In April 2021, the European Commission presented the proposal for this Directive, which requires mandatory reporting on environmental and social impact of business activities, as well as independent assurance on the non-financial information that has been presented. The Directive aims to increase the quality of information and transparency about sustainability matters of companies, and thereby support the transition to a sustainable economy following the Paris climate agreement and EU Green Deal. For many companies, the proposed CSRD timeline means they need to start preparing in order to be ready by 2024 and meet the CSRD obligations.
Who does the CSRD apply to?
The CSRD is an extension of the existing European directive on sustainability reporting: the Non-Financial Reporting Directive (NFRD). This NFRD came into effect in 2018 and requires public interest companies (such as banks, insurers and publicly traded companies) with more than 500 employees to report on how they deal with issues such as environmental pollution, social responsibility, human rights and diversity.
The CSRD significantly broadens the scope of entities that will have to report. It will capture all listed entities, as well as to large companies that meet 2 of the following 3 criteria:
- More than 250 employees
- More than €40 million net turnover
- More than €20 million on the statement of financial position.
Latest indications are the CSRD reporting obligations will apply to at least 50,000 companies operating in Europe, but we anticipate many companies below those thresholds will also implement these requirements. This will enable them to fulfil the expectations of their largest customers who will almost certainly be required to report under this Directive.
What will the reporting requirements be under CSRD?
The format and exact criteria of what CSRD will require is still under development. However, it is highly likely the reporting must contain the following components:
- An annual report that will make disclosures on sustainability topics that are material to the company relating to, as a minimum, environmental, social and employee matters, diversity in company board, respect for human rights, anticorruption and bribery matters. Disclosures of other material sustainability topics will be required to cover matters such as strategy, governance, policies, processes, systems, KPIs, results and the achievement of sustainability targets.
- Material sustainability topics will be based on the double materiality principle:
- Which sustainability risks and opportunities may result in financial materiality for the company (eg raw materials scarcity or production disruptions due to extreme weather conditions, but also transition risks such as reputational damage), and
- Which material impacts the company has on people and environment (such as loss of biodiversity or human rights violations in the value chain).
- Information about the company's long-term sustainability goals, and progress toward those goals (so forward-looking information as opposed to just results in a given year).
- The reporting will be linked in line with other recent European regulations, for example, the Sustainable Finance Disclosure Regulation (SFDR) and EU Taxonomy.
In addition to substantive requirements, a limited assurance on the report by an accountant is required as well as making the report available in electronic (XHTML) format. These requirements are expected to make an important contribution to increasing the quality and comparability of sustainability reports.
Steps to be taken - infographic
In order to prepare for CSRD reporting from 2024 onwards, companies should now be familiarising themselves with CSRD and developing their sustainability strategy on how they are going to meet the reporting requirements set out in the Directive. Performing a gap analysis against the CSRD requirements to assess the amount of change that will be required will be essential to this process. Companies will need to develop and set up relevant policies and systems and develop their indicator framework, to be able to manage their KPIs, benchmarks and targets.
This Corporate Sustainability Reporting Directive (CSRD) infographic has been developed by our highly experienced team at Sinzer, part of Grant Thornton Netherlands. The graphic summarises some important timelines and steps to take to be ready for these requirements.
If you would would like to know more, contact Fani Xylouri.