The new Corporate Sustainability Reporting Directive, are you ready?

To strengthen transparency around sustainability and other non-financial matters, in April 2021 the European Commission published a proposal for a Corporate Sustainability Reporting Directive (CSRD). Together with the EU taxonomy, the CSRD forms a sustainable finance package that aims to streamline the flow of capital towards companies that demonstrate positive social and environmental impacts, and sustainable activities in general.

Currently, the Non-Financial Reporting Directive (NFRD) is still in place. Under this directive, only 20% of large companies currently apply existing reporting standards (for instance GRI or GHG-protocol) and only 30% seek some kind of assurance for their sustainability reporting. This means that the reported information is often not sufficiently relevant, comparable, reliable, or accessible for users (investors, civil society, and others). The new CSRD will replace the NFRD starting from 2023 and will expand the list of companies obliged to report and strengthen the scope, standardisation, and assurance of sustainability reporting, resulting in easier identification of sustainable companies.

With this new regulation, all large companies will be publicly accountable for their environmental and social impacts. The Corporate Sustainability Reporting Directive is relevant for all listed companies plus all unlisted large companies that meet 2 of these 3 criteria:

• More than 250 employees
• More than 40 million revenue
• More than 20 million on the company balance

Listed small companies will have milder reporting requirements at least the first years. Additionally, for SMEs outside of the CSRD scope, simplified reporting standards will be developed for use on a voluntary basis.

Companies that have obligations under this directive will need to disclose more information on the sustainability of their business model and supply chain. For example, companies have to report how their strategy and performance align with limiting global warming as formulated in the Paris Agreement (1.5°C-2°C). Next to that, other environmental factors need to be covered, such as water and marine resources, resource use and circular economy, pollution, biodiversity and ecosystems. Companies need to consider how to collect and process sustainability-related information, manage sustainability risks, and formulate targets and KPI’s to measure their progress. The Directive also gives focus to the clarification of the double materiality assessment, which has been misinterpretated in past and current reporting.

To harmonise sustainability reporting across the EU, companies will need to use sustainability reporting standards when they develop non-financial aspects of their management report. This gives users an integrated insight into a company’s sustainability performance. The first set of sustainability reporting standards is expected to be provided by October 2022. For the provision of these standards, the Commission will take into account existing sustainability reporting developments, such as:

• The work of global standard-setting initiatives, existing standards and frameworks for natural capital accounting, responsible business conduct, corporate social responsibility, and sustainable development.

Where auditing of a company’s financial reporting is already mandatory, assurance of non-financial reporting is not yet a common practice. Although non-financial reporting is less mature, there is a general consensus that assurance is also needed for sustainability reporting. Therefore, under the CSRD, auditors will need to provide ‘limited assurance’ to safeguard the integrity of the information provided by companies. Assurance needs to be performed on the compliance of the sustainability reporting with the reporting standards, on the information identification process, on the mark-up of sustainability reporting, and on indicators of the Taxonomy Regulation.

Based on the regulatory text we anticipate that limited assurance will shift to ‘reasonable assurance’ (a higher, more demanding level of assurance) in the medium term.

Provision of reports should be in digital format including digital tags of data points, which should increase machine readability, and easy access within the EU as a single market. That means that the provision of reports solely in PDF or paper format would not be sufficient.

This specific requirement significantly changes companies’ reporting timelines. They will need to set up data collection systems well in advance to ensure that all information is available and processed for the publication deadlines of annual management reports.

The CSRD will likely be accepted before mid-2022 by the European Parliament and European Council. The reporting standards are being formulated by the European Financial Reporting Advisory Group (EFRAG) and need to be ready by 2023. Usage of these standards will be mandatory in annual reports for the financial year of 2023.

Our experience with substantial regulatory changes tells us that even though CSRD obligations become effective from 2023, companies should already start preparations today. This includes getting a clear picture of the organisation’s capacity for reporting, creating, or updating a foundational sustainability strategy, as well as designing processes and systems to collect data of sufficient quality. This will ensure that reporting on the required sustainability indicators will be compliant in time.

At Ecomatters we have over 10 years of experience in sustainability reporting and legislation. If you need support in the preparation of the CSRD or want to start with sustainability reporting in general, get in touch with us.