to comply with CSRD?

The European Corporate Sustainability Reporting Directive (CSRD) will introduce new reporting requirements for large companies and listed SMEs operating within the European Union, as well as for third-country companies with significant operations in the EU. To comply with the CSRD, companies will need to take the following steps:

1. Assess whether the company is subject to the CSRD: 

1. Large companies that meet at least 2 of the following criteria:
   a) >  250 employees
   b) Turnover exceeding €40 million, 
   c) Balance sheet total exceeding €20 million in assets will be subject to the CSRD reporting requirements.
   d) Listed SMEs, except micro-enterprises, small and non-complex credit institutions and captive insurance undertakings;
   e) Third-country undertakings with net turnover above 150 million in the EU, if they have at least one subsidiary or branch in the EU exceeding certain thresholds.
2. Identify the relevant application date: 
   a) Reporting in 2025 for FY 2024: Companies covered by NFRD​
   b) Reporting in 2026 for FY 2025: Large companies that are not currently subject to the NFRD;
   c)Reporting  in 2027 for FY 2026: Listed SMEs (except micro undertakings), small and non-complex credit institutions and captive insurance undertakings;
   d) Reporting in 2029 for FY 2028: Third-country undertakings as indicated above.
3. Assess the company's current sustainability reporting practices: Companies will need to review their current sustainability reporting practices and identify any gaps in their reporting.
4. Develop a sustainability reporting strategy: Based on the identified gaps, companies will need to develop a strategy to address these gaps and comply with the new CSRD obligations and the reporting requirements specified in the ESRS. This strategy should include a timeline for implementation, as well as any required resources.
5. Identify, collect and analyze relevant sustainability data: Companies will need to collect and analyze relevant sustainability data to ensure they have accurate and reliable information to report under the CSRD, and in alignment with the ESRS. The starting point for such a process will be the double materiality assessment, through which companies will need to identify material impacts, risks and opportunities to report on. This will help companies to ensure they have accurate and reliable information to report under the new standards. Contact Daato for more information on this. 
6. Implement appropriate reporting processes and procedures: Companies will need to implement appropriate reporting processes and procedures to ensure the accuracy and reliability of the sustainability information reported under the CSRD and in line with the ESRS.
7. Stay up-to-date with ESRS developments: Companies should stay up-to-date with the latest developments regarding the ESRS, such as the adoption of the final standards expected in June 2023. This will enable companies to understand the specific reporting requirements they will need to meet.

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By taking these steps, companies can ensure that they are compliant with the new reporting requirements, and are contributing to a more sustainable future. Additionally, implementing appropriate sustainability reporting practices can help companies identify and address sustainability impacts, risks and opportunities, contributing to their long-term success and sustainability.

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How is Daato helping clients with their sustainability reporting?

Daato is a solution for sustainable organizations that helps clients future-proof their ESG reporting and ESG management. Daato is a one-stop shop for everything ESG-related, from compliance to action.

At Daato, it is our purpose to assist you to manage ESG performance in one place, covering the supply chain. We also provide a platform for bringing all ESG data together in one place and reporting on legal and voluntary frameworks. Additionally, Daato helps you to identify and manage ESG risks and opportunities in the financial system and report in accordance with standard frameworks. It can further help you assess your current reporting practices against the new ESRS standards, and support the identification of material impacts, risks and opportunities as part of the double-materiality assessment, required to meet the CSRD and ESRS requirements. 

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Conclusion

The EU Corporate Sustainability Reporting Directive represents a significant step forward towards achieving a sustainable future for the European Union. The directive will make sustainability reporting more consistent, comparable, and reliable, and will help companies to better identify and address sustainability impacts, risks and opportunities.

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With the adoption of the CSRD, companies will need to ensure that they are compliant with the new reporting requirements. By doing so, they will not only be contributing to a more sustainable future but also ensuring that they remain competitive in an increasingly environmentally and socially conscious market.

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