How to Comply With the CSRD and the Challenges It Presents

How to Comply With the CSRD and the Challenges It Presents

Blog
October 10, 2024
Portrait of an empty port

Greenwashing is when a company that harms the environment markets itself as being environmentally friendly to deceive customers and society. Such misleading tactics can be uncovered early if companies are required to report their sustainability practices in depth. Apart from stopping this misconduct, society, investors, and other stakeholders must know the impacts of climate change and climate actions both on and from companies.

To facilitate such transparency, the European Union (EU) enacted the Corporate Sustainability Reporting Directive (CSRD) in 2022. In this article, we explore the wider sustainability landscape and then seek to understand the CSRD's role in it, learn its provisions, and identify its challenges.

The EU's Sustainability Reporting Landscape

To understand what motivated the CSRD, it helps to first understand the EU's vision on sustainability.

What does the EU consider as "sustainable"? The European Sustainability Reporting Standards (ESRS) — along with the EU taxonomy for sustainable activities and the taxonomy regulation — define the environment, social, and governance (ESG) concerns under sustainability reporting.

The environmental concerns emerge from the European Green Deal strategy for climate neutrality, net zero emissions, and a sustainable economy. Such concerns include:

  • Climate change mitigation
  • Climate change adaptation
  • Water and marine resources
  • The circular economy
  • Pollution
  • Biodiversity and ecosystems

The social concerns under sustainability include topics like:

  • Human rights issues
  • Treatment of employees
  • Diversity

The governance aspects of sustainability include:

  • Organizational and management policies
  • Business ethics
  • Anti-corruption and bribery concerns
  • Innovation, products, services, and the organization's reputation

The European Parliament considers such sustainability information from companies to be in the public interest. It has authorized the European Commission (EC) to implement detailed ESG reporting in all the EU member states.

Sustainability Reporting

In the past, the EC has created regulations and policy directives for detailed sustainability disclosures by companies. These directives are implemented by the member states through their national laws. They include the following:

  • Non-Financial Reporting Directive (NFRD): In 2014, the NFRD introduced the reporting of some sustainability and diversity concerns alongside normal financial disclosures for investors and other stakeholders.
  • Sustainable Finance Disclosure Regulation (SFDR): In 2019, the SFDR introduced climate-related financial disclosures but only for financial market participants. It also proposed a set of uniform disclosure standards for them.

The NFRD applied only to large companies and the SFDR only to financial institutions. Many businesses that impacted Europe's sustainability escaped through this regulatory gap.

Extending the NFRD wasn't an option. Often, disclosures under it were not relevant, reliable, comparable, or easy to access. Though it was a first and important step under the Paris Agreement, it was clear that the EU needed something better. Enter the CSRD.

What Is the Corporate Sustainability Reporting Directive?

CSRD: piece of paper on a table

Think of the CSRD as version two of the NFRD, with improvements like:

  • Greater coverage: Many more companies with sustainability impacts are made accountable. Compared to the NFRD's 11,700 companies, the number of companies in the scope of the CSRD is about 50,000.
  • Standardized reporting: The reports must comply with the EU sustainability reporting standards (for example, the ESRS for climate change). They ensure that nothing relevant is missed out on and that anything irrelevant isn't included. They also make the reports comparable across companies and over time.
  • Double materiality perspectives: Climate change and sustainability bring two distinct material concerns for stakeholders. First are the sustainability risks to the company (along with opportunities). Next are the impacts of the company on sustainability and climate. CSRD's sustainability reporting standards ensure that both perspectives are separately analyzed and reported.
  • Mandatory audits: CSRD requires sustainability reports to be externally audited just like financial reports. This helps assure the reliability of their information.

We'll get into the details of the CSRD's new rules later. First, let's see who must comply with them.

Who Must Comply With the Corporate Sustainability Reporting Directive?

The NFRD covers large public-interest companies with more than 500 employees and net sales turnover exceeding 40 million euros during the financial year. Such companies must follow the CSRD once it comes into force but continue under the NFRD until then.

Public-interest entities include listed companies on any of the EU-regulated markets, credit institutions, insurance undertakings, and undertakings that may be designated as public interest by governments of member states.

The CSRD also applies to the following companies incorporated anywhere in the EU or that are EU subsidiaries of non-EU companies:

  • All public-interest large undertakings having more than 250 employees and a net turnover exceeding 40 million euros
  • All medium-sized public-interest companies with less than 250 employees and a net turnover below 40 million euros
  • All small public-interest companies with less than 50 employees and a net turnover below 40 million euros

However, micro-sized undertakings are exempt from CSRD reporting. These are micro-enterprises that satisfy two of three criteria, namely, less than 10 employees; turnover of less than 700,000 euros; and balance sheet total of less than 350,000 euros.

