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The Year of Starting to Navigate the CSRD

Updated: 6 days ago


Introduction


2024 just has started and with it comes the new rules concerning ESG regulation in the European Union, as explored in my article ESG Regulation and Policies and Their Implications for Companies.


In this article, we explore more deeply the Corporate Sustainability Reporting Directive (CSRD). The Corporate Sustainability Reporting Directive (CSRD) is one such sustainability reporting law. It significantly extends the existing Non-Financial Reporting Directive (NFRD) by expanding its scope, tightening reporting requirements, and integrating sustainability into corporate governance. Initial reports are due in 2025 for the first cohort of companies in scope.  

The CSRD marks a crucial step towards more comprehensive and standardized sustainability reporting practices for companies. Navigating the CSRD requires a strategic approach to ensure smart sustainability compliance. In this article, we’ll explore key aspects of the CSRD and provide insights for companies aiming to enhance their sustainability reporting.


Understanding the CSRD

The Corporate Sustainability Reporting Directive is a legislative proposal by the European Commission aimed at revising and expanding the existing Non-Financial Reporting Directive (NFRD). The CSRD is designed to address the shortcomings of the NFRD and align reporting requirements with evolving sustainability challenges. The adoption of CSRD will have a profound impact on how companies disclose their non-financial information.


Key Changes Introduced by the CSRD


1. Scope & Timeline:

The CSRD proposes to extend reporting obligations to a broader range of companies. While the NFRD primarily applied to large public-interest entities, the CSRD includes more companies, capturing those with significant environmental or social impacts.

Companies that meet two of the following three conditions must comply with the CSRD: 

  • More than €40 million in net turnover 

  • Balance sheet total assets are greater than €20 million

  • 250 or more employees 


In addition, non-EU companies with a turnover of at least €150 million in the EU over two consecutive years must comply. 

The new rules will apply for the first time in the financial year 2024 for reports that will be published in 2025. The CSRD will cover all listed companies in EU-regulated markets (except listed micro-enterprises). 

In summary, this is the scope and timeline:


2. Detailed Sustainability Reporting Standards:

The CSRD introduces detailed reporting standards developed by the European Financial Reporting Advisory Group (EFRAG). This aims to standardise reporting practices and enhance comparability among companies.

Compared to NFRD, the CSRD breaks new ground for reporting requirements, and it replaces many national standards to date. At the root of these requirements isa “double-materiality” principle, stating that companies must not only identify sustainability issues that represent impacts, risks, and opportunities to their business but also the reverse: What sustainability impacts their business is making on the planet and society - worldwide. 


To specify requirements for what and how to report on various sustainability topics, the CSRD references the European Sustainability Reporting Standards (ESRS). These are set to provide a comprehensive, detailed, and comparable picture of how businesses are performing in terms of sustainability, covering environmental, social, and employee matters, human rights, anti-corruption, and bribery issues. Companies must conduct a materiality analysis to determine which these are included or emphasised for their industry and business. 

In the following table, we present key elements of what is expected from companies regarding each CSRD disclosure element:


3. Digitalisation of Reporting:


A significant aspect of the CSRD is the push towards digital reporting. It proposes the use of Inline XBRL (eXtensible Business Reporting Language) to facilitate accessibility, comparability, and analysis of reported data.


4. Consistency with Other Reporting Frameworks:

The CSRD aligns reporting requirements with international standards, including the Global Reporting Initiative (GRI) and the Task Force on Climate-related Financial Disclosures (TCFD), promoting global consistency.

Navigating the CSRD: Smart Sustainability Compliance Strategies


1. Engagement with Stakeholders:


The CSRD emphasises the importance of stakeholder engagement in the reporting process. Companies should establish mechanisms for ongoing dialogue with stakeholders to identify material issues and address concerns effectively.


2. Integration with Financial Reporting:


Smart sustainability compliance involves integrating non-financial information seamlessly with financial reporting. Companies should explore ways to present a holistic view of their performance, linking sustainability metrics with financial outcomes.


4. Investment in Digital Capabilities:


Given the digitalisation drive, companies should invest in digital capabilities to meet the CSRD's reporting requirements. This includes adopting technologies that facilitate data tagging and structured reporting.


5. Capacity Building:


Ensuring that teams possess the necessary skills for comprehensive sustainability reporting is vital. Companies should invest in training and capacity building to navigate the complexities of the CSRD effectively.


6. Collaboration with Reporting Standards:


Collaborating with established reporting standards such as GRI and TCFD can streamline compliance efforts. Companies should assess how existing reporting frameworks align with CSRD requirements and make adjustments accordingly.


7. Scenario Analysis and Risk Assessment:


The CSRD places a strong emphasis on scenario analysis, particularly about climate risks. Companies should conduct thorough risk assessments and scenario analyses to understand and disclose the potential impacts of climate-related risks on their business.


Conclusion


The Corporate Sustainability Reporting Directive represents a paradigm shift in how companies disclose their non-financial information. Navigating the CSRD requires a proactive and strategic approach, where companies not only comply with regulatory requirements but also embrace sustainability as a core aspect of their business strategy. By adopting smart sustainability compliance strategies, companies can not only meet regulatory standards but also contribute to a more transparent, accountable, and sustainable business environment. 


The journey towards CSRD compliance is an opportunity for companies to showcase their commitment to responsible business practices and create long-term value for stakeholders. 


No matter where a company is on its sustainability and compliance journey, trying not to fall behind due diligence requirements or using them as a guide to creating value, partnering with a best practice leader is key to success. With AMARNA Vida’s experience in supporting due diligence regulations, your company will be able to not only comply with regulations but also go beyond sustainability. 


What about your company? It is only concerned with getting along with compliance issues, or does it see the value of going beyond sustainability?


Please share your thoughts with us, as we certainly don’t have all the answers. 




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