Legislating Sustainability: The CSRD and Why it Matters
The EU’s newest legislation is a groundbreaking, much-needed standard that will ensure financial, social and environmental information is given equal weighting in companies’ annual performance reports.
Senior consultant in our London, UK team, Helen has a background in social and environmental impact, communications and stakeholder engagement.
The landscape of reporting environmental and social issues is changing. Mandatory disclosure is increasing, both in the requirements and in the scope of companies that are required to report. What was a ‘nice to have’ is now a must in an increasing number of jurisdictions.
The EU is leading this trend with the introduction of the Corporate Sustainability Reporting Directive (CSRD)—a new and improved legislation that requires in-scope companies to give equal weighting to non-financial performance as they would to their financial performance.
Here’s what you need to know, as a business leader.
What is the Corporate Sustainability Reporting Directive?
The CSRD replaces and is wider in scope than the Non-Financial Reporting Direction (NFRD), aiming to bring sustainability reporting to the same level as financial reporting for all listed companies in the EU market.
Which Companies Will the CSRD Apply To?
The reporting obligation applies to all listed companies in the EU market, specifically:
- all listed companies on the EU-regulated market (including listed SMEs, but no micro-enterprises)
- all large companies exceeding two of the three following criteria (as per the Accounting Directive 2013/34/EU):
- 250 employees during the financial year
- balance sheet totalling EUR 20 million or more
- net turnover of EUR 40 million or more
- non-EU companies generating a net turnover of more than EUR 150 million in the EU and that have at least one subsidiary or branch in the EU must follow the criteria applicable to EU companies
That’s a lot of companies…it is estimated over 50,000 companies will have to report according to the CSRD (in comparison to 12,000 within the scope of the NFRD).
When Will Reporting Start?
Reporting requirements will be phased. Companies under the scope of the NFRD will have to begin reporting in January 2024, large companies not presently subject to the NFRD will need to report from January 2025 and listed SMEs must begin reporting in January 2026.
What Will Companies be Expected to Report On?
The exact reporting standard (EU Sustainability Reporting Standards or ESRS) is to be confirmed by the European Financial Reporting Advisory Group (EFRAG) by June 2023. They will look to align with other standards, including the EU taxonomy, the GRI, SASB and other sustainability standards. A draft version of the standards includes mandatory reporting on two cross-sector standards and 11 environmental, social and governance standards. Company and sector-specific reporting standards will follow in subsequent years. An SME may have to report according to different standards than a non-EU-based company for example.
Essentially companies will need to report on information necessary to ‘understand the company’s impacts on sustainability matters and how they affect the company’s development, performance and position’. This includes aspects of business strategy, governance of ESG issues, reporting on material environmental and social factors, including those within the business supply chain.
Key additions to the CSRD include double materiality and value-chain impacts. These encourage businesses 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 has focused on the outside-in risk to enterprise value of social and environmental issues. Requiring double materiality, that is, inside-out impacts as well as outside-in risks, is a key development within the CSRD.
How Will Companies Disclose Sustainability Data?
Sustainability-related data will be disclosed within the company’s annual report alongside financial performance. Third-party assurance of sustainability reporting will be mandatory. Limited assurance will be mandatory from 2024, but this will move to Reasonable Assurance over time, which demands more transparency and auditing to demonstrate authenticity of the information captured.
Why is the CSRD Important?
Ultimately, this legislation is one of many initiatives to ensure businesses and investors place equal importance on their financial and non-financial performance.
This is one of many initiatives (both within the EU and beyond) to bring a consideration of environmental and social factors into business strategic planning. With a wider scope than its predecessor, the CSRD will have significant impacts beyond European soil, encompassing companies that are not based in the EU. It will also apply to more European companies than before, including SMEs. Making sure you’re compliant and understanding what you are required to report upon is therefore of high importance for European and multinational companies.
The inclusion of third-party assurance for all reporting is also an important aspect of the new directive–an attempt by the EU to limit greenwashing and companies’ making unsubstantiated claims concerning their sustainability impact.
Does the CSRD Go Far Enough?
The CSRD is ground-breaking. It is a monumental effort to introduce legislation that brings sustainability-related performance in line with financial performance. This will be a game changer for ‘in-scope’ companies and the wider ecosystem.
However, the standards and topics that companies must report on need to be revisited and enhanced if meaningful action is to take place. Although double materiality is written into the new reporting standards within the CSRD, context-based performance is not.
Without context on how a business is doing in key topics areas in relation to an external norm or condition, reporting will only go so far. This is an important distinction–measuring performance in relation to social norms and ecological limits is vital if we are to understand how sustainable any business is. To quote Adam Garfunkel, Junxion’s Managing Director:
Moving from reporting on a business’ impact on environmental and social topics, to reporting on a business’ performance in relation to global norms and thresholds, is missing from the current CSRD reporting standard. But it is vital if companies, their investors and their wider stakeholders are to truly understand how sustainable a company is.
What Does the CSRD Mean For Business Leaders?
This is one of many reporting obligations that businesses, investors and other financial and non-financial entities must conform to as the world continues to take action on environmental and social crises facing us today and in the future.
Climate-risk reporting is now becoming mandatory across multiple jurisdictions, with frameworks such as the Taskforce for Climate-related Financial Disclosure (TCFD) in the UK (and beyond!) and the SEC changes in the USA making reporting on climate risks obligatory for many companies.
But a business impacts more than just the climate….and there is emerging legislation mandating businesses to not only monitor, but improve their impact on other, material environmental and social issues. Beyond climate risk reporting, the EU Deforestation Regulation (EUDR) and the Taskforce for Nature-related Financial Disclosure (TNFD) are ensuring further attention is given by organizations to nature and biodiversity-related issues. The EU Circular Economy Action Plan and the phasing out of disposable plastic in the UK is one part of growing legislation to increase the circular economy in these jurisdictions.
We can confidently assume that increasing regulation and reporting on sustainability is the direction of travel. In line with this trend, as a business leader you must:
- Instil a governance system that ensures sustainability-related topics are prioritised as much as financial performance, for example by including sustainability targets in job descriptions and tying compensation to them
- Comprehensively understand your material issues–identify what environmental and social factors you are impacting
- Take bold action to address these material issues–setting context-based goals in line with environmental and social thresholds and norms and using meaningful indicators to measure progress, such as the new Sustainable Development Performance Indicators (SPDI) issued by UNRISD.
- Measure and report regularly and transparently on your progress
These factors are all addressed within a sustainability strategy that is developed in line with your business strategy. Are you stressed about incoming regulations? Reach out if you’d like to know how Junxion can help set up your organization for success, ensuring you are ready for current and future sustainability-led legislation.