CSRD leads the standardisation of sustainability disclosure
The newly-adopted proposal aims to optimise corporate reporting of sustainability information and boost sustainable investments.
What is ‘sustainable’? Most ESG (environmental, social and governance) professionals out there will know too well that the lack of universally agreed standards and a single taxonomy means there isn’t one straightforward answer to the question. The consequent inconsistency in sustainability reporting has been one of the biggest challenges faced by both companies and investors looking to comply and unlock sustainable capital.
In response to the situation, and as part of its ongoing efforts to drive sustainable investment and achieve 2050 goals for a carbon-neutral Europe, the EU’’s Commission is evolving existing reporting requirements of the Non Financial Reporting Directive (NFRD) and adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD) on 21 April 2021.
The CSRD will have a broader reach and clearer standards than the NFRD, which has been criticised by investors and other finance industry stakeholders for its lack of clarity and therefore lack of consistency when comparing different companies. The proposal’s key changes include:
Extending the scope to all large companies and all companies listed on regulated markets (except listed micro-enterprises)
Requiring audit (assurance) of reported information
More detailed reporting requirements,including reporting according to mandatory EU sustainability reporting standards
Digitally tagging the reported information, so it is machine readable and feeds into the European single access point envisaged in the capital markets union action plan
1. Widening the scope
The CSRD extends the scope to all large companies, both listed and non-listed, and all companies listed on regulated markets. Small and medium-sized enterprises (SMEs) trading on EU regulated markets would also come under the scope of the CSRD (except for micro-enterprises). However, reporting will be simpler and only required three years after the CSRD’s entry into force. Non-listed SMEs will have the opportunity to keep reporting on a voluntary basis, although opting not to do so might impact growth and performance, due to exclusion from investment opportunities.
The NFRD currently applies to ‘large public interest entities’ with 500+ employees, while the CSRD will apply to companies falling within two of the following criteria:
Companies with a balance sheet total of €20+ million
Companies with a net turnover of €40+ million
Companies with 250+ employees during the financial year.
2. New assurance requirement
For the first time, sustainability information will be required to be audited EU-wide, as part of the CSRD’s efforts to ensure all reporting information is reliable. However, due to a general lack of sustainability assurance services, the European Commission is enforcing a cost-efficient ‘limited’ assurance requirement, which could change in the future.
The overall goal is to ensure sustainability audits are as reliable as financial audits, boosting confidence of investors and other stakeholders.
3. Detailed ESG reporting
Companies will be required to report according to mandatory EU sustainability reporting standards – which will be developed by the European Financial Reporting Advisory Group (EFRAG).
In order to fill the information gap resulting from the non-binding NFRD guidelines, new mandatory standards require more detail on ESG factors, including:
Business model and strategy, and plans and implementation of these
Sustainability targets and progress towards their achievement;
Role of management and supervisory bodies in regards to sustainability
Supply chain and operations due-diligence processes, principal risks and dependencies
Processes and indicators relevant for identifying and measuring all the above
Intangibles such as human and social capital
All processes carried out to identify the information disclosed
The principle of ‘double materiality’ – according to which ESG related impacts require disclosure as they can be material to the company and viceversa - remains, with some clarifications on what information to report on the impact of relevant ESG related issues.
4. Digitising disclosure
As the digitisation of sustainability information increases, the CSRD will require companies to edit their management reports and financial statements in XHTML (as per the European Single Electronic Format (ESEF) regulation), and tag information according to a system that will be developed alongside the reporting standards.
This will allow for all information to be uploaded digitally into the newly pitched European Single Access Point (ESAP) and be easily accessible, in line with the financial sector’s Digital Finance Strategy.
Coherence and timing
The Commision envisages the adoption of EU sustainability reporting standards which will be drafted by the European Financial Reporting Advisory Group (EFRAG).
The standards will be tailored to EU policies and will need to be aligned with disclosure requirements under the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation, in order to avoid duplication in reporting. They will also be aligned with global sustainability frameworks and contribute to international reporting standardisation initiatives, such as the newly proposed IFRS Foundation’s sustainability standards board, the Global Reporting Initiative’s (GRI); the Value Reporting Foundation, the Sustainability Accounting Standards Board (SASB); the Task Force on Climate-Related Financial Disclosures (TCFD), to name a few.
The first set of standards would be adopted by October 2022, while the CSRD is planned to be embedded in national law by 1 December 2022 with applicability from fiscal years beginning 1 January 2023.
Time to take action
With such a rapid advancement of the corporate sustainability reporting and accounting agenda, it is advisable for companies, including SMEs, not to wait for a mandate and take action. This could include:
Reporting voluntarily on all ESG areas and metrics relevant to the business and industry
Integrating sustainability into the business strategy
Ensuring the board’s agenda includes ESG reporting and how it impacts performance and reputation
Setting solid and consistent sustainability reporting processes, in line with financial reporting standards and ensuring financial teams help shape these
Building credibility and contributing to setting standards through a multi-stakeholder approach, engaging with peers, regulators and civil society.
Despite leaving room for some ambiguity – for example, the potential exemption of EU-based subsidiaries of third-country-based parent companies – the CSRD proposal is an important step forward towards delivering the EU’s Sustainable Finance strategy.
Once adopted, it will play an important role in standardising sustainability reporting, making it more accessible and relevant and driving investments towards a more sustainable economy.
If you'd like to find out more about CSRD or how Emperor can help you on your sustainability reporting journey, please get in touch with Sara Cudicio at [email protected].