The EU is not devoid of ESG reporting. In fact, the ESG wave first started in this region. There exists reporting frameworks like NFRD (Non-Financial Reporting Directive) launched in 2018 and SFDR (Sustainable Finance Disclosure Regulation). But these frameworks are now said to be old-fashioned that do not keep up with contemporary sustainability trends and requirements. A lot has changed in the past few years, including the EU’s ambitious sustainability goals. Thus the EU was in need of a new, modified ESG reporting framework which suited its agenda and filled the lacunae in the existing framework. And this need reached a conclusion with the introduction of CSRD, i.e. Corporate Sustainability Reporting Directive. The proposal for CSRD was presented by the European Commission in April 2021 as part of the European Green Deal and the Sustainable Finance Agenda. In February 2022, the proposal was unanimously agreed to by EU member states. In June 2022, the European Parliament and the Council provisionally agreed to the proposal. On 28th November 2022, the European Council formally approved the legislative enactment of CSRD.
Companies in the EU will soon be subject to detailed sustainability reporting with CSRD having received the final approval. It brings both large companies and listed SMEs within its radar. Not only they but also non-European companies that are generating revenue in the EU over a net turnover of 150 million Euros are required to report under the framework. It will take effect at different times for different types of companies beginning in 2025. Let’s have a look at the timescales.
2025: Companies already subject to NFRD
2026: Large companies not currently subject to NFRD
2027: Listed SMEs (except micro undertakings), small and non-complex credit institutions, and captive insurance undertakings
2029: Non-EU companies that generate 150 million euros in the EU
CSRD serves many purposes. It is a lens through which a company’s accountability can be increasingly scrutinised. It resolves the discrepancies resulting from fragmented reporting frameworks and brings in the needed element of uniformity. It facilitates the transition of the present economy into a sustainable economy. It aims to create an impact on society by making organisations accountable for their unsustainable actions. It encourages companies to possess a balanced approach towards profits by taking into consideration people and the planet. It will also make publicly available the environmental and social actions that companies have taken and are planning to take, helping ESG enthusiasts to make informed decisions.
Under CSRD, companies are expected to report on the effects of external parameters such as global warming or other social issues within their business activities. In addition, companies have to report on their sustainability roadmap created to fight these obstacles. CSRD demands a detailed reporting procedure wherein companies are required to assess not only their own ESG data but also their subsidiaries’ and value chains’. It complements and is drafted in line with SFDR and the EU Taxonomy Regulation.
CSRD reporting requires company disclosures on the following aspects-
a. Environmental: climate change adaptation and mitigation, circular economy, pollution control, biodiversity and ecosystems.
b. Social: gender equality, equal treatment, equal opportunities, equal pay for equal work, training and development, inclusion, working conditions, health and safety, human rights, and social engagement.
c. Governance: board composition, expertise, skills, risk management, internal controls, business ethics, anti-corruption, anti-bribery, political lobbying, and the role played by management and administration to help penetrate sustainability into the organisation.
d. Strategy: business model resilience, strategies to deal with sustainability risks and suited to stakeholders’ interests and plans, and policies that correspond to Paris Agreement targets.
e. Targets: sustainability targets and implementation.
f. Policies: policies on sustainability matters.
g. Incentives: incentives offered to act sustainably.
h. Due diligence: due diligence process in place to ensure smooth implementation of sustainability plans.
i. Impact: company’s impact on sustainability issues.
j. Remedial actions: actions along with results to mitigate impacts.
k. Risks: risk assessment and management.
l. Retrospective and future data: keeping a frame of short-, medium- and long-term, and past and future qualitative and quantitative data to be provided.
m. ESRS: disclosures should be compliant with the European Sustainability Reporting Standards.
CSRD effectively replaces NFRD. It is not eradication of NFRD but simply an extension to it. It broadens the scope and is very comprehensive in nature. Since NFRD was applicable only to large and listed companies, it covered only 11,600 companies. On the other hand, CSRD aims to cover around 49,000 companies, a number which is way larger than the scope of NFRD. CSRD demands reporting on a larger range of aspects as stated above. Another development under CSRD is revolutionary. It is the mandatory audit assurance. This was optional in NFRD but now is mandatory under CSRD. The benefit of Audit assurance requirements is that they can spot and eliminate greenwashing, which happens to be a real threat in sustainability reporting.
Since CSRD has a post-dated effect at present, more guidelines pertaining to the same are expected to be unveiled with time. The underlying practical issues will only come to light once companies start reporting. However, on the face of it, CSRD appears holistic and bears a green flag from industry experts to move ahead with.
You can learn more about CSRD developments by opting for the ESG Expert Certification course from Directors’ Institute - World Council of Directors.