Are you ready to report sustainability under CSRD?

More and more companies have started talking about their paths towards sustainable business and reduced climate impact. Even though many companies already realize their role in fighting against climate change, European Commission wants to give an extra push. As a result, Corporate Sustainability Reporting Directive (CSRD) has been finalized and will replace the existing Non-Financial Reporting Directive (NFRD), 2014/95/EU from the year 2024.  Consequently, the new reporting obligation will expand to 49 000 companies, instead of the current 11 600.

 

What it is?

The goal of CSRD is to advance the existing NFRD´s requirements to support the higher aim of the EU Green Deal – reaching climate neutrality by 2050. With this goal in mind, the new directive sets obligations for sustainability reporting to the big companies and listed enterprises to report their business’s environmental, social, and governance (ESG criteria) activities while considering new advancements such as EU Taxonomy and Sustainable Finance Disclosure Regulation (SFDR), 2019/2088/EU.

One of the goals of CSRD is the harmonization of sustainability reporting in the EU. CSRD´s central element is European Sustainability Reporting Standards (ESRS) which mandate the requirements and specific disclosures that must be followed in CSRD-aligned reporting. ESRS is still being developed but according to the latest draft (published in November 2022), the Standards are divided into 4 themes, 12 standards, and 82 disclosure requirements (DRs). Disclosure topics for each organization will be comprised of a) mandatory DRs (e.g., disclosures under ESRS 2 General Disclosures and ESRS E1 Climate Change) and b) those that are identified via materiality assessment (the methodology for which is yet to be established in the first half of 2023). A common framework ensures the comparability of reported information and helps to prevent greenwashing.

The final version of ESRS is expected to be adopted in June 2023.

 

What is a large company?

CSRD applies to all large and listed companies (except listed micro-enterprises). CSRD’s definition of a „large company“ differs from NFRD, setting three thresholds out of which two must be fulfilled in the organization´s previous financial year:

• 250 employees
• > €40 million in net turnover
• > €20 million in assets

Importantly, the company´s size estimation must also account for its parent-, subsidiary- and sister companies. Further clarification is yet to be provided about whether other associated companies (exempted from the group’s consolidated annual report) should be disclosed under CSRD.

 

What obligations shall be fulfilled?

The foundation of CSRD reporting is the principle of double materiality, requiring the companies to disclose how external factors affect the company´s operations (inward impact) and what effect do company´s operations have on the people, society, and environment (outward impact).

 

The list of disclosable topics is relatively wide, including subjects such as:

• Sustainability goals and their implementation progress
• Board´s role and responsibilities within sustainability
• Company’s sustainability policy, including the due diligence process
• The effect of the Paris Agreement´s 1.5 C warming on the company
• Negative sustainability influence in the value chain
• Sustainability risks

 

According to current plans, the published information will be subject to a mandatory (limited) assurance.

 

When to prepare?

CSRD rules are expected to start applying from 2024 when companies need to start collecting necessary information on their business activities. First, the reporting obligation extends to NFRD-defined large companies (listed companies with over 500 employees) who are required to publish their first CSRD-aligned report in 2025. From the year 2026, every large company (listed not) is subject to CSRD and in 2027 the obligation will be extended to the listed small and medium-sized enterprises (SMEs).

 

This means that large companies covered by NFRD (listed companies with >500 employees) must start preparing now to identify the important sustainability-related information and establish the needed processes for the data collection. Only then can you be truly ready for the ongoing (rather than reactive) and systematic data gathering during the year 2025 and subsequent publishing in 2026. The first step would be to measure the organization´s current environmental impact through carbon footprint analysis (read more from our other article HERE) and establish a sustainability strategy, relevant KPIs and monitoring processes.

Contact us to create clarity on sustainability reporting, impact measurement, and becoming green in practice!

Veeli Oeselg

CIVITTA Estonian partner

[email protected]