The Corporate Sustainability Reporting Directive (CSRD) introduces rigorous sustainability reporting requirements for companies in the European Union (EU) and abroad if they meet certain criteria. The CSRD mandates detailed ESG disclosures based on European Sustainability Reporting Standards (ESRS) developed by EFRAG. When evaluating CSRD scope considerations, it's crucial to understand who needs to comply and what the requirements entail.
1. Scope of Applicability
The CSRD broadens the scope beyond the Non-Financial Reporting Directive (NFRD). Companies falling under the CSRD include:
- EU Large Companies: Companies meeting at least two of the following three criteria:
- More than 250 employees
- A turnover exceeding €40 million
- Total assets above €20 million
- Listed Companies: All companies listed on EU-regulated markets, except micro-companies (defined as having fewer than 10 employees and less than €700,000 in turnover).
- Non-EU Companies: Non-European companies with substantial operations in the EU must comply if they generate:
- A net turnover of more than €150 million in the EU and have at least one EU subsidiary or branch.
- SMEs: While initially excluded, SMEs listed on EU-regulated markets will need to comply starting in 2026, with a simplified reporting standard.
2. Timeline for Implementation
- FY 2024: Large public-interest companies already subject to NFRD
- FY 2025: Large companies not previously subject to NFRD
- FY 2026: Listed SMEs, small and non-complex credit institutions, and captive insurance undertakings
- FY 2028: Non-EU companies meeting the criteria
3. Reporting Standards (ESRS)
The CSRD requires disclosures aligned with the European Sustainability Reporting Standards (ESRS), which cover key areas:
- ESRS E: Environmental standards (e.g., climate change, water, biodiversity)
- ESRS S: Social standards (e.g., employee well-being, human rights)
- ESRS G: Governance standards (e.g., board diversity, anti-corruption)
These standards require both quantitative metrics (KPIs) and qualitative narrative on material ESG issues.
4. Double Materiality Concept
A key feature of the CSRD is the double materiality assessment, which requires companies to consider:
- Financial Materiality: The impact of ESG factors on the company’s financial performance.
- Impact Materiality: The company's impact on the environment and society, regardless of financial implications.
5. Audit and Assurance Requirements
- The CSRD introduces a mandatory limited assurance requirement for reported sustainability information, moving towards reasonable assurance in the future.
- This will necessitate robust internal controls and processes to ensure data accuracy and consistency.
6. Digital Reporting and Tagging
- Companies must use digital tagging (in XHTML format) in line with the European Single Electronic Format (ESEF), making reported data machine-readable.
7. Implications for Non-EU Subsidiaries
- Non-EU companies with significant EU operations may need to implement reporting processes across their global entities to comply with the CSRD.
- This often requires harmonizing existing reporting frameworks (e.g., TCFD, GRI) with the new ESRS standards to ensure comprehensive disclosure.
8. Key Considerations for Compliance
- Materiality Assessments: Establish robust frameworks for assessing double materiality.
- Data Management: Invest in systems to collect, validate, and report on sustainability data.
- Stakeholder Engagement: Engage with stakeholders to understand the expectations and improve the quality of disclosures.
- Gap Analysis: Conduct a thorough gap analysis to identify areas where current practices do not meet CSRD requirements.
Next Steps for Companies
- Assess applicability based on company size, listing status, and EU operations.
- Conduct a double materiality assessment to determine key reporting topics.
- Align with ESRS standards and integrate sustainability reporting into existing financial reporting processes.
- Prepare for assurance requirements, which may involve upgrading data collection and validation systems.
- Engage with auditors and consultants early to ensure a smooth transition to compliance.
This directive marks a significant shift towards standardized, transparent sustainability reporting, requiring companies to be proactive in their compliance strategies.