Small and medium enterprises (SMEs) also get some exemptions from the more complex disclosure requirements.

Sustainability Reporting Under the CSRD

CSRD: employee pointing at a laptop

This section explains some of the key reporting requirements under the CSRD. Assume that these disclosure requirements apply to all covered companies unless specified otherwise.

1. Double Materiality Perspectives

The management report must address two distinct sets of material concerns:

  • Risks and opportunities due to sustainability matters
  • Impacts of the company on sustainability matters

In addition, all these perspectives must include both forward-looking and retrospective views.

2. Sustainability Risk Management

Companies must explain the resiliency of their business model and strategies against sustainability risks over different time horizons. They must also explain their risk management, internal controls, risk monitoring processes, and related metrics.

3. Opportunities From Sustainability

Any opportunities emerging due to sustainability concerns must go into the reporting. For example, optimizing your supply chain to reduce emissions may also enable long-term cost savings.

4. Impacts on Sustainability

Companies must report the positive and negative impacts of their activities on sustainability matters over different time horizons along with relevant indicators.

5. Climate-Related Commitments

Companies must describe their plans, actions, and investments to achieve these global commitments:

  • Limit global temperature increase to under 1.5°C
  • Achieve climate neutrality in Europe by 2050

They must also report their:

  • Greenhouse gas emission reduction targets for 2030 and 2050
  • Exposure to coal-, oil-, and gas-related activities

6. Due diligence

The reports must explain the company's due diligence processes on sustainability matters. How does it identify, prevent, and mitigate its adverse impacts? How is it doing that for its supply chains and other value chains?

7. CSRD Reporting Standards

All the reported information must follow the CSRD requirements laid out in the ESRS. They ensure uniformity and comparability of reports across companies and over time.

As of June 2023, the first set of 12 ESRS have been adopted by the EC for CSRD. They consist of two general standards, five environmental ones, four social standards, and one for governance:

Additional sector-specific standards and standards for SMEs are being developed and will be adopted in the future.

8. Digital Reporting Format

All the reports must be available in the structured, digital European Single Electronic Format (ESEF) with the sustainability information digitally tagged according to the ESEF specification. This enables software tools and all stakeholders to access and process the information more easily.

9. Audits

The sustainability reports must be audited independently by certified auditors, much like financial information.

Auditing generally offers two levels of assurance — limited assurance and reasonable assurance. Limited assurance involves fewer checks and a weaker assurance compared to reasonable assurance. Since the standards for reasonable assurance are yet to be framed by the EC, all auditing of sustainability reports will be with limited assurance for the foreseeable future.

CSRD Timeline

The CSRD timeline looks like this:

  • January 5, 2023: The CSRD came into force.
  • June 2023: The EC will adopt the first set of 12 ESRS as official standards.
  • January 1, 2024: The CSRD applies to any company under the NFRD in 2024. These companies’ sustainability reports must be published in 2025.
  • January 1, 2025: The CSRD applies to all covered companies.
  • January 1, 2028: SMEs must adhere to the CSRD (until this date, SMEs can opt out of the CSRD, with explanations).

CSRD Challenges

CSRD: portrait of a graph

CSRD compliance has its challenges:

  • Information gathering: The information required by the ESRS is complex and vast. Gathering all of it manually will be inconvenient. Process orchestration and workflow automation are essential.
  • Deep visibility: Companies with complex supply chains or value chains will need deep visibility into the sustainability aspects of all their third parties. Consequently, the due diligence on them must also be far more robust.
  • Scenario analyses: The CSRD requires organizations to set and report future climate targets. Companies may have to use scenario analyses to come up with them.
  • Data processing: Compiling the metrics and indicators across an enterprise isn't simple, either. Here, too, process orchestration and automation are essential.

These challenges can be solved with a compliance platform like Certa.

How to Comply With the CSRD and the Challenges It Presents
Share on Social
How to Comply With the CSRD and the Challenges It Presents

How to Comply With the CSRD and the Challenges It Presents

Blog
June 16, 2023
ESG
Best Practices
June 16, 2023
Portrait of an empty port

Greenwashing is when a company that harms the environment markets itself as being environmentally friendly to deceive customers and society. Such misleading tactics can be uncovered early if companies are required to report their sustainability practices in depth. Apart from stopping this misconduct, society, investors, and other stakeholders must know the impacts of climate change and climate actions both on and from companies.

