In the fast-changing landscape of sustainability reporting, the EU emerges as a front-runner. And in doing so, it is making a crucial impact not only in Europe, but across the world. The EU has set an ambitious path to reorient capital flows toward a sustainable economy while avoiding greenwashing, and it has introduced far-reaching legislation, such as the Sustainable Finance Disclosure Regulation and the EU Taxonomy. To support the EU’s goals, investors need quality and comparable data from companies.
This is where the Corporate Sustainability Reporting Directive proposal comes in.
The Corporate Sustainability Reporting Directive proposal (CSRD) was released in April this year and replaces the Non-Financial Reporting Directive (NFRD). The change in name is welcome, highlighting that sustainability topics are also financial topics rather than opposed to them. Ultimately, sustainability information should be considered as important as financial information.
The goal of the CSRD is to provide investors with the information they need to consider ESG in their investment decisions and meet the requirements under the Sustainable Finance Disclosure Regulation. But it is not just about investors. The CSRD will also enable civil society organizations, trade unions, and other stakeholders to assess companies’ impacts on society and the environment.
Here are six things global businesses should know about the CSRD:
1. The CSRD will cover 49,000 companies, compared to 11,000 under the previous NFRD.
All large companies governed by the law of, or established in, an EU member state and all European stock exchange-listed companies (with the exception of micro-companies) are under the scope of the new directive. For global businesses with operations in Europe, these new requirements may apply.
A large company is defined as meeting two out three of the following criteria: (1) EUR€40 million in net turnover, (2) EUR€20 million on the balance sheet, and (3) 250 or more employees. Companies that are not established in the EU but have securities on EU-regulated markets are also in scope.
2. The CSRD proposal applies double materiality.
Double materiality means that businesses must not only disclose how sustainability issues can affect the company ("impacts inward"), but also how the company impacts society and the environment ("impacts outward"). For businesses that have historically assessed only risks to their business rather than their impacts on the world, the CSRD implies a fundamental shift in measurement and reporting.
3. The CSRD proposal mandates that companies will need to report according to new EU sustainability reporting standards.
The European Commission has commissioned the European Financial Reporting Advisory Group (EFRAG) to develop EU sustainability reporting standards. The standards will be mandatory for large companies, while SMEs will benefit from a simplified reporting regime. A taskforce, convened by the European Commission, has already commenced work and published its recommendations in March 2021, providing us with a sneak peek at what the new reporting standards will look like.
The standards will take into account global standard-setting initiatives such as GRI and SASB, but they will also need to cover other EU legislations and initiatives, such as the Sustainable Finance Disclosure Regulation, the EU Taxonomy, and others.
4. Third-party assurance of the data will be mandatory.
Businesses will be required to seek "limited" assurance of the sustainability information. Although "limited" assurance still requires an auditor to evaluate the information, it falls short of what is required for the financial audit statement. There may be a move toward requiring "reasonable" assurance in the future, which is a more demanding assurance process.
5. The sustainability information will be included in the management report and digitally tagged.
Companies will need to report the sustainability information in the management report rather than in a separate report. This means that financial and sustainability information will be published at the same time and that the administrative, management, and supervisory bodies will be accountable for this reporting. Companies will also need to digitally tag sustainability information so that it can be fed into the European single access point database.
6. Companies will likely need to start reporting to the new sustainability reporting standards in 2024, based on FY2023 information.
The European Commission plans to adopt the CSRD in late 2022. In the meantime, a first set of standards should be adopted by October 2022 and a second set of standards by October 2023 with complementary and sector-specific information. SMEs will have more time to comply.
We hope that the sustainability reporting standards will look familiar to companies since they draw from the standards with which they currently work. By defining a baseline for decision-useful information to both investors and stakeholders at-large, the sustainability reporting standards should both increase the impact of disclosure and reduce the burden of reporting on companies.
At BSR, we have supported greater harmonization and clarity in the field of sustainability reporting for a long time. Competing standards and diverging requests for sustainability information from stakeholders have created an unreasonable burden and reporting fatigue for companies, hindering the effectiveness and impact of reporting. We will continue to push for progress on that front, building on the leadership displayed by the EU.
It is essential that the evolution of these standards reflects the voice of report preparers, so we encourage companies to play an active part in the EU sustainability reporting standard-setting process. We will update BSR members on opportunities to get involved as they arise, such as a potential opportunity to become a member of EFRAG. If you would like to discuss this topic further, please reach out to our Future of Reporting collaborative initiative.