What is the CSRD Regulation?

An overview of the Corporate Sustainability Reporting Directive.

In 2021, the European Commission introduced the Corporate Sustainability Reporting Directive (CSRD), to standardise non-financial reporting by companies, improving the consistency and quality of publicly available data. CSRD will impact a wide range of companies and organisations that operate in Europe, with it coming into effect on 1st January 2024.

It’s a complex area, so we’ve broken down the key bits you need to know.

What is CSRD?

At its core, CSRD seeks to encourage more sustainable business models throughout Europe. It does this by setting European Sustainability Reporting Standards (ESRS) for comprehensive reporting across Environment, Social and Governance (ESG).

It replaces the current Non-Financial Reporting Directive (NFRD), expanding its remit in both scope and sophistication.

The European Commission sets the reporting requirements, including 12 ESRS covering environmental, social and governance issues. The depth to which you need to report on these standards depends on the results of a double materiality assessment.

Who does it impact?

Large companies will report first, starting in 2025 (FY24 annual report), with smaller ones to follow.

The reporting is complex and you won’t be perfect first time. If your organisation fits into any of the below categories, you should be getting to grips with what CSRD reporting means for your organisation now:

• Companies listed on European regulated markets, including listed SMEs

• Other large European companies, listed or not, exceeding two of the three defined thresholds:

• 250 employees

• €40 million in revenue

• €20 million in total assets
• Non-European companies whose subsidiaries or branches have revenues exceeding €150 million within the European Union

There are some opt-outs to bear in mind:‍

• Companies need only disclose in relation to their direct operations for the first 3 years of disclosure

• Financial impacts can be omitted in the first year, and may report qualitatively for the first three years

• Companies with less than 750 employees can omit the information required by ESRS 4 for the first two years

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Not every company needs to start reporting from 2024 though, the European Commission is taking a phased approach, with the current timeline being:

• FY 2024 (reporting 2025): Public Interest Entities (PIEs), i.e. public companies with debt or equity listed on an EU market and EU-regulated banks and insurance companies with more than 500 employees.

• FY 2025 (2026): All large companies and group parent companies meeting at least 2 of: balance sheet of €20m+; €40m+ annual revenues; more than 250 employees.

• FY 2026 (2027): Small and mid-size companies (excluding ‘micro-enterprises’) with securities listed on EU-regulated markets, or which are EU-regulated banks or insurance companies. SMEs still have the possibility of opting out for a period of two years if they clarify why information is not provided. Non-listed SME reporting is voluntary.

• FY 2028 (2029): EU branches with a net turnover of €40m or more and EU subsidiaries of non-EU companies that at group level generate a net turnover of more than €150m.

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The basics

Where to report

• The CSRD requires in-scope companies to include a dedicated section (‘Sustainability Statement’) in their annual report on sustainability matters, that must be human and machine-readable.

• The Sustainability statement should form a subsection of a corporate’s management report.

• The statement must be structured in four parts: general information, environmental, social, and governance information.

How frequently

• Disclosures are expected on an annual basis.

Audit timeline

• The Commission will adopt ‘limited assurance’ standards by 2026 for information disclosed under CSRD.

• By October 2028, if conditions are met, there will be a shift to ‘reasonable assurance’.

         (Limited and reasonable assurances are explained at the bottom of the page.)

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What will you need to report on?

Overall, companies are required to disclose any significant sustainability-related impacts, risks, and opportunities, how these are managed, how they affect its strategy and business model, and the financial implications.

All in-scope companies will need to start by looking at the Cross-Cutting Standards. These standards set out what you need to report and how you should do that. This is done via a double materiality assessment.

Double Materiality Assessment

This means that different reporting requirements are triggered by the outcome of your double materiality assessment. The double materiality assessment looks at the impact on the company, and the impact of the company.

The European Financial Reporting Advisory Group (EFRAG) has released draft implementation guidance for double materiality assessments.

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How it works

Let’s take a look at how it would work if your double materiality assessment triggered ESRS 4, biodiversity and ecosystems:

1. Identify sites that are in or near sites of high biodiversity importance
2. Identify impacts and dependencies associated with business activity at sites deemed to be material
3. Assess risks and opportunities associated with those risks and dependencies
4. Identify policies and actions to answer to these risks and opportunities
5. Set targets (including setting a baseline for those targets), and measure the state of nature at material sites
6. Disclose

Then repeat similar steps for each ESRS under the environment, social and governance categories that your double materiality assessment triggered. Once put together, this will make up the required elements of your sustainability reporting.

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Get ready for CSRD

If you fall into any of the in-scope categories, now’s the time to start getting familiar with these topics. Figure out which teams will need to work together, what the next steps for your team are and if you need support doing so.

The legislation, its requirements, and data needed to inform those requirements are complex. It will take time for an organisation to develop responses that reflect best practice. Also, much like climate reporting, expectations of best practice are not static. For those caught by the scope of this regulation, it is important to start preparing now. This will ensure that you are well positioned amongst peers when external stakeholders begin scrutinising reports in 2025.

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If you’re interested in finding out how Natcap can help your organisation approach CSRD, please get in touch.

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Footnote:

Limited assurance: nature, timing and extent of procedures performed by 3rd party are limited compared to reasonable assurance (i.e. nothing came to our attention to indicate x is misstated)

Reasonable assurance: test to evaluate accuracy and completeness of the information, this can include examining documentation, records, interviews etc. as set out by auditor (i.e., based on procedures we believe x is reasonably stated)