To facilitate such transparency, the European Union (EU) enacted the Corporate Sustainability Reporting Directive (CSRD) in 2022. In this article, we explore the wider sustainability landscape and then seek to understand the CSRD's role in it, learn its provisions, and identify its challenges.

The EU's Sustainability Reporting Landscape

To understand what motivated the CSRD, it helps to first understand the EU's vision on sustainability.

What does the EU consider as "sustainable"? The European Sustainability Reporting Standards (ESRS) — along with the EU taxonomy for sustainable activities and the taxonomy regulation — define the environment, social, and governance (ESG) concerns under sustainability reporting.

The environmental concerns emerge from the European Green Deal strategy for climate neutrality, net zero emissions, and a sustainable economy. Such concerns include:

  • Climate change mitigation
  • Climate change adaptation
  • Water and marine resources
  • The circular economy
  • Pollution
  • Biodiversity and ecosystems

The social concerns under sustainability include topics like:

  • Human rights issues
  • Treatment of employees
  • Diversity

The governance aspects of sustainability include:

  • Organizational and management policies
  • Business ethics
  • Anti-corruption and bribery concerns
  • Innovation, products, services, and the organization's reputation

The European Parliament considers such sustainability information from companies to be in the public interest. It has authorized the European Commission (EC) to implement detailed ESG reporting in all the EU member states.

Sustainability Reporting

In the past, the EC has created regulations and policy directives for detailed sustainability disclosures by companies. These directives are implemented by the member states through their national laws. They include the following:

  • Non-Financial Reporting Directive (NFRD): In 2014, the NFRD introduced the reporting of some sustainability and diversity concerns alongside normal financial disclosures for investors and other stakeholders.
  • Sustainable Finance Disclosure Regulation (SFDR): In 2019, the SFDR introduced climate-related financial disclosures but only for financial market participants. It also proposed a set of uniform disclosure standards for them.

The NFRD applied only to large companies and the SFDR only to financial institutions. Many businesses that impacted Europe's sustainability escaped through this regulatory gap.

Extending the NFRD wasn't an option. Often, disclosures under it were not relevant, reliable, comparable, or easy to access. Though it was a first and important step under the Paris Agreement, it was clear that the EU needed something better. Enter the CSRD.

What Is the Corporate Sustainability Reporting Directive?

CSRD: piece of paper on a table

Think of the CSRD as version two of the NFRD, with improvements like:

  • Greater coverage: Many more companies with sustainability impacts are made accountable. Compared to the NFRD's 11,700 companies, the number of companies in the scope of the CSRD is about 50,000.
  • Standardized reporting: The reports must comply with the EU sustainability reporting standards (for example, the ESRS for climate change). They ensure that nothing relevant is missed out on and that anything irrelevant isn't included. They also make the reports comparable across companies and over time.
  • Double materiality perspectives: Climate change and sustainability bring two distinct material concerns for stakeholders. First are the sustainability risks to the company (along with opportunities). Next are the impacts of the company on sustainability and climate. CSRD's sustainability reporting standards ensure that both perspectives are separately analyzed and reported.
  • Mandatory audits: CSRD requires sustainability reports to be externally audited just like financial reports. This helps assure the reliability of their information.

We'll get into the details of the CSRD's new rules later. First, let's see who must comply with them.

Who Must Comply With the Corporate Sustainability Reporting Directive?

The NFRD covers large public-interest companies with more than 500 employees and net sales turnover exceeding 40 million euros during the financial year. Such companies must follow the CSRD once it comes into force but continue under the NFRD until then.

Public-interest entities include listed companies on any of the EU-regulated markets, credit institutions, insurance undertakings, and undertakings that may be designated as public interest by governments of member states.

The CSRD also applies to the following companies incorporated anywhere in the EU or that are EU subsidiaries of non-EU companies:

  • All public-interest large undertakings having more than 250 employees and a net turnover exceeding 40 million euros
  • All medium-sized public-interest companies with less than 250 employees and a net turnover below 40 million euros
  • All small public-interest companies with less than 50 employees and a net turnover below 40 million euros

However, micro-sized undertakings are exempt from CSRD reporting. These are micro-enterprises that satisfy two of three criteria, namely, less than 10 employees; turnover of less than 700,000 euros; and balance sheet total of less than 350,000 euros.

Small and medium enterprises (SMEs) also get some exemptions from the more complex disclosure requirements.

