In the first quarter of 2022, a new EU directive called the CSRD: Corporate Sustainability Reporting Directive was adopted.
What is the CSRD and what does it mean to you The CSRD requires companies to disclose data on the impacts of their activities, as well as the opportunities and risks they are exposed to regarding environmental, social, and human rights, and governance factors.
The CSRD, is a review of the current Non-Financial Reporting Directive (NFRD) and is in line with the European Green Deal objectives to counter climate change. In its crusade against climate change, the European Union carries “Sustainability”, among others, high on its banner.
Who's in? In principle the scope of the Directive targets all companies except micro-enterprises. So if you employ more than 10, or you have a net turnover of over EUR 10 million, you have the CSRD’s target on your back. This means, your company is among the 50 000 companies that need to get ready.
But, different sizes face different timelines. The CSRD will be implemented and becomes enforceable in different phases. At first companies already under the NFRD should comply to the Directive starting from the First of January 2024. In the next phase, starting 01/01/2025, all companies fulfilling 2 out of the 3 following criteria shall be taken in the scope of the CSRD:
For publicly listed SMEs, the CSRD will apply from 1 January 2026, but they have a voluntary opt-out possibility until 2028, and will be allowed to report according to separate, lighter standards that EFRAG will develop in 2023
What needs to be covered by the sustainability reporting? A specific part of the management report needs to be dedicated to the undertaking’s impacts on sustainability matters, and how sustainability matters affect the undertaking’s performance (also known as double materiality). ‘Sustainability matters’ means: environmental, social and human rights, and governance factors, including employee matters, anti‐corruption and anti‐bribery matters.
In particular, the reporting needs to mention the resilience of the business model and strategy in relation to risks and opportunities related to sustainability matters, as well as the plans and actions to ensure compatibility with a sustainable economy and with the 1.5 °C limit of the Paris Agreement.
The reporting needs to include a description of the time-bound targets related to sustainability matters set by the undertaking, including, where appropriate, absolute greenhouse gas emission reduction targets at least for 2030 and 2050, as well as a description of the progress made.
Companies will need to show the role of the administrative, management and supervisory bodies with regard to sustainability matters, and of their expertise and skills in relation to fulfilling that role or the access they have to such expertise and skills.
Companies are also required to disclose their supply chain due diligence which is specified in greater detail and must follow international conventions.
Auditing requirements After many negotiations it was decided a third party audit is required to include an opinion on the compliance with the sustainability reporting requirements and the (future) standards. The auditor’s opinion should provide ‘limited assurance’. The stricter ‘reasonable assurance’ will only be required once standards for such a ‘reasonable assurance’ will be adopted by means of Delegated Acts, no later than 1 October 2028.
What's next? The relevant reporting standards will be adopted by the European Commission through a Delegated Act. Those technical details will be developed for the Commission by the European Financial Reporting Advisory Group (EFRAG), who will prepare drafts of these European Sustainability Reporting Standards (ESRS).
A light change in the manner of reporting occurred as well. The report should be a single report in a “digital machine-readable format” (meaning written in XHTML) and should be included in your Management report instead of the Annual one. So, if there is some time left, do not wait too long. For more help, contact us to list your preparatory actions, an overview of the reporting standards and reporting templates.