In today’s rapidly evolving corporate landscape, sustainability has emerged as a crucial aspect of business operations. As companies recognize the significance of environmental, social, and governance (ESG) factors, sustainability reporting has become an integral component of their strategic frameworks.
The Corporate Sustainability Reporting Directive (CSRD) marks a significant milestone in the realm of sustainability reporting, necessitating a comprehensive understanding of its implications for businesses. As the first companies prepare to apply the new rules for the first time in the 2024 financial year, with reports published in 2025, it is crucial for organizations to familiarize themselves with the requirements and opportunities presented by CSRD. This article serves as a comprehensive guide, focusing on CSRD lifecycle and its impact on sustainability reporting practices, while also exploring the associated business benefits.
Applicability
The CSRD applies to the following undertakings:
- Large EU public interest companies: this includes EU-listed companies, with the first reporting deadline set for January 2025, covering the financial year 2024.
- Large EU companies, which exceed at least two out of the three criteria:
- balance sheet total exceeding €20 million,
- net turnover exceeding €40 million, and
- average number of employees during the financial year exceeding 25
are subject to annual reporting obligations starting from January 2025, covering the financial year 2024.
- Small and medium-sized EU companies: EU companies classified as small and medium-sized enterprises (SMEs) with the first reporting deadline set for January 2027, covering the financial year 2026.
The CSRD extends its applicability to non-EU entities:
- Non-EU companies with transferable securities listed on an EU-regulated market with the first reporting deadline depending on their size.
- A company outside of the EU with a net turnover over €150 million in the EU for each of the last 2 consecutive financial years and fulfilling one of these conditions:
- At least one subsidiary in the EU considered a “large company” as stated in the CSRD
- At least one subsidiary that is listed in an EU-regulated market
- A branch in the EU with a net turnover the previous year of over €40 million
These companies will need to disclose on a consolidated global group level their 2028 financial year in 2029.
Reporting
Reporting is done on the basis of sustainability reporting standards adopted pursuant to Article 29b CSRD, being the European Sustainability Reporting Standards (ESRS).
Companies are required to report specific sustainability-related information in their annual reports. This includes disclosing their business model and strategy, time-bound targets for greenhouse gas emissions reduction, the role of administrative bodies, sustainability policies, and incentive schemes. They must also describe their due diligence process, actions taken to address adverse impacts, principal risks, and relevant indicators. Auditors play a crucial role in auditing the sustainability information reported. While EU entities have comprehensive reporting obligations, non-EU entities may have specific requirements related to their EU activities. The CSRD aims to enhance transparency and comparability in sustainability reporting, ensuring meaningful and reliable information is provided to stakeholders.
Sanctions
At the moment of writing, the CSRD has not been fully implemented and is expected to come into effect in the Netherlands by ultimately July 2024.
Non-compliance with the CSRD can result in various consequences for companies, but specific penalties are determined by individual EU member states during implementation. These penalties may include financial fines, administrative measures, and reputational damage. In the Netherlands, for example, companies failing to comply with CSRD obligations may face potential sanctions including fines. It is crucial for companies to stay informed, adapt their reporting practices, and seek legal and sustainability expertise to ensure CSRD compliance and mitigate associated risks.
It is essential for organizations to diligently adhere to the CSRD requirements, seek legal counsel, and implement robust compliance measures to mitigate the risks associated with non-compliance and ensure adherence to the directive’s provisions.
Process
Companies in scope of the CSRD will need to implement the following high-level steps to achieve compliance: <picture – see below>
- Establishing material sustainability themes, KPIs from both the impact and financial perspective (double materiality) and gather relevant insights from external and internal stakeholders.
- Screening current reporting practices and disclosed KPIs versus the outcomes of the materiality assessment.
- Establishing board and senior management responsibilities over material sustainability topics, including a function ultimately responsible for sustainability reporting and controls. Assigning owners to KPIs.
- Modifying the business model and strategy to align with 1.5 °C transition pathway and ensuring integration of material sustainability topics into core business.
- Operationalizing the strategy by defining targets, baselines, data requirements, functions and stakeholders involved. Creation of a viable action plan.
- Dashboard deployment and continuous monitoring and evaluation of progress against set targets.
- Disclosure of material, high-quality information in the annual report in line with the ESRS requirements and expectations of users of information and affected stakeholders.
Governance, data, and systems
CSRD requires companies to collect and process many data points from various sources. This entails siloes need to be broken in place of enhanced cross-functional collaboration between sustainability, finance, legal, audit, risk, and other functions. Companies should be leveraging their existing financial data collection systems and internal controls – an integrated reporting process drives robustness of the data and minimizes implementation costs. CFOs will have a prominent role to play to ensure transparency and auditability of the process.
The integration should be further supported by an auditable, finance-grade IT system which provides a value chain wide single source of truth and allows to capture and track ESG performance beyond annual reporting. A single repository of information is the enabler of informed strategic decision-making and organization-wide transition towards a sustainable economy.
Conclusion
The lifecycle of CSRD is not only a compliance exercise, but entails to pursue various phases and multidisciplinairy actions in order to establish CSRD readiness through a company’s entire organization and it’s business strategy.
Authors of this article are Bart Wolters (Partner M&A and ESG – HVG Law) and Will Weerts (Partner and ESG leader- EY NL Consulting), in cooperation with Emma Farid (Energy and ESG – HVG Law) and Jan Renkas (ESG – EY NL Consulting).
