CSRD - What is it, does it affect you and what do you need to do?
- Terry Wills
- Jan 12, 2024
- 5 min read
The Corporate Sustainability Reporting Directive (CSRD) is transforming the landscape of corporate sustainability, impacting businesses within and beyond the European Union. This blog post takes a look into CSRD at a high-level, focusing on its requirements, data reporting, challenges, and the advantages for companies embracing these standards.
The CSRD expands on the EU’s Non-Financial Reporting Directive (NFRD), mandating detailed disclosures on environmental, social, and governance (ESG) practices for large companies and listed companies in the EU.
Who Does CSRD Apply To?
CSRD compliance is applicable to over 49,000 companies in the EU, and targets entities that have more than 250 employees and an annual turnover exceeding €40 million, or a total balance sheet above €20 million. If your organisation is below these thresholds, you can still opt to report on a voluntary basis. While this might seem like extra effort for no return, it would be expected that the scope of CSRD will be expanded in the coming years to cover businesses within a lower threshold of size, so this could be a good opportunity to get prepared early. A good example of this are listed SMEs, which can opt out, but only until 2028.
Beyond companies Headquartered in the E.U, external entities (I.e not with their HQ in the E.U) with a net turnover > €150m in the E.U and at least one branch or subsidiary in the region will need to follow CSRD for these activities.
As we have seen with regional regulations such as GDPR, they can tend to cascade in to general use outside the region they were created for, as it can be easier to just comply by default, if trading with that region is a key requirement of your operation. We may see the same with CSRD. This means further, international considerations should be understood, such as:
a) Global Supply Chains: Non-EU companies in the EU supply chain may face demands to comply with CSRD standards
b) Market Access: Access to the EU market might require meeting CSRD standards.
c) Investor Expectations: With a global shift towards sustainable investment, aligning with CSRD as the largest emerging reporting requirement might become a prerequisite for securing capital from the market at competitive rates.
d)Benchmarking Standards: As per point (c), CSRD is likely to influence global sustainability practices, with large elements of it possibly becoming part of wider global regulation. Understanding CSRD and moving closer to its requirements now could help avoid the risk of having to drive transformation later down the road, with the near-term benefit of seamless compatibility with one of the world’s largest trading blocks.
What are the main high-level reportable items of CSRD?
Using the fundamental basis of ESG as a principle, CSRD includes:
1. Environmental Impact Reporting: Emissions, energy and water usage, waste management, pollution.
2. Social Responsibilities: Labour practices, human rights, diversity, community impact.
3. Governance Practices: Management structures, risk management, ethical business practices.
What sort of data will need to be reported and in what volumes?
As with any reporting process, the type and volumes of data will depend on your business, but in general the datapoints closely follow the key reportable items of CSRD. Estimations on the total number of data points required span from 300 to 1000.
What are the key steps to enabling reporting under CSRD?
Understanding CSRD Requirements: Gain a comprehensive knowledge of CSRD specifics relevant to your industry. These may vary considerably from sector to sector and understanding the scope of your required reporting ‘Universe’ is a fundamental initial phase. Without this, however good your data or reporting is, you risk missing key reportable items. This is particularly important when considering upstream and downstream impacts, relating to clients and supply chain etc where solid data may be much harder to access.
Conducting Audit and Gap Analysis: Assess your current practices against CSRD standards to identify where there is more to do. It may be the case that other frameworks currently being used already cover a large percentage of the datapoints that need to be applied for CSRD. This step is crucial to avoid duplication of effort.
Implementing Data Collection Systems: Beyond traditional methods for data collection, intended for external reporting, CSRD brings the requirement for ‘Double Materiality’. This joins normal business performance metrics and reporting with understanding the impact (and benefits) the company’s actions are having related to ESG areas. The objective is to achieve a balance between what is important to an organisation, while supporting the environment and society through good governance and a clear purpose.
A simpler way of looking at this is by using the 3 Nested Dependences model. This suggests the economy should operate within societal limits, which in turn should respect environmental capacities, investing in both to provide balance of growth.
Developing Reporting Framework: Choose a suitable framework (like GRI or SASB) that aligns with CSRD requirements for compiling and presenting your sustainability report.
Engaging External Verification: Ensure the credibility of your report through third-party verification or auditing, which adds an additional layer of trust and transparency. This is an important consideration and may depend in the maturity and depth of in-house expertise in your organisation. Remember, all datapoints will be reported externally and there will need to be a strong level of confidence that you can stand behind them. Again, this is much more challenging when data is required to be provided via 3rd parties such as vendors.
What advantages can CSRD reporting bring (excluding basic compliance)?
1. Enhanced Brand Value and Reputation: Demonstrating commitment to sustainability can significantly boost a company's image, enhancing customer trust and loyalty.
2. Increased Investor Attraction: A growing number of investors favour companies with strong ESG profiles, making CSRD compliance a key factor in attracting investment.
3. Operational Efficiencies: Sustainable practices often lead to reductions in energy usage, waste, and resource consumption, resulting in significant cost savings.
4. Improved Risk Management: Comprehensive sustainability reporting helps identify and mitigate environmental and social risks, enhancing long-term business resilience.
5. Employee Engagement and Attraction: Companies that prioritise sustainability tend to attract and retain talent, especially among the environmentally and socially conscious workforce.
6. Market Leadership: Early adoption of CSRD standards can position a company as a leader in sustainability, setting it apart in an increasingly competitive market.
Summary
While it will be a sizeable transformation effort for most companies, understanding and implementing CSRD not only ensures compliance but also brings a multitude of benefits. As with all sustainability approaches, the true benefit is only realised when the culture, objectives, leadership, operation, and purpose of the organisation is fully aligned towards the goal. Doing only the minimum runs the risk of missing opportunities for efficiencies, innovation, and market differentiation. CRSD represents a powerful stage for organisations that are committed to ESG alignment to clearly demonstrate their depth and capabilities.
Further reading and resources.