April 24, 2023
As global awareness of environmental and social issues grows, businesses face increasing scrutiny for their contributions to climate change, diversity and inclusion, and ethical governance.
Finance professionals play a pivotal role in navigating this dynamic landscape, making it imperative to understand ESG reporting requirements and the new ESRS regulation.
In this blog post, we'll provide a comprehensive overview of what you need to know.
Recently, we had the honor of collaborating with PwC in a breakfast seminar held at our office, where Erik Johnson, Sustainability Advisor at PwC, shared valuable insights on the upcoming regulatory changes concerning ESG and their implications for businesses.
Below are our notes from the seminar, all errors and omissions are our responsibility alone.
The Corporate Sustainability Reporting Directive (CSRD) represents a significant expansion of the Non-Financial Reporting Directive (NFRD), encompassing a broader range of organizations. With its implementation, over 50,000 companies are expected to fall under its purview, leading to an approximate quadrupling of the number of covered entities.
Moreover, an estimated 10,000 non-EU companies with substantial operations in Europe will also be subject to these new regulations. This article provides an overview of the CSRD, exploring its scope and the disclosures it requires, while shedding light on its connection to the EU Taxonomy.
The Impending ESG Revolution
By 2025, all large European companies will need to adhere to the new regulations on ESG reporting for their annual reports, covering the year 2024. Publicly listed companies will have to comply with these requirements a year earlier, for their 2024 reports. Although the ESRS framework encompasses Environmental, Social, and Governance components, its primary focus is on Environmental reporting.
In effect, the ESRS (European Sustainability Reporting Standards) is a reporting standard that will be used to meet the requirements of the EU CSRD. The EU CSRD sets out reporting requirements and obligations, while the ESRS provide a framework and methodology for reporting on sustainability issues.
Who is subject to the CSRD?
The CSRD applies to EU-based public companies, except for micro-enterprises. Additionally, it encompasses all EU-based private organizations classified as "large," defined as those meeting two or more of the following criteria: (1) having 250 or more employees, (2) generating annual revenues of €40 million or more, or (3) possessing a balance sheet exceeding €20 million.
Non-EU parent companies may also fall under the CSRD if their EU subsidiaries meet the aforementioned criteria. Consequently, reporting obligations may extend to the EU subsidiaries, with some companies opting for consolidated reporting at the global level. However, future requirements will also bring non-EU companies into the regulatory framework, mandating reporting for the entire entity, including the parent company, based on specific conditions.
Fig 1. ESG reporting requirements from 2025 onwards. See more on the official site, EFRAG
What disclosures does the CSRD require?
The CSRD introduces technical standards called the Environmental, Social, and Governance Reporting Standards (ESRS), comprising 12 draft standards.
Two standards, namely general requirements and general disclosures, cover broad environmental, social, and governance topics. In addition to these, there are five environmental, four social, and one governance topical standards that provide detailed guidelines for disclosures and metrics concerning specific areas.
For a comprehensive understanding of the standards, consult our CSRD guide.
What are the overarching aspects of ESRS requirements?
1. Double Materiality Assessment: This integrated approach connects ESG factors with business performance drivers, placing it at the heart of a company's strategic toolbox. The classic SWOT analysis has a new companion.
One of the key aspects of the CSRD is the requirement for filers to conduct a "double materiality" assessment. This assessment entails identifying how a company's operations impact people and the environment, as well as understanding how sustainability-related developments impact the organization.
Materiality is determined if the impact is considered significant from either or both perspectives. The assessment involves soliciting input from various stakeholders, including scientific experts, customers, employees, and investors, who evaluate risks and opportunities across the CSRD-covered topics.
Qualitative and quantitative insights gleaned from these assessments aid in identifying material topics. Consequently, companies focus their reporting efforts on areas that are relevant to both the organization and society at large.
Fig 2. Example of a double materiality assessment.
2. Data Gathering:
Irrespective of a company's materiality assessment, the CSRD establishes a baseline requirement for reporting. This includes comprehensive climate change reporting, surpassing the guidelines provided by the Task Force on Climate-related Financial Disclosures (TCFD), upon which the CSRD is based.
