The Corporate Sustainability Reporting Directive (CSRD) has become a key regulation in the European Union as sustainability becomes more important in the business landscape. The directive is designed to help companies improve and standardize their sustainability reporting, making sure they operate transparently. However, many businesses are struggling to meet these requirements, as there isn’t always clear guidance on how to comply with national laws on sustainability reporting or how to report on different sustainability metrics. This deep dive post offers a comprehensive guide to understanding the directive.
What is the CSRD?
CSRD is a framework established by the EU to govern and enhance sustainability reporting in companies. It builds upon and replaces the Non-Financial Reporting Directive (NFRD), significantly broadening its scope and demands. Companies are now required to provide disclosures on various environmental, social, and governance (ESG) aspects under this directive. The primary objective of the CSRD is to offer investors, consumers and other stakeholders comparable information on companies' sustainability practices and impacts.
Overview of the European Sustainability Reporting Standards
What is the relationship between the EU Taxonomy and CSRD? The EU Taxonomy is a framework that classifies economic activities as sustainable or unsustainable based on environmental criteria. The CRSD requires companies to disclose information about their environmental impact and how they align with the EU Taxonomy. This helps investors and other stakeholders understand how companies are contributing to sustainability goals.
How EarthScan helps you comply with CSRD
EarthScan is a SaaS platform that allows companies to analyse, report, and act on their exposure to climate risk. Leveraging data modeling, machine learning, and state-of-the-art climate science, EarthScan provides customized analysis of the climate risks threatening your business assets. Its robust scientific methodology provides ready-to-go data to accurately report for ESRS E1.
Who does CSRD apply to?
The CSRD applies to a wide range of companies operating within the EU. This includes:
- Large Businesses: All corporations regardless of their stock exchange listings are required to follow the CSRD reporting guidelines. The classification of companies is based on specific factors like surpassing thresholds for total assets, net turnover, and employee count. Specifically, large companies meeting two of the following three conditions will have to comply with the CSRD:
- €50+ million in net turnover
- €25+ million in assets
- 250+ employees
- Traded Companies: Every company listed on EU-regulated markets, such as players in finance and insurance, must comply with the CSRD regulations. However, small and medium-sized enterprises will have simplified reporting requirements compared to larger entities.
- International Businesses: Non-EU companies with operations in the EU that generate a net turnover superior to €150 million in the EU. This ensures that multinational corporations with a presence in the EU maintain transparency in their sustainability efforts.
Is CSRD mandatory?
Compliance with the CSRD is mandatory for companies operating within the EU. EU Member States are required to incorporate the CSRD into their national laws by July 2024. Failure to comply with this directive can result in penalties and reputational risks, underscoring the importance for affected companies to prepare adequately.
Can member states impose sanctions?
If a company fails to comply with CSRD, member states can impose one or more of the following sanctions: a public statement about the breach, a directive for the entity to change its conduct, or financial penalties. The specific penalties and their severity are determined by each member state, as seen in Germany, where fines can reach up to €10 million, 5% of annual turnover, or twice the profits gained, or losses avoided due to the breach. The French legislation emphasizes the necessity of external assurance of CSRD reports, with fines up to €75,000 and five-year imprisonment for obstructing auditors, and penalties up to €30,000 and two-year jail terms for not having reports audited by accredited entities.
Insufficient sustainability reporting may also lead to loss of investment, as sustainability-related issues increasingly influence company performance and investor decisions, further driven by legislation like the SFDR and the Taxonomy Regulation that emphasize green investments and environmental disclosures.
When does CSRD come into effect?
The implementation of the CSRD will occur in stages with timelines, for different types of companies.
The new directive came into effect in January 2024 for public interest organisations with over 500 employees, previously under the NFRD. Other businesses, including entities not covered by the NFRD and listed SMEs will need to comply in subsequent years. This phased approach allows companies ample time to adjust to the regulations and get ready for compliance.
How to prepare for the CSRD
Preparing for the CSRD involves several key steps:
- Assess Current Reporting Practices: Companies should begin by evaluating their existing sustainability reporting practices. Identifying gaps and areas for improvement will be crucial in aligning with CSRD requirements.
- Develop a Reporting Strategy: Establish a comprehensive strategy that outlines how the company will gather, analyse, and report sustainability data. This includes defining roles and responsibilities within the organisation.
- Engage Stakeholders: Effective sustainability reporting requires input from various stakeholders, including employees, customers, suppliers, and investors. Engaging these groups will provide valuable insights and ensure the reported information meets stakeholder expectations.
