Navigating CSRD and ESRS: Sustainability Reporting in EU
Explore the intricacies of EU sustainability reporting with insights on CSRD and ESRS, guiding businesses through essential compliance and reporting strategies.
The Corporate Sustainability Reporting Directive (CSRD) provides the regulatory basis for corporate disclosures for companies operating within the EU on environmental, social, and governance (ESG) matters in the form of sustainability reporting. In alignment with and facilitating the directive, the European Sustainability Reporting Standards (ESRS) provide a comprehensive framework based on which these ESG disclosures are to be made.
This article serves as a guiding document, providing a brief overview of CSRD and ESRS. We explore the key elements of CSRD such as its scope and applicability, and the core disclosures that ESRS contains. These insights are relevant not just for companies working towards complying with CRSD in the coming years, but also for other businesses, to help them prepare for evolving sustainability regulation within the EU.
Want to know more about the European Sustainability Reporting Standards (ESRS)? Click to check out our in-depth article on the topic.
What is the Corporate Sustainability Reporting Directive (CSRD)
The EU Corporate Sustainability Reporting Directive (CSRD), in effect since January 5, 2023, is poised to transform sustainability reporting in the European Union. This directive is a comprehensive initiative designed to reinforce reporting obligations for large companies, alongside introducing substantial measures. By expanding reporting requirements and covering more companies, the CSRD aims to build significantly over its predecessor, the Non-Financial Reporting Directive (NFRD).
The CSRD brings larger and listed small and medium-sized enterprises (SMEs) under its ambit, intending to empower stakeholders to make informed decisions based on a holistic understanding of ESG performance. The directive applies to a broad range of companies, including “large companies” with over 250 employees and specific financial thresholds.
Additionally, under CSRD, businesses must have their sustainability information verified by a statutory auditor, who provides an opinion on compliance with EU sustainability reporting standards. This process, termed ‘limited assurance,’ involves fewer tests than reasonable assurance, ensuring compliance with sustainability reporting standards.
For reporting under CSRD, specific sustainability reporting standards, The European Sustainability Reporting Standards (ESRS) have been developed by the European Financial Reporting Advisory Group (EFRAG) to align with existing EU regulations, emphasizing factors like double materiality, environmental footprints, and diversity and inclusion. SMEs will have tailored standards to streamline reporting requirements.
Understanding the European Sustainability Reporting Standards (ESRS)
The European Sustainability Reporting Standards (ESRS) are pivotal to companies reporting under the EU Corporate Sustainability Reporting Directive (CSRD). Developed by the European Financial Reporting Advisory Group (EFRAG), these standards establish a comprehensive framework for reporting Environmental, Social, and Governance (ESG) performance.
The CSRD, in force since January 5, 2023, mandates that companies within its purview adhere to ESRS when reporting sustainability performance. The directive’s timeline spans from the adoption of the proposal in April 2021 to its enforcement in 2023. Companies will commence reporting under CSRD rules for the 2024 financial year.
Reporting Areas within ESRS cover crucial aspects of:
- Governance: Disclosures on governance structures, controls, and practices related to sustainability.
- Strategy: Disclosures about how a company’s strategy aligns with its impacts, risks, and possibilities.
- Impact, Risk, and Opportunity Management: Reporting on procedures to identify sustainability impacts, risks, and opportunities.
- Metrics and Targets: Providing performance indicators for managing critical sustainability issues.
- Stakeholders and Materiality Assessment: Engaging with affected stakeholders for ongoing due diligence and assessing sustainability materiality.
ESRS introduces the concept of Double Materiality, recognizing the reciprocal relationship between a company’s sustainability and financial performance. This involves assessing a company’s impact on society and the environment, and determining whether this impact is financially material.
In its governance section, ESRS addresses various aspects of corporate governance, including board composition, risk management, and stakeholder engagement. It also emphasizes the importance of strategy and business model disclosures, aiming to offer insights into the governance mechanisms established for monitoring and managing sustainability aspects.
There has been a very significant increase in demand for corporate sustainability information in recent years, especially on the part of the investment community. That increase in demand is driven by the changing nature of risks to undertakings and growing investor awareness of the financial implications of those risks. That is especially the case for climate-related financial risks. There is also growing awareness of the risks and opportunities for undertakings and for investments resulting from other environmental issues, such as biodiversity loss, and from health and social issues, including child labour and forced labour.
Corporate Sustainability Reporting Directive (CSRD)
Key Considerations for Companies
As the European Union sets course toward a more comprehensive and stringent approach to sustainability reporting through the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS), companies need to strategically prepare for the evolving landscape. They can do so by:
Understanding the Scope: First and foremost, companies must grasp the expanded scope of the CSRD. It now applies not only to large entities but also encompasses listed SMEs. This means that companies falling within the CSRD’s purview need to identify and evaluate their sustainability impacts.
Engagement with Stakeholders: CSRD emphasizes stakeholder engagement, and effective stakeholder engagement takes time. Companies should establish robust mechanisms for ongoing dialogue with stakeholders, ensuring that their sustainability reports effectively address concerns and expectations.
Transition to ESRS Standards: To align with ESRS, companies should familiarize themselves with the reporting areas stated in the section above. Transitioning smoothly involves comparing existing reporting practices to these standards and identifying gaps that need addressing.
Investing in Data Management: A crucial aspect is enhancing data management capabilities. As reporting requirements become more granular and data-driven, companies should put in place internal systems and processes to efficiently collect, process, and analyze sustainability data. This facilitates accurate reporting and enhances transparency.
Building Internal Capacities: Preparing for CSRD and ESRS requires more than just procedural adjustments. It demands a shift in mindset and capabilities. Companies should invest in training and building internal capacities to ensure that teams are well-versed in the new reporting standards and can navigate the complexities effectively.
