ESG reporting under the Corporate Social Responsibility Directive

7 minutes03/20/2023

The EU’s Corporate Sustainability Reporting Directive (CSRD) initiates a significant expansion of ESG reporting requirements. It affects a gradually growing number of organizations – starting with those covered by the Non-Financial Reporting Directive (NFRD) and eventually extending to non-EU companies. Affected companies will need to assess how their strategy and business model align with and impact sustainability issues. For the first time, it will be mandatory to apply Double Materiality and to report on the entire value chain. The clock is ticking. Get prepared!

Let’s take a look at this new directive and how it affects companies: 

• What is CSRD?

• Applicability

• Disclosures: What information must be included in ESG reporting?

• European Sustainability Reporting Standards (ESRS) for CRSD

• How can I prepare for CSRD reporting?  

What is CSRD

On November 28, 2022, the European Council officially gave the green light to the Corporate Sustainability Reporting Directive (CSRD), after the European Parliament had previously approved it. The European Commission published this new directive, which concerns the information companies are required to disclose about their sustainability practices, in the Official Journal of the European Union on December 16, 2022. Member states have 18 months to transpose its provisions into their national law.

This Directive replaces the existing Non-Financial Reporting Directive (NFRD) and is a major step forward in making non-financial information a new lever for corporate performance. For the first time ever, most European companies will be required to report and verify standardized sustainability information. It will ultimately affect some 50,000 companies, compared to the 11,700 covered by the current system. 

Along with other regulations such as the Sustainable Finance Disclosure Regulation (SFDR) and the “Green Taxonomy,” this will have a significant and lasting impact on the European economy and a knock-on effect on other global economic zones.

Corporate leaders will need to make fundamental changes in the way they prepare and communicate sustainability information. They will need to take both a prospective (goals) and retrospective view, considering how the company’s activities affect the outside world and how external factors impact the company’s own value creation process (the idea of “Double Materiality”).

CSRD Applicability

Which companies will be affected and how will it be applied? The CSRD will eventually apply to around 50,000 companies in Europe and includes a progressive implementation scheme spread out over several years to give companies, especially small and medium-sized enterprises, time to get prepare. 

The new rules will begin to apply to the various affected companies between 2024 and 2028: 

CSRD Disclosures: What information must be included in ESG reporting?

The CSRD introduces an important concept known as double materiality. It requires companies to identify and consider their material ESG issues through the lens of the risks and opportunities these issues may present to the company, but also how they may affect society and the environment

European Sustainability Reporting Standards (ESRS) for CRSD

According to the CSRD, the content of ESG reports must comply with the requirements of the European Sustainability Reporting Standards (ESRS), which EFRAG is currently developing based on the following architecture.

It includes reporting on three areas

• Corporate strategy (the strategy and business model, governance, and an analysis of the main impacts, risks, and opportunities), 
• Implementation of the strategy (policies, objectives, concrete actions, and resources allocated), 
• Performance (KPIs, including those related to monitoring whether objectives are met).

It covers three topics

Companies must report on:

• Environmental issues 
• Social issues
• Governance issues

There are three levels of information

• First set: Cross-cutting standards, which are mandatory for all companies subject to the CSRD. They will apply from the 2024 reporting year. These 13 standards will cover the following topics:
  • General principles, general strategy, governance, and materiality assessment;
  • Climate change, pollution, water and marine resources, biodiversity, resource use, and circular economy;
  • Own workforce (working conditions, equal treatment, respect for human rights), workers in the value chain, affected communities, as well as consumers and end-users;
  • Governance, risk management, internal control, and business conduct.

Current information

On July 31, 2023, the European Commission adopted the Delegated Act for Set 1 of the ESRS. Compared to the draft from May 2023, several adjustments have been made in the standards, which partially negate previously introduced simplifications. For example, it is now necessary to explicitly define which information is deemed non-essential, and it is expected that the results of the materiality analysis will be explained in detail in these cases.

• Second set: Sector-specific standards, which are mandatory for all companies based on the sector in which they operate. These standards are currently being developed and are expected to be available in June 2024 for use in the 2025 financial year.
• Third set: Company-specific information, depending on the issues the company deems important and were not covered in the rest of the ESG report. This reporting is optional.

A prospective and retrospective view should be applied to all sustainability information disclosed. It should be both qualitative and quantitative. Companies should also consider the short, medium, and long-term horizons, as well as the company’s entire value chain.

The European Commission will adopt mandatory ESG reporting standards for large companies and separate, proportionate standards for SMEs, in line with the principle of proportionality.

To make it easier for ESG report users to find sustainability information, companies are required to prepare their financial statements and management report in a single XHTML format, and sustainability information must be tagged using a numerical taxonomy. 

How can I prepare for CSRD reporting?

For companies already subject to non-financial performance declarations, this year’s reporting will not change. However, they need to start putting more effort to collect and consolidate data and information, given the broader range of topics and indicators covered by the directive.  

If your company is not currently subject to non-financial disclosure obligations, here are the three key steps to help you prepare for this change in European regulations.  

1. Extend your regulatory monitoring to cover your ESG issues 

As regulations are being developed, you will need to adapt your EHSQ regulatory monitoring system to include ESG topics. You can subscribe to an ESG monitoring platform and add the content you consider relevant to your current monitoring.  
 
For effective review, you need to create compliance tasks related to these requirements or recommendations, to be able to assign them to the people responsible for evaluating them, and then to be able to create the corresponding preventive/corrective action plans. Some companies have used ISO 26000 and/or GRI guidelines to help improve their sustainability management system.

2. Identify the significant impacts and risks associated with your ESG issues

Start collecting your ESG data as soon as possible so that you are not caught off guard and can quickly make an initial internal assessment in terms of: 

• Availability and quality of required data and information;  
• Impacts, risks, and opportunities related to your activities and locations, with a focus on Double Materiality; 
• ESG performance.  

As mentioned, the CSRD requirements for ESG reporting cover the company’s entire value chain. As a result, collecting, assessing, and reporting data can quickly become a daunting task. For this step, it may be necessary to seek assistance from specialized consulting firms and consider acquiring an expert software solution to: 

• Conduct stakeholder mapping;  
• Transcribe and perform your Double Materiality assessment;  
• Incorporate the ESG reporting indicators required by the CSRD;  
• Set up and manage your internal collection, validation, and consolidation processes. 

3. CSRD Scope 3 Emissions: Carry out a GHG emissions assessment

Some companies already calculate their carbon footprint. They will be able to capitalize on their more recent GHG emissions report and extend it to scope 3 as required by the CSRD. For the others, a first step based on carbon footprint on scopes 1 and 2 will likely be the right approach, once again with the aim of gradually bringing smaller companies in line with these new regulations.  

CSRD goes beyond compliance

CSRD compliance will require your organization to work hard, but the results are worth it because in doing so, you will implement processes that ensure sustainability. You will also benefit from the actions you take even before complying with the directive: The required data will help you assess your company's ESG performance and improve efficiency and decision-making. By integrating sustainability into your business model and processes, your organization can improve stakeholder relationships, streamline operations, and protect its reputation.

Find out how Quentic solutions can help you with your sustainability reporting and meet your ESG performance goals. Get in touch with us!