The Corporate Sustainability Reporting Directive (CSRD) expands upon the previous Non-Financial Reporting Directive (NFRD) in several key ways, broadening the scope of companies that are required to comply and the depth of reporting required.
Companies covered by the CSRD are large or listed companies within the European Union or any non-EU companies generating a net turnover of more than €150 million in the EU and having at least one subsidiary or branch in the EU.
Large companies are defined as having a net turnover of more than €40 million, or a balance sheet total of more than €20 million. The number of companies under NFRD has now been expanded from 11,000 to almost 50,000 under the CDRD.
In addition, there are more detailed reporting requirements including mandatory EU sustainability reporting standards that require any sustainability information to be verified.
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Emer Keaveny, sustainability reporting and assurance services partner, EY Ireland, points out that companies are required to not only report their own sustainability performance but also on sustainability in their value chains.
“This is expected to enhance transparency and facilitate the comparison of sustainability performance across companies,” says Keaveny.
The new directive requires companies to report on more than 1,000 data points covering environmental, social and governance (ESG) aspects.
“For example, under environmental factors reporting will look at elements such as greenhouse gas emissions and carbon footprint, energy consumption and efficiency, water usage and management, pollution, biodiversity and ecosystem impact.
“While social will cover employee wellbeing, diversity, and inclusion, human rights due diligence and impacts, labour practices, including working conditions and fair wages, community engagement and customer satisfaction and product safety,” she says.
Governance factors will look at corporate governance structures and practices, anti-corruption and bribery measures, risk management processes related to sustainability issues, and executive remuneration linked to sustainability performance.
The CSRD introduces mandatory EU sustainability reporting standards, which are more extensive, specific and standardised compared to the diverse voluntary frameworks and guidelines that companies currently use, such as the Global Reporting Initiative, Sustainability Accounting Standards Board and others.
“The CSRD requires reporting on the entire value chain, including supply chains, which goes beyond the company-centric focus of many existing standards,” says Keaveny.
The CSRD is expected to make sustainability reporting more consistent, comparable, and reliable across the EU, providing stakeholders with better information to make informed decisions. It will also likely influence global reporting practices as non-EU companies operating in the EU market will need to comply with these new requirements.
“Ensuring compliance with the CSRD requires organisations to undertake a series of strategic and operational steps, particularly in the areas of data collection and governance structures. The CSRD’s expanded scope and detailed reporting requirements mean that organisations must have robust systems and processes in place to accurately report on sustainability matters,” says Keaveny.
The CSRD is set to come into effect in stages, with different implementation dates depending on the type of organisation with strict criteria affecting different cohorts.
Companies already subject to the NFRD need to comply with the Corporate Sustainability Reporting Directive for fiscal years starting on or after January 1st, 2024. This means that the first CSRD reports for these companies will be published in 2025, covering the 2024 fiscal year.
“It’s important for organisations to be aware of these deadlines and begin preparing for compliance well in advance. This preparation includes understanding the specific reporting requirements under the CSRD, assessing current sustainability reporting practices, enhancing data collection and governance structures, and engaging with stakeholders throughout the process,” Keaveny adds.
Organisations that are not adequately prepared for CSRD reporting may face several challenges and risks, which can have significant implications for their operations, reputation, and financial performance. These implications include penalties, reputational damage, restrictive access to investor relations and or capital, operational disruptions, supply chain risks and competitive disadvantage.
She advises affected companies to begin preparation early and establish governance structures with defined roles and responsibilities for sustainable reporting.
“We advise companies to develop robust systems for data collection, management and analysis. This may involve investing in new technologies or enhancing existing systems to ensure data quality and reliability,” says Keaveny.
By proactively addressing these challenges and implementing strategies to mitigate risks, organisations cannot only ensure compliance with the Corporate Sustainability Reporting Directive but also leverage sustainability reporting as a tool for strategic decision-making and value creation.
Sarah Moran, director and ESG advisory lead with KPMG in Ireland, believes the Corporate Sustainability Reporting Directive will fundamentally change the face of the annual report, enhancing transparency, comparability and accountability for sustainability-related credentials reported in the market.
“Governance, resource and data structures will need to significantly adapt to accommodate these new reporting standards which will serve to demonstrate the interconnectedness of financial and non-financial performance, whilst calibrating business model resilience to our already changing climate, society and economy,” she says.