AUTHOR – Michela Tallarico
EU CSRD: Obligations and timeline of the upcoming sustainability reporting rules in Europe
What is the EU CSRD?
The EU Corporate Sustainability Reporting Directive (CSRD) is a new reporting policy that has been developed by the European Financial Reporting Advisory Group (EFRAG) at the request of the European Commission. It is going to replace and enhance the current Non-Financial Reporting Directive (NFRD) and is set to become a real game changer in the European sustainability reporting scenario – making it more comprehensive and standardized.
Following the new EU CSRD guidelines, organisations will have to submit sustainability disclosures on a variety of areas relating to environmental and social challenges, as well as detail how their business strategy will mitigate and reduce risks connected with these environmental and social aspects. As they follow the new guidelines, companies will also be required to take into account and report according to their double materiality – which represents a significant change from the previous NFRD regulation and means looking at inside-out impacts as well as outside-in risks.
The previous standard applied to a smaller number of businesses compared to the EU CSRD, which has a far greater set of criteria for inclusion. As for its standardization, although full details have not been disclosed yet, the EU CSRD looks to be aligning with already existing widely recognised reporting standards such as the EU Taxonomy, GRI, SASB and TCFD, resulting in less vagueness of reporting requirements, better data consistency and transparency. On a larger scale, a more equal EU financial system will be made possible as a result of stakeholders being able to base their decisions on readily available, standardized sustainability data.
Who has to report to it?
The scope of companies required to report under the EU CSRD will be significantly larger compared to the NFRD which was limited to large listed EU companies. Nearly 50,000 companies – almost three quarters of all businesses in the European Economic Area (EEA) – are now expected to report to the new framework. This will be mandatory for:
All listed companies on the EU regulated market, including listed SMEs (except for micro-enterprises) – For SMEs there will be a three-year transitional period and substantial benefits to comply with the requirements, i.e. being proportionally subject to just a limited number of reporting requirements compared to larger companies, which will not encompass all reporting areas.
All large companies – The CSRD classifies a large company as one that meets two out of three of the following criteria:
- 250+ employees during the reporting year
- over €40 million of net turnover
- over €20 million of total assets
Non-EU companies – As long as they generate a net turnover in excess of €150 million in the EU and have at least one subsidiary within the European Union, they will be obliged to report at a global consolidated level to the EU CSRD.
When does it come into place?
Although delays and changes are still possible, the EU CSRD is expected to be rolled out in a phased approach starting from January 2024. All large companies already complying with the current NFRD will be the first ones to start reporting to the new regulation from 1 January 2025, covering their financial year (FY) starting in 2024. Afterwards, it will be the turn of the large companies that at the moment are not subject to NFRD. These will have to disclose their FY 2025 as of January 2026. Finally, non-EU companies with at least one subsidiary in Europe and small and medium-sized companies (SMEs) will be required to report their FY 2028 as of January 2029. For the latter, there is also the possibility to start reporting voluntarily from 2027 (disclosing FY 2026).
*First opt-in CSRD reporting for SMEs is in 2027 with FY starting in 2026
Why is it important and how is it going to affect companies’ disclosure?
This regulation aims to be much more ambitious and detailed than the current NFRD and the information will have to be publicly disclosed by businesses. The new sustainability reporting will not only cover GHG accounting metrics but also environmental, social and governance factors, including:
- mitigation and adaptation factors to climate change
- the company’s main adverse effects and actions taken to prevent these potential negative impacts
- business model and strategy aligning with the UN Sustainable Development Goals
- the 1.5 degree reduction alignment
- stakeholders’ involvement
Environmental matters will be the focal point of the framework and will be aligned with already existing regulations including, for instance, the EU Taxonomy, climate risk-related reporting in line with TCFD, and the Science-Based Targets Initiative. Furthermore, additional details on the reporting company’s social matters, including the role of the Management Board and Supervisory Board, employee treatment practices, corporate ethics, as well as bribery and anti-corruption policies and governance insights shall be included.
A pivotal addition to the EU CSRD is the concept of “double materiality”, that is inside-out impacts as well as outside-in risks. “Double materiality” requires companies to report on both the impact of sustainability on segments on their balance sheet as well as the impact companies have on the environment and society. This unique principle aims to encourage organisations to report on their impact within a business ecosystem, taking a stakeholder-centric view of the company and the impact it has on all stakeholders. Traditional financial or single materiality perspectives focus on the outside-in risk to enterprise value of social and environmental issues. Requiring the “double materiality” principle when disclosing all the relevant information is a key development within the EU CSRD.
Finally, for the first time in sustainability-related European legislation, companies will have to be prepared to have their data evaluated by an independent third party auditor in order to comply with the standard. The collection of quantifiable key figures, the setting of concrete targets, and the progress report on the achievement of these targets represent key challenges of the new reporting obligation. However, this will simultaneously give enhanced credibility and comparability to businesses within the market and entice more investors and stakeholders by showing tangible climate action plans.
How can Ecometrica help?
If your company is going to be affected by the new EU CSRD regulation and you are looking at preparing your emissions reporting and wider CSRD reporting processes, Ecometrica can track and report your carbon footprint, monitor your climate risk, as well as record the required ESG metrics.
We are accredited experts in climate metrics and since 2008, have been enabling organisations and public sectors across the globe to effectively and transparently disclose their climate impact in accordance with the most up to date standards. Thanks to our Sustainability Reporting Platform and the guidance and expertise of our Sustainability Analysts, we will make sure your data is robust and accurate, ensuring it is ready to be audited and meet the reporting and disclosure criteria. Our sustainability experts closely monitor changes to regulation requirements, enabling our clients to stay ahead of the curve in an ever-evolving sustainability disclosure requirement landscape.
Reading Time: 8 Minutes
Date Published: May 9, 2023
TLDR:
The EU Corporate Sustainability Reporting Directive (CSRD) is a new reporting framework that will be rolled out in a phased approach from 2024 in Europe. This new regulation is going to replace and improve the previous corporate sustainability reporting policy called Non-Financial Reporting Directive (NFRD), which some companies have already been following.
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