- Invest in Technology and Training: Implementing robust data collection and reporting systems is essential for accurate and efficient sustainability reporting. Additionally, providing training for relevant staff members will ensure they are well-equipped to handle the new reporting requirements.
- Stay Informed and Updated: The regulatory landscape is continuously evolving. Staying informed about the latest developments and guidance related to the CSRD will help companies remain compliant and proactive in their reporting efforts.
Why was the CSRD adopted?
The adoption of the CSRD was driven by several factors:
- Promoting Transparency: The directive aims to enhance transparency and comparability in sustainability reporting by companies. This helps investors and stakeholders make informed decisions.
- Managing ESG Risks: Through requiring disclosures on ESG factors the CSRD assists companies in identifying and mitigating risks linked to these issues. This contributes to the long-term sustainability and resilience of businesses.
- Aligning with EU Green Initiatives: The CSRD is in line with the EU's sustainability goals, such as the European Green Deal. Improved sustainability reporting supports the shift towards a sustainable and environmentally friendly economy.
- Meeting Investor Needs: There is a rising demand from investors for standardized and evidence-based ESG information. The CSRD addresses this need by ensuring that companies provide high-quality disclosures on sustainability matters.
The key CSRD requirements
CSRD sets out a list of requirements for businesses outlined in the European Sustainability Reporting Standards (ESRS). Crafted by the European Financial Reporting Advisory Group (EFRAG) and formally endorsed by the European Commission on July 31, 2023, these standards mark a stride in implementing the directive. Below are the requirements that companies should take note of.
Comprehensive ESG Disclosures
CSRD mandates detailed disclosures across ESG topics, as per the 12 ESRS. Companies must provide comprehensive and granular information covering their business model, strategy, policies, key performance indicators, targets, and governance. This extensive reporting ensures that all relevant aspects of a company's sustainability impact, opportunities, and risks are transparently communicated.
Reporting on Scope 3 Emissions
A critical component of the CSRD is the requirement for companies to report on Scope 3 emissions. These are indirect emissions resulting from a company’s upstream and downstream activities within its value chain. Scope 3 emissions often represent the majority of an organization’s total greenhouse gas (GHG) emissions, sometimes accounting for over 90%. Accurate estimation of these emissions is essential, and companies are encouraged to report on all relevant categories, continuously improving accuracy as more data becomes available.
Mandatory External Assurance
To uphold the credibility and reliability of reported sustainability data the CSRD requires mandatory external assurance. This means that all reported data must be audited by an independent third party. The requirement for external assurance helps maintain high standards of accuracy and trustworthiness in sustainability reporting.
Standardized Digital Reporting
Companies must submit their sustainability data in a standardized digital format, such as the European Single Electronic Format (ESEF) or eXtensible Business Reporting Language (XBRL). This requirement facilitates machine readability and accessibility, making it easier for stakeholders to analyse and compare sustainability data across different companies.
Comprehensive Reporting Standards
The CSRD's comprehensive reporting standards, outlined in the ESRS, encompass a wide range of activities from raw material extraction to the end-of-life treatment of sold products. By aligning with these standards, companies can manage their environmental impact more effectively, support product lifecycle management, and provide greater visibility into the sustainability of their supply chains.
Reporting physical risk requirements
Companies are required to report on the potential physical impacts of climate change on their assets and operations, along with any oversight measures in place to address these impacts and enhance resilience. This includes providing a comparative analysis of the vulnerability and risks faced by their assets worldwide under different climate scenarios, including business-as-usual, moderate, and worst-case scenarios.
The table below outlines the key disclosure requirements related to physical risks for CSRD:
How EarthScan helps you comply with CSRD requirements
EarthScan is your comprehensive solution for sustainability reporting and achieving compliance with regulations such as the Corporate Sustainability Reporting Directive (CSRD). EarthScan’s environmental impact assessment tools are designed to provide a detailed and accurate analysis of your company’s sustainability performance. With EarthScan, you gain a trusted partner dedicated to helping you succeed by providing you with:
- Advanced Risk Analysis: Understand how climate risks will impact your business over time, allowing for strategic planning and resilience-building.
- Data-Driven Insights: Utilise comprehensive climate data to make informed decisions that protect your assets and ensure business continuity. Institutions, such as the World Meteorological Organization, European Commission and UNDP, have partnered with us to develop climate risk projects and assessments.
- Customer Success: Benefit from our white-glove customer support and off-platform access to our climate subject matter experts.
Take the first step towards becoming climate resilient. Explore EarthScan today and discover how our solutions can transform your business’s sustainability practices and compliance efforts. Visit EarthScan to learn more.
