The EU Commission’s newly implemented Corporate Social Responsibility Directive (CSRD) has changed the ESG reporting way. The new framework is comprehensive, far-reaching, and places heightened emphasis on transparency.
Many companies are struggling to determine when and how to get started on the CSRD requirements. You need to understand the scope and objectives of the CSRD framework before you can effectively implement the new requirements, and this article aims to give you better clarity on the situation.
Before we begin, if you are in need of a corporate reporting software for your ESG and CSRD submission, check how CtrlPrint can help you deliver compliant and captivating sustainable reports.
What is ESG Reporting?
ESG reporting is a framework that requires companies to disclose their impact in the Environmental, Social, and Governance (ESG) categories.
While ESG reporting has long been a requisite for businesses globally, the regulatory landscape continually evolves.
The Environmental pillar of this framework assesses the ramifications of your business’s energy consumption and emissions output. Important factors include carbon emissions, waste management, natural resource depletion, and pollution control.
The Social portion relates to your business’s relations with stakeholders - both internal and external including employees, local communities, and company investors.
Key measures include compliance with labour laws, wage rates, diversity and inclusion, community involvement, and protection of human rights.
The Governance part of the framework assesses how a company is being managed. This part comprises a set of internal controls, policies, board formation, risk management, compliance with regulatory obligations, and transparency.
All three pillars of this framework are intertwined - for instance, the governance model is to ensure that the social and environmental models are in place and functioning.
Businesses taking a proactive approach to ESG compliance capitalise on enhanced brand reputation, regulatory alignment, and improved overall performance.
European Sustainability Reporting Standards (ESRS) and ESG
The European Commission’s Green Deal 2019 served as the impetus for the newly developed ESG regulatory framework. The initiative led the EU to develop new sustainability reporting frameworks and reframe the existing ones.
The EU Commission introduced a legislative framework Corporate Sustainability Reporting Directive (CSRD) to realise its vision of becoming a leading sustainable and green economy.
The European Financial Reporting Advisory Group (EFRAG) developed the reporting standards under the CSRD initiative. The European Sustainability Reporting Standards (ESRS) aim to develop a consistent, comparable, and reliable ESG reporting framework across borders.
The ESRSs broadly introduce four pillars of sustainability reporting including the ESG aspect.
- Cross-Cutting and General Requirements
- ESRS1 - General principles to be applied according to ESRS with no specific requirements.
- ESRS2 - Mandatory and specific essential information to be disclosed by reporting entities.
- Environmental
- ESRS E1 - Climate Change
- ESRS E2 - Pollution
- ESRS E3 - Water and Marine Resources
- ESRS E4 - Resource Use and Circular Economy
- Social
- ESRS S1 - Own Workforce
- ESRS S2 - Workers in the Value Chain
- ESRS S3 - Affected Communities
- ESRS S4 - Consumers and End-users
- Governance
- ESRS G1 - Business Conduct
The ESRS framework is more comprehensive than the existing ESG frameworks adopted globally. The ESRS compliance will be mandatory for companies under the CSRD scope which will be phased in in the coming years.
When is CSRD coming into force and who needs to comply?
The EU Commission adopted the European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD) on 31st July 2023.
The new reporting framework will gradually replace the existing Non-Financial Reporting Directive (NFRD) from 2024 onward. The EU Commission estimates that the replaced reporting framework will extend to around 49,000 entities up from 11,600 under the NFRD.
The complexity and phased implementation of the ESRSs for your business means you’ll need to assess when and how you’ll start the new mandatory reporting.
- All large entities (Listed and Unlisted) meeting the following criteria:
- Annual Turnover of €50 million
- Total Asset Valuation of €25 million
- Having 250 or more employees
- Small and Medium-Sized (SMEs) will be subject to the voluntary reporting requirements generally.
- SMEs listed on regulated markets will comply with the simplified reporting standards while unlisted SMEs will be subject to voluntary reporting requirements.
- Non-EU entities operating through subsidiaries or group entities having an annual turnover of €150 million. Or
- Owning a subsidiary or branch with €40 million annual turnover.
- Ownership of a subsidiary with debt or equity securities being traded on a regulated exchange.
- Ownership of a “Large” classified entity as a subsidiary.
Another relevant case to consider for Non-Eu companies is the following criteria:
- Any Non-EU entities with no presence in any EU member states will be exempted from these reporting requirements.
What is the timeline for CSRD implementation?
Below you will find the most up-to-date timeline for the future CSRD implementation:
- January 2023, the EU Commission officially adopts the ESRS under the CSRD framework.
- All companies previously subject to the NFRD must comply with the CSRD reporting requirements from January 2024. The first published reporting year will be 2025.
- Large entities under the widened scope of CSRD (previously unaffected by NFRD) will be required to comply from 2026 onward.
- Listed SMEs will start complying from the fiscal year 2028 onward.
- All non-EU entities meeting the described criteria will be subject to CSRD reporting requirements from 2028 onward.
The key part of the sector-specific sustainability reporting requirements is currently on hold by the EU Commission.
Why is ESG Reporting Changing?
Companies operating in the EU region were previously reporting their ESG and sustainability compliance under the Non-Financial Reporting Directive (NFRD) implemented in 2017.
The NFRD reporting framework did not fully satisfy the key stakeholders including investors. Investors didn’t see a clear picture of the financial impact of the ESG initiatives as the focus remained primarily on non-financial disclosures.
