Introduction
In 2022, the EU Council adopted the Corporate Sustainability Reporting Directive (CSRD). This delegated act, part of the EU Green Deal, sets out requirements for large businesses operating in the EU to disclose annually their material topics related to sustainability. This article provides an introduction to CSRD. It is the first in a series we are publishing which describes CSRD, it’s role in the economy, the challenges businesses face and how we as a CSRD consulting firm approach it. You can find the full series here. In this article, we provide some background to the policy, its objectives and how it is expected to evolve over time.
What is CSRD?
CSRD is an EU directive which mandates businesses operating within the EU to disclose, on an annual basis, information about their sustainability related impacts, risks and opportunities. CSRD is one of many policies within the European Green Deal. The directive stipulates the criteria for which businesses are in scope based on annual revenue, number of employees and location. The directive also establishes standards, the European Sustainability Reporting Standards (ESRS), to define the variety of topics which a business should report information on. These topics span across environmental, social and governance (ESG) matters. The directive is connected to the duties and responsibilities of directors and officers of a business through the relevant companies act within the jurisdiction they are based, establishing a legal obligation for businesses and their executives to comply with the regulation.
European Green Deal
The EU Commission launched the European Green Deal in 2019. The Green Deal is a package of policies which coordinate the EU’s response to climate change, aligned to the commitments made in the Paris Agreement. The bloc is using the Green Deal to achieve its targets, including reducing its emissions by at least 55% by 2030. In the process, the EU is looking to build a resilient economy, which contributes to a fair and prosperous society.
The package of policies in the Green Deal span across sectors and are designed to create a multi-layered approach to achieving the climate goal. The policies span across the environment, energy, finance, society, products, industry, transportation and agriculture.
CSRD Policy Objective
Like many sustainability related reporting policies, the policy objective of CSRD is to give stakeholders, in particular investors, sufficient information about the risks and opportunities associated with an organisations business model. Policy makers in general agree that by regulating the disclosure of information by businesses, the markets will use that information to drive systemic change.
Practical Objectives
Whilst CSRD is designed to achieve clear policy objectives, there are also a number of practical objectives the directive is designed to meet.
Mature sustainability reporting to similar maturity of financial reporting: This is really at the heart of CSRD. In plain terms, it is an effort by policy makers to get businesses to take environmental and social matters into consideration when making decisions.
Establish peer reporting standards: One of the current challenge is the lack of consistency of corporate sustainability reporting. To address this, the EU have developed the European Sustainability Reporting Standards (ESRS). This provides a consistent, level playing field, so stakeholders can more easily make comparisons across businesses. Comparability is critical to CSRD.
Provide audit assurance of information: Independent assurance from auditors is how businesses validate their approach. In the most part, this is related to financial reporting today, but CSRD introduces first limited assurance, with reasonable assurance expected to be mandatory from 2028 onwards.
Digital reporting: To assist with comparability, reports will need to be developed with XBRL. This digital reporting language, enables stakeholders to take company reports and process them digitally, allowing for data across companies, markets, geographies to be more easily read and compared.
Ensure information is properly governed: This is the big one in many ways. CSRD connects the responsibility for complying with the regulations to the duties of directors and officers of businesses under their relevant companies act in the jurisdiction where they are based. This means senior leaders have legal responsibility to ensure correct management and governance of sustainability related matters.
ESRS
The European Sustainability Reporting Standards are a comprehensive set of common standards which are designed to ensure companies subject to CSRD report reliably and comparably. By establishing a set of standards, the variability of voluntary reporting can be eliminated, reducing the burden on companies and improving the ability for stakeholders to view and compare information across organisations.
The standards are designed to provide a structured approach to the types of information which is expected to be reported for ESG related topics. At present, ESRS address sector-agnostic topics, but sector-specific standards are in development, including a cut-down set of standards for SME’s.
The standards are developed by EFRAG, an organisation responsible for developing and promoting European interests in financial and sustainability reporting. They were tasked by the EU Commission to establish a sustainability standards board, supported by a technical advice group to develop a broad range of standards to deliver the policy objectives of CSRD.
The standards vary contextually across topics, but in general follow a similar structure. They serve to disaggregate a given topic into sub and sub-sub topics, providing increasing levels of granularity. The topics are listed in the diagram below.
