The engine that powers sustainable organisations
On 21 June 2022, the European Parliament and Council reached a provisional agreement to implement the Corporate Sustainability Reporting Directive (CSRD) with a phase-in period for different entities from the year 2024 to 2026.
This comes as major focus is cast on ESG reporting standards in the EU and as part of a wider package of transformations that set in motion the European Green Deal. Succeeding its predecessor, the 2014 Non-Financial Reporting Directive (NFRD), the CSRD was proposed as a way to address the shortcomings of the existing EU sustainability reporting framework.
The European Sustainability Reporting Standards (ESRS) exposure drafts are still under public consultation until 8 August 2022. Until then, affected companies continue to report according to NFRD requirements while awaiting the final directive on sustainability reporting requirements.
However, some disclosure requirements are already clear from Directive 2014/96/EU and the existing exposure drafts. Environmental and social indicators including employee-related topics, as well as human rights and integrity-related issues remain as minimum disclosures. But these reporting areas will be revised with more detailed requirements.
In the new revision to the directive, additional emphasis is placed on corporate governance information as it relates to the role of management bodies, their composition, and the enterprise risk management framework. Another area of focus is how sustainability is embedded in a company’s strategy and management approaches.
The directive follows the double materiality concept. The impact of a company’s operations on sustainability is thereby just as important as the impact of sustainability issues.
One firm requirement is the verification of disclosures by an independent auditor. This will make greenwashing a lot harder for companies, in line with the directive’s aim to “ensure the reliability of data and avoid greenwashing” - problems identified in a review of the NFRD. In practice, the NFRD allows gaps in material information including climate- and biodiversity-related information. The more comprehensive CSRD is set to replace the NFRD starting 1 January 2024.
Public companies will be required to ensure that sustainability data is available in line with XBRL format. To that end, a XBRL taxonomy is being developed for digital tagging purposes. The reporting format is an electronic XHTML and should follow the XBRL taxonomy to enable easy access to data and machine readability. This means that disclosures have to be digitally available and tagged to taxonomy categories, which are still being finalised.
The new rules will affect companies already subject to the NFRD from 1 January 2024. NFRD-exempt companies with 250 or more employees will be affected from 1 January 2025, and SMEs from 1 January 2026. Non-European companies with operational footprint in the EU with a net turnover of €150
a million or more must also disclose and verify their ESG impacts.
The revised directive will complement the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation. It will thereby create a coherent reporting ecosystem that can support the European Green Deal.