The mandatory climate change reporting encompasses the measurement and disclosure of a company's full scope 1-3 emissions footprint, evaluation of climate risks, and policies related to climate change mitigation and adaptation.
With ESRS requiring the disclosure of 1,144 data points and over 95% of company emissions stemming from suppliers, supplier management is crucial. Employ a systematic tool for asking pertinent questions and engaging with the right stakeholders among your suppliers.
To ensure that sustainability reporting attains a level of rigor comparable to financial reporting and to combat greenwashing, the CSRD introduces an audit assurance requirement. Starting with limited assurance in 2026, companies will be required to obtain reasonable assurance two years later.
For many organizations, this assurance requirement will necessitate a heightened focus on data accuracy, completeness, and controls.
The CSRD and EU Taxonomy
The CSRD and EU Taxonomy are complementary frameworks within the European Union's sustainability agenda. While the CSRD focuses on corporate sustainability reporting, the EU Taxonomy establishes a classification system for environmentally sustainable economic activities.
Companies subject to the CSRD reporting requirements will also be required to comply with the EU Taxonomy. This means that in addition to disclosing their sustainability performance and impacts, companies must align their reporting with the taxonomy's criteria for determining whether their activities are environmentally sustainable. The EU Taxonomy provides a standardized framework for identifying which economic activities contribute to the EU's environmental objectives, such as climate change mitigation, adaptation, and the transition to a circular economy.
The CSRD reporting obligations will be incorporated into companies' annual sustainability reports, which will also include information related to the EU Taxonomy. This integration ensures that companies provide comprehensive and consistent information regarding their sustainability performance, both in terms of their overall impact and alignment with environmentally sustainable activities.
By linking the CSRD with the EU Taxonomy, the European Union aims to create a harmonized and transparent reporting framework that enhances comparability, facilitates decision-making, and supports the transition to a more sustainable economy. The combined efforts of the CSRD and EU Taxonomy contribute to the EU's broader sustainability goals, including the European Green Deal and the Paris Agreement.
Leveraging ESG through ruthless prioritisation
Renowned companies like FLSmith, Carlsberg, and Novo have adopted clear, effective ESG strategies that reflect their internal double materiality assessments. Carlsberg's "Together Towards Zero Water Waste" initiative exemplifies this approach, targeting water waste—a key component in the beverage industry—to simultaneously benefit the environment and the bottom line.
Conclusions
The Corporate Sustainability Reporting Directive (CSRD) represents a significant expansion of reporting requirements, encompassing a larger number of companies and introducing stricter guidelines for sustainability disclosures. The CSRD extends reporting obligations to EU-based public companies, large private organizations, and non-EU companies with significant operations in Europe. It incorporates the concept of "double materiality" assessments, mandatory climate change reporting, and the need for audit assurance to ensure reporting accuracy and combat greenwashing.
Furthermore, the CSRD is closely linked to the EU Taxonomy, which establishes a classification system for environmentally sustainable economic activities. Companies subject to the CSRD reporting requirements must also align their reporting with the taxonomy's criteria, promoting transparency and consistency in sustainability reporting.
The integration of the CSRD and EU Taxonomy demonstrates the European Union's commitment to driving sustainability and facilitating the transition to a greener economy. By providing a robust reporting framework and promoting environmentally sustainable practices, the CSRD and EU Taxonomy contribute to the EU's broader sustainability agenda and support the achievement of global climate and environmental goals.
Day 1 ESG
As with any new process, the recommendation from both large and mid-sized corporations that have gone through the ESG process, is to start with a small scope and start now. Remind internal stakeholders and leadership that this is a new process and having a trial run will help your business be in much better shape for 2025, as the data gathering from your suppliers will improve dramatically over time.
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Further ressources
EFRAG; the organisation creating the ESRS requirements adopted by the European CSRD Directive - First draft of ESRS
FinanceHQ - the community for modern finance leaders, who has a series of events and seminars - amongst other on ESG reporting. FinanceHQ Site
Advisors
PwC - ESG services
EY - ESG services
Deloitte - ESG services
The Footprint Firm - ESG services
ESG Tools
Sphera - ESG reporting tools
Persephoni - ESG reporting tools
SAP Sustainability Control Tower - ESG reporting tools
Light's Footprint tool - ESG reporting tools