Last week the European Parliament officially adopted the new CSRD. On the 28th of November, the Council is expected to approve the proposal. After the final vote, the new CSRD will enter the EU Official Journal before coming into force. To make sure you're ready, have a read below.
Sustainability disclosure consists of publicly reporting non-financial aspects of a company's performance. These refer to environmental, social, and governance (ESG) topics.
Through non-financial disclosure, organisations communicate to a wide range of stakeholders on:
Non-financial disclosure is rapidly becoming part of good business practice mainly due to an increase in regulations and external pressure:
However, organisations should not approach non-financial disclosure as a tick-in-the-box exercise, as disclosing their sustainability performance can:
The new CSRD aims to provide more verifiable, accessible and coherent non-financial data. The CSRD will act as the new fundamental sustainability reporting framework. It will be heavily based on the structure of the Global Reporting Initiative (GRI) Standard, within the EU.
The CSRD has been adopted on the 21st of April 2021. It will come into effect in 2024. This means that organisations previously required to report against the NFRD will start reporting in 2025 on 2024 progress. For other applicable companies see the timeline section.
The European Commission and the European Financial Reporting Advisory Group (EFRAG) are developing the new European Union Sustainability Reporting Standards. They will be at the foundation of the CSRD.
Reporting entities will prepare their disclosure in XHTML format to comply with the ESEF regulation and the EU Sustainability Taxonomy.
Entities that will fall under the scope of the new CSRD are:
Organisations will be categorised as 'large' entities when meeting at least 2 out of the following 3 criteria:
Non-EU-based companies with subsidiaries located in EU countries that match two out of the three previous criteria are recommended to future-proof their entire organisation by disclosing according to the new CSRD with regard to the entire entity.
The Directive does not apply to:
Moreover, the Directive also excludes listed micro-enterprises which meet at least two of the following criteria:
The excluded firms, however, can use the developed standards voluntarily.
Organisations will be requested to provide information concerning their financial and non-financial material (relevant) impacts. Therefore, organisations will have to conduct a materiality assessment, similar to what is already required by the GRI Standards (GRI3).
The European Commission and the European Financial Reporting Advisory Group (EFRAG) are developing the new European Union Sustainability Reporting Standards (ESRS).
As announced by the EFRAG, the new Standard will be heavily based on the Global Reporting Initiative (GRI) Framework.
Therefore, the concept of double materiality will be at the foundation of the new CSRD. Moreover, as the GRI started to develop sector standards, we can expect a similar approach for the new CSRD as well.
Organisations must report their overall sustainability strategy. Additionally, they have to explain how it is managed across the organisation and highlight the roadmap of their sustainability transition. It is important to draw the connection between the organisation’s sustainability and corporate strategy, as well as who from top management is responsible for executing the sustainability strategy.
Reporting entities will be required to disclose their main sustainability-related risks and opportunities, together with future ambitions and targets. They will have to provide a description of the process to identify impacts, risks, and opportunities.
Due diligence is the process of identifying and mitigating actual and potential negative impacts. Organisations will have to explain:
Organisations must report their previous sustainability performance by disclosing their KPIs and achieved results.
Organisations will be requested to communicate on their set of goals and targets to achieve their sustainability objectives.
Reporting entities will be required to extend the coverage of their disclosure to include suppliers and related supplier practices.
The CSRD requirements will trickle down into companies’ supply chains. Suppliers will have to provide additional information to allow reporting companies to report as accurately as possible.
A key requirement will be to measure and report on carbon emissions and provide a complete environmental footprint. To do so, companies will have to request their suppliers to perform carbon footprint assessments. The CSRD thus affects organisations throughout the value chain.
Non-financial communication published under the CSRD Framework has to undergo an auditing process through a third independent-party verification.
Map your existing reporting system and spot the gaps against the CSRD requirements to identify your priorities.
Make sure you are disclosing all the ESG topics you are having an impact on. Likewise, report on those issues that are influencing your business model.
When developing your sustainability strategy, set up a risk management system to promptly act on your material topics.
Develop targets and KPIs that will allow you to track progress over time and systematically report on that.
Prepare yourself to undergo an auditing of sustainability information as the new CSRD requests third-party verification.