The CSRD aims to address the shortcomings of the NFRD by broadening the scope of the ESG reporting framework, mandatory compliance, and ensuring transparency from the reporting entities.
Some key factors to understand why ESG reporting is changing:
Broader Scope
The new sustainability reporting framework under the CSRD has a broader scope. For instance, the inclusion of assessment areas like biodiversity, human resources, marine resources, and workers in the value chain.
Mandatory Compliance
The mandatory compliance requirements for reporting entities under CSRD will be phased in in the coming years.
The ESRS Double Materiality Assessment
Reporting entities will assess the reporting factors through the double-materiality assessment(Impact and Financial) under the ESRS.
The reporting entity’s impact on sustainability factors through its operations, services, and products will be assessed. The Financial Materiality check assesses the impact of sustainability measures on the reporting entity - revenue, cash flows, financing, and growth aspects.
Development of the Sector-Specific Standards
The CSRD will also introduce industry or sector-specific reporting standards in the coming years.
How will the CSRD change ESG reports and the CFOs responsibilities?
The biggest limitation of ESG reporting under the NFRD was the lack of integration with the finance function. Investors and regulators argued they were unable to measure the financial impact of the ESG and sustainability actions of a business.
Transitioning to the CSRD also means that the company’s CFOs will get busier. The new sustainability reporting framework will require the finance and sustainability functions to converge.
Some key changes the CSRD introduces are:
- The sustainability reporting scope extends to all large and listed SMEs.
- The sustainability and ESG reports will now be audited.
- The required information will be digitally linked to the European Single Access Point.
- The new directive introduces mandatory reporting standards under the ESRS framework to cover the ESG elements extensively.
CSRD will be part of the annual report and the emphasis will be on the financial piece of the puzzle that has been missing with the previous reporting frameworks.
Here is how the CFO being part of the C-Suite can contribute to meeting the new sustainability reporting requirements.
Data Collection
Each business operates under unique circumstances in terms of sustainability impact. The CFOs and their teams must ensure they understand the sustainability reporting points.
Their primary task will be to present quality data that clearly meets the expectations of stakeholders.
Data Reporting
The CFO and the board will take a coherent approach to ensure the quality of the collected data. These data reports will now require third-party auditing and assurance checks.
Digitalisation of Sustainability Reporting
A key step in the transition to the new sustainability reporting is the linking of data to the European Single Access Point.
Listed companies have already transitioned to digitalisation of their financial data with the help of XBRL tagging. The new emphasis will be on tagging the sustainability report with the ESRS XBRL taxonomy.
Compliance with evolving regulations
ESG and sustainability compliance requirements have been constantly evolving. The EU’s new CSRD and other reporting directives will continue to evolve.
Successful businesses will remain proactive, anticipate, and adapt to changes, thereby avoiding resource-intensive challenges.
What do the new CSRD requirements mean for your business?
Compliance with the CSRD requirements is a daunting task. The complexity and phased implementation only means you should start preparing now rather than react when you are left with no choice.
A PWC survey result showed that 63% of companies are very or extremely confident in meeting the CSRD compliance requirements. However, less than 50% of those due to report in the next six months showed readiness in the key reporting metrics like the double materiality assessment, reporting options, and validity of data.
The lack of readiness problem stems from the focus of the reporting entities solely on the financial side. The CSRD aims to change that. It now requires entities to assess, measure, and report the sustainability side of doing business inextricably linked to financial reporting.
Here are the key steps to prepare for CSRD reporting.
Assessment - What to report On?
Each business’s sustainability reporting data points are different. You’ll need to perform a double materiality assessment (DMA) and identify the Impact, Risks, and Opportunities (IROs) that are deemed material according to ESRSs.
This should be followed by a Gap Analysis to identify missing policies on ESG reporting points.
Once you are clear on the reporting topics, chalking out an effective plan for your governance and internal controls will become easier.
ESG assurance through CSRD compliance
From identifying the materiality points to data collection and assurance on reported data through third-party auditing, you’ll need to ensure CSRD compliance at each step.
A primary focus area will be data documentation, digitalisation, and transparency.
A proactive approach is to work with your assurance providers and set up a comprehensive and effective plan as early as possible.
Review and maintenance
The ESG reporting standards will keep evolving. For instance, the EU Commission plans to introduce industry-specific sustainability reporting requirements in the coming years. Therefore, you must consistently review and maintain the ESG controls in place.
Is an ESG report the same as a CSRD report?
An ESG report has remained a voluntary disclosure requirement for large entities. It focuses on the Environmental, Social, and Governance aspects of the reporting entities. It’s an essential part of the Corporate Social Responsibility (CSR) report.
The scope of the CSRD framework through the newly developed European Sustainability Reporting Standards (ESRS) includes all the ESG elements. With evolving developments and new compliance requirements, the ESG reports will become part of the more comprehensive and mandatory CSRD reports.
Overwhelmed by CSRD? Professional help is here
The CSRD framework is rooted in 12 ESRS reporting standards and hundreds of data points. You need to perform a double materiality assessment and disclosure requirements. It’s a complex whole new world of sustainability reporting.
While the CSRD may seem daunting, embracing this shift presents a unique opportunity for businesses to demonstrate leadership in sustainability.
By preparing early and seeking expert guidance, your organisation can navigate these changes smoothly, turning compliance into a strategic advantage that benefits not only your business but also the broader global community.
Working with a corporate and sustainability data reporting platform like CtrlPrint will help you create meaningful and compliant reporting solutions. Contact our sales team today to learn more about our reporting services at CtrlPrint!