Sustainability Reporting Under the CSRD

CSRD: employee pointing at a laptop

This section explains some of the key reporting requirements under the CSRD. Assume that these disclosure requirements apply to all covered companies unless specified otherwise.

1. Double Materiality Perspectives

The management report must address two distinct sets of material concerns:

  • Risks and opportunities due to sustainability matters
  • Impacts of the company on sustainability matters

In addition, all these perspectives must include both forward-looking and retrospective views.

2. Sustainability Risk Management

Companies must explain the resiliency of their business model and strategies against sustainability risks over different time horizons. They must also explain their risk management, internal controls, risk monitoring processes, and related metrics.

3. Opportunities From Sustainability

Any opportunities emerging due to sustainability concerns must go into the reporting. For example, optimizing your supply chain to reduce emissions may also enable long-term cost savings.

4. Impacts on Sustainability

Companies must report the positive and negative impacts of their activities on sustainability matters over different time horizons along with relevant indicators.

5. Climate-Related Commitments

Companies must describe their plans, actions, and investments to achieve these global commitments:

  • Limit global temperature increase to under 1.5°C
  • Achieve climate neutrality in Europe by 2050

They must also report their:

  • Greenhouse gas emission reduction targets for 2030 and 2050
  • Exposure to coal-, oil-, and gas-related activities

6. Due diligence

The reports must explain the company's due diligence processes on sustainability matters. How does it identify, prevent, and mitigate its adverse impacts? How is it doing that for its supply chains and other value chains?

7. CSRD Reporting Standards

All the reported information must follow the CSRD requirements laid out in the ESRS. They ensure uniformity and comparability of reports across companies and over time.

As of June 2023, the first set of 12 ESRS have been adopted by the EC for CSRD. They consist of two general standards, five environmental ones, four social standards, and one for governance:

Additional sector-specific standards and standards for SMEs are being developed and will be adopted in the future.

8. Digital Reporting Format

All the reports must be available in the structured, digital European Single Electronic Format (ESEF) with the sustainability information digitally tagged according to the ESEF specification. This enables software tools and all stakeholders to access and process the information more easily.

9. Audits

The sustainability reports must be audited independently by certified auditors, much like financial information.

Auditing generally offers two levels of assurance — limited assurance and reasonable assurance. Limited assurance involves fewer checks and a weaker assurance compared to reasonable assurance. Since the standards for reasonable assurance are yet to be framed by the EC, all auditing of sustainability reports will be with limited assurance for the foreseeable future.

CSRD Timeline

The CSRD timeline looks like this:

  • January 5, 2023: The CSRD came into force.
  • June 2023: The EC will adopt the first set of 12 ESRS as official standards.
  • January 1, 2024: The CSRD applies to any company under the NFRD in 2024. These companies’ sustainability reports must be published in 2025.
  • January 1, 2025: The CSRD applies to all covered companies.
  • January 1, 2028: SMEs must adhere to the CSRD (until this date, SMEs can opt out of the CSRD, with explanations).

CSRD Challenges

CSRD: portrait of a graph

CSRD compliance has its challenges:

  • Information gathering: The information required by the ESRS is complex and vast. Gathering all of it manually will be inconvenient. Process orchestration and workflow automation are essential.
  • Deep visibility: Companies with complex supply chains or value chains will need deep visibility into the sustainability aspects of all their third parties. Consequently, the due diligence on them must also be far more robust.
  • Scenario analyses: The CSRD requires organizations to set and report future climate targets. Companies may have to use scenario analyses to come up with them.
  • Data processing: Compiling the metrics and indicators across an enterprise isn't simple, either. Here, too, process orchestration and automation are essential.

These challenges can be solved with a compliance platform like Certa.

expand icon

expand icon

expand icon

How Certa Helps Your CSRD Reporting

In this article, we explored the upcoming CSRD rules and their challenges. Certa is a compliance platform that helps companies meet these challenges, with features like:

  • Extensive ESG reporting capability: Certa's ESG solution comes with standards-compliant reporting templates to create your disclosure reports.
  • Carbon footprint estimation: For the metrics reporting, effortlessly measure your net carbon footprint across all three scopes of emission — Scope 1, Scope 2, and Scope 3.
  • Deep visibility into your supply chains: Certa's process orchestration and workflow automation enable you to automate the climate information gathering through all levels of your supply chain across multiple companies in a time-bound way. It guides those responsible throughout the reporting process automatically.
  • Third-party due diligence: Assess your suppliers by fetching their sustainability scores from data intelligence services like EcoVadis, Craft, D&B, and Supplier.io.

Talk to our experts today to learn more about using Certa for CSRD compliance.