What is CSRD, who is affected by it and how can you prepare your business for reporting? Read our handy guide to stay in the know.
Table of contents:
- What is the CSRD?
- How have we arrived here?
- What information do companies need to provide?
- What other changes are coming?
- Who is affected by this change?
- What happens next?
- How can Dreher Consulting support you?
What is the CSRD?
The ‘Corporate Sustainability Reporting Directive’ (CSRD) is a new law governing the requirements for sustainability reporting in the EU and is a significant step up from the existing and relatively limited EU sustainability reporting requirements.
For any reporting company, the CSRD puts new requirements in place for the contents, the format and the processes involving sustainability reporting. The law also requires new European Sustainability Reporting Standards (ESRS) to be developed and define the content companies are required to report on.
The CSRD also expands the number of companies with activities in the European Union (EU) to which the mandatory reporting requirements apply. Its effects will inevitably affect companies based outside the EU, either directly or indirectly through competition and the value chain.
How have we arrived here?
On 10 November, 2022, the European Parliament voted ‘Yes’ to the Corporate Sustainability Reporting Directive (CSRD) proposal. The legislation was proposed in April 2021 and agreed upon with amendments in the Summer of 2022.
Companies are expected to comply with the bill, starting with the largest listed companies for fiscal year 2024, other large companies for fiscal year 2025, and listed small and medium enterprises (SMEs) in fiscal year 2026. The CSRD is part of the broader ‘European Green Deal’ program, that so far has delivered legislation including the EU Taxonomy Regulation and the revised Sustainable Finance Disclosure Regulation.
The law will bring sustainability reporting much closer to the discipline and fidelity of financial reporting and significantly impact which sustainability data will be published, how that will be collected, and which processes need to be in place to meet the additional requirements of the legislation. The effects will be felt both directly by organisations — inside and outside the EU — responsible for reporting under the CSRD norms and indirectly by organisations competing with them or those that are part of their value chains.
What information do companies need to provide?
Companies are required to report in accordance with the double-materiality principle, meaning that sustainability information should consider both the impacts caused by the organisation and those incurred. This could impact materiality assessments because understanding the impacts from both perspectives is needed to be able to report on them successfully.
According to the CSRD, relevant “sustainability matters” include all relevant environmental, social and human rights and governance factors.
Specifically, the CSRD outlines the following areas to be covered in organisations’ mandatory sustainability reporting
The ESRS will further define the contents and metrics organisations will use to report within these areas. Those standards are currently being developed by EFRAG, an EU public-private partnership on financial and sustainability reporting. By June 2023, the EU Commission will adopt secondary legislation imposing the ESRS, and by June 2024, complimentary and sector-specific information must be adopted. Different standards for small and medium enterprises and third-country undertakings will be adopted by June 30, 2024.
Organisations must provide: - “information necessary to understand the undertaking’s impacts on sustainability matters, and information necessary to understand how sustainability matters affect the undertaking’s development, performance and position.”
What other changes are coming?
The CSRD dictates the format and process requirements for sustainability reporting. One important requirement is that the reporting shall take place in the management report of the organisation. Another significant change is that the reported information will need to undergo assurance in the future, starting with limited assurance and later to a reasonable assurance standard. These assurance standards are to be developed by the European Commission by 2026 and 2028, respectively.
Who is affected by this change?
We expect many organisations inside and outside the EU to be affected directly or indirectly.
The legislation directly applies to undertakings specified by the CSRD (see table). Indirectly, organisations will be affected through their value chain. The CSRD requires companies to report on their value chain, so suppliers to CSRD-reporting organisations should expect increased requests and requirements for information. Further, we anticipate that competition between undertakings required to report under the CSRD and those that are not will increase the need for the latter to align with CSRD standards for reporting.
What happens next?
Over the next two years, the EU and its Members States will take the following actions:
- Member States need to formally transpose the legislation into their national laws within eighteen months after the official publication of the CSRD
- The ESRS first tranche needs to be adopted by the EU Commission by June 30, 2023
- The ESRS second tranche needs to be adopted by the EU Commission by June 30, 2024
Companies should be aware of the following important reporting milestones:
- Large, listed companies need to report sustainability information under the CSRD and ESRS for FY 2024 data
- All large companies need to report sustainability information following the CSRD and ESRS for FY 2025 data
- SMEs need to report sustainability information per the CSRD and ESRS for FY 2026 data
How can Dreher Consulting support you?
The introduction of the CSRD arguably marks the most significant change to date in corporate sustainability reporting, and Dreher Consulting are here for you to help with the transition. We offer a solution that provides you the information and learning you need, help you to analyse your needs for change, and support you in implementing that change.
Our solution is two-fold: first, to prepare your organisation for compliance through accurately defining the current status quo of your company and interactions (this is normally achieved through a Sustainability Assessment). Secondly, through requirement engineering we address the EU compliance targets for your industry before providing a step by step sustainability strategy to ensure you reach and exceed your goals. Regardless of where you are in the process our consultants will support you ever step of the way through change and process management.
Finally, our highly trained team will happily continue supporting you with meeting and exceeding the EU compliance standards year on year with our client focussed consulting. We take the worry out of sustainability and process optimisation. Dreher Consulting - welcome to the family!
