Corporate Sustainability Reporting, also known as non-financial reporting, is a framework that enables companies to disclose their environmental, social, and governance (ESG) performance. It provides critical insights beyond traditional financial metrics, covering areas such as sustainability, social impact, and corporate governance. This approach aligns business practices with global standards for corporate responsibility, creating value not only for investors but also for the broader community of stakeholders.

A Bit of History: NRFD, CSRD, EFR…

Adopted in 2014, the “Non-financial Reporting Directive” (NFRD) (Directive 2014/95/EU) was the EU’s first directive for non-financial reporting, mandating large companies to disclose ESG information. Its primary goal was to enhance transparency and accountability in large companies (over 500 employees) by requiring them to report on environmental, social, and governance (ESG) matters. Companies were required to disclose non-financial information related to environmental protection, social responsibility, human rights, anti-corruption, and diversity. The directive introduced the concept of “double materiality,” meaning companies had to report on how sustainability issues affected them (financially material) and their impact on society and the environment (non-financially material). However, the NFRD had non-binding guidelines and lacked standardization, leading to inconsistent and less comparable reports across companies.

Proposed as an update to the NFRD and adopted in 2022, the “Corporate Sustainability Reporting Directive” (CSRD) provides a more rigorous framework, making it more comprehensive and standardized for a broader range of companies with stricter requirements. The CSRD mandates the use of standardized European Sustainability Reporting Standards (ESRS) developed by the European Financial Reporting Advisory Group (EFRAG). It also introduces limited assurance requirements for reported data, which will eventually evolve into full audits. Reports under the CSRD must be prepared in a digital, machine-readable format to ensure easy access and usability by stakeholders, including investors and regulators.

« Extra-financial reporting » is a general term that applies to any non-financial disclosures. It is not an official EU directive but is often used informally to refer to frameworks surrounding non-financial information reporting.

Components and Scope of the CSRD

The Corporate Sustainability Reporting Directive (CSRD) introduces a rigorous framework for sustainability reporting, focusing on enhancing transparency, comparability, and accountability. Companies must report on a wide array of sustainability topics, including:

• Environmental Impact: Climate change mitigation, biodiversity, resource usage, etc.
• Social Impact: Workforce diversity, employee welfare, human rights, etc.
• Governance: Anti-corruption practices, board diversity, and overall corporate governance.

Unlike previous frameworks, the CSRD mandates limited assurance for sustainability reports, which will transition to full audits in the future to verify the accuracy of reported data.

Companies Subject to the CSRD

The CSRD broadens the scope of companies required to report, moving beyond the limitations of the NFRD. The directive applies to:

• Large companies that meet at least two of the following criteria:
  • More than 250 employees.
  • Net revenue exceeding €40 million.
  • Total assets over €20 million.
• Listed Small and Medium-Sized Enterprises (SMEs) on EU-regulated markets, excluding micro-enterprises (companies with fewer than 10 employees and a revenue or a balance sheet below €700,000).
• Non-EU companies generating significant turnover in the EU, with at least €150 million in revenue in the EU and either a branch or subsidiary located within the EU.

This broad reach ensures that larger organizations and significant players in the EU economy adhere to higher sustainability reporting standards, aimed at enhancing transparency, comparability, and accountability across industries.

CSRD Timeline and Reporting Milestones

• 1 January, 2024: The CSRD officially takes effect. Companies already subject to the NFRD will be the first to report under the new CSRD standards, collecting data starting in January 2024 for their first report, due in 2025.
• 1 January, 2025: CSRD obligations extend to large companies that were not covered under the previous NFRD. These companies will report in 2026, covering the 2025 fiscal year.
• 1 January, 2026: CSRD applies to listed SMEs, small and non-complex credit institutions, and captive insurance undertakings. Their first report, based on 2026 data, will be due in 2027.
• 1 January, 2028: Non-EU companies that generate a net turnover of more than €150 million in the EU and have at least one subsidiary or branch in the EU will be required to comply, starting in 2029.

CSRD and SDGs (Sustainable Development Goals)

The CSRD aligns closely with the United Nations Sustainable Development Goals (SDGs), promoting transparency in business practices and driving corporate responsibility across ESG factors. Key SDGs supported by the CSRD include:

• Environmental Goals: The CSRD addresses SDGs like climate action (Goal 13), responsible consumption and production (Goal 12), and life on land (Goal 15), mandating reports on greenhouse gas emissions, climate change adaptation, and resource use.
• Social and Economic Goals: By mandating disclosures on workforce diversity, human rights, and employee treatment, the CSRD also supports SDGs related to decent work and economic growth (Goal 8), gender equality (Goal 5), and reduced inequalities (Goal 10).
• Governance Goals: The CSRD’s focus on anti-corruption and diversity also contributes to SDG 16 (peace, justice, and strong institutions), fostering more transparent and ethical corporate governance.

Challenges in Implementing the CSRD

The CSRD presents several challenges for companies:

• Data Collection and Management: Accurate tracking and measurement of ESG metrics can be difficult, especially for companies with limited experience in sustainability reporting.
• Compliance Costs: Meeting CSRD requirements can be financially burdensome, especially for SMEs that are newly included in the reporting scope. Costs include investments in reporting technology, staff training, and third-party auditing.
• Resource Intensity and Expertise: Companies need skilled personnel and systems to manage the increased reporting complexity and evolving regulatory requirements.
• Standardization Issues: While the ESRS aims to standardize reporting, variations in industry practices and regional differences can make full alignment difficult.
• Audit and Assurance Requirements: Companies must ensure the accuracy and verifiability of their ESG data, which requires robust audit processes and internal controls.
• Adapting to Evolving Standards: As sustainability regulations evolve, companies must continuously update their reporting processes to meet new standards.

Pragmatic Implementation of the CSRD

To effectively implement the CSRD, companies should adopt a phased, structured approach:

• Establish a Cross-Functional Task Force: Involve representatives from finance, sustainability, legal, IT, and human resources to manage the CSRD implementation.
• Conduct a Gap Analysis: Compare current ESG reporting against the CSRD’s requirements to identify areas for improvement.
• Invest in Data Management Systems: Use technology to streamline data collection, tracking, and reporting, ensuring accuracy and compliance.
• Train Staff: Equip staff with the necessary skills and knowledge to meet the CSRD’s requirements.
• Plan for Limited Assurance: Prepare for external auditing of ESG data, with potential future audits moving towards full assurance.
• Align ESG Strategy with Reporting: Ensure the company’s ESG strategy is aligned with reporting requirements to create long-term sustainability value.
• Monitor Compliance: Set a clear timeline for CSRD compliance and monitor progress regularly.

By following this structured approach, companies can not only achieve compliance with the CSRD but also drive long-term value through enhanced sustainability practices, aligning with global goals like the SDGs and boosting investor confidence.

Oct 24 - Nystio