Standards break down into a range of topics which businesses are expected to report on. Some aspects are mandatory for all businesses, whilst other topics are to be reported on at the discretion of the business if they are deemed to be material to the business. The decision on if a topic is material or not is determined through a double materiality assessment, a process of engaging stakeholders across the entire value chain to build an outside-in and inside-out perspective of the business. We will discuss double materiality in more detail in a later article.
For each of the standards the information required falls into four categories:
Strategy: Does the business have a strategy related to the given topic?
Metrics and Targets: Has the business set clear targets related to the topic, have they been validated, are they science aligned, are there KPI’s to monitor performance?
Impacts, Risks and Opportunities: Is the business clear on the IRO’s related to the topic, are there policies in place to address them, what actions have been taken or are in motion and where in the business model and value chain do these IRO’s exist?
Governance: What levels of governance are in place related to the topic, how is the governance related to management remuneration?
How do businesses report?
The expectation is that companies include the information related to CSRD into their integrated annual report and publish the report on their website. Before publication, limited audit assurance is required and this is expected to increase to reasonable assurance by 2028.
The published reports must be structured consistently, with guidance provided within CSRD. The information within the report must also be reported using XBRL, a digital reporting language which enables every piece of information to be tagged with references back to ESRS, thereby enabling digital consumption of the reports.
What does CSRD mean for businesses?
For businesses which operate in Europe, CSRD will have an affect on them in some way. The large businesses who are listed in the EU and have over €150m turnover will be directly affected. Businesses with a subsidiary in the EU and over €40m in turnover or €20m in assets will also be subject to the directive. For many others, the value chain effects of CSRD will be widespread.
The policy makers recognise that by targeting the largest businesses in the bloc, they will trigger a market wide effect. The suppliers and partners of the large businesses will be asked to supply increasing levels of information, thereby increasing the need for them to improve the management and governance of their sustainability related matters.
Perhaps most significant for businesses subject to CSRD will be the integration of management and governance of ESG across their business. Consider how deeply integrated financial management is today in a business. Almost every decision made in is biased towards financial cost\benefit analysis. CSRD is fundamentally about elevating ESG matters to the same level as financial considerations across the whole business.
The transparency that CSRD achieves will also have an impact in capital markets. Investors are increasingly favouring investments which have more positive ESG ratings. With the depth and breadth of information provided via CSRD and the consistency, access to capital consequently will increasingly become connected to ESG performance of the business.
Risk management of business is also a deeply rooted aspect of CSRD. By mandating that businesses must report their transition plan alongside a climate risk analysis, CSRD will result in companies improving their approach to risk management, in particular in relation to climate change.
The long term impacts of CSRD, along with other policy instruments such as CSDDD, will mean that the EU economy is more resilient to climate change. It will also mean that producers and consumers within the bloc will be more informed of the impact of their choices, resulting in shifts in consumer and producer behaviours.
Finally, CSRD presents risks to businesses who either do not comply fully with the directive, or who disclose information which others leverage to draw attention the the business. Climate litigation and green washing claims are increasing, and the level of transparency which CSRD delivers is only likely to continue this trend. We will discuss the challenges, risks and pitfalls of CSRD in a later article.
How does CSRD related to businesses outside the EU?
The criteria for CSRD stipulates that any business outside the bloc which has a subsidiary within the EU and over €150m in annual revenue is in scope. This expands to many large businesses which serve businesses and consumers within the market. There is also a value chain effect of mandating that these large businesses report on this information. CSRD will push companies to engage up and down their value chain to obtain increasing amounts of information from their suppliers and partners, expanding the impact of CSRD.
CSRD has also been developed alongside other global standards, such as those developed by IFRS and GRI. In the development of ESRS, EFRAG have collaborated with these other global standard setters to ensure interoperability, meaning any business who reports against CSRD satisfies their requirements under the other standards and vice-versa. There is no doubt that sustainability standards are currently a complex landscape, but this interoperability will hopefully lead to a harmonization across the globe.
How Jordisk can help
For every business in Europe, CSRD will require action at some level. We’ve been working with the first businesses subject to CSRD, helping our clients to adopt and integrate CSRD into their business. Our experts take a pragmatic, but comprehensive approach to helping companies to approach CSRD using our CSRD program.
If you’d like to learn more about how we can help, send us a mail at hello@jordisk.com and one of our team will schedule time with you. We also maintain a list of CSRD FAQ’s.
