Over the last years the European Commission has implemented a number of reporting and disclosure regulations that seek to create better transparency around sustainability performance. The theory goes, by requiring companies and investors to report on these non-financial metrics, the markets will have the necessary tools to deploy capital to truly impactful projects.
The Corporate Sustainability Reporting Directive (CSRD) is core to the new suite of regulations by setting rules about the social and environmental information that companies have to report. It is a core part of the trifecta of recent reporting regulations, together with the EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR). The CSRD was introduced to replace the Non-financial Reporting Directive (NFRD), with the goal to expand mandatory disclosures to smaller firms and to standardize disclosed KPIs, referred to as the European Sustainability Reporting Standard (ESRS). It aims to provide investors and other stakeholders with the information they need to assess risks arising from climate change and other sustainability issues. As discussed in this recent webinar with representatives from South Pole (ESG consultancy) and Raise Capital (impact investor), the implementation of the CSRD and resulting ESRS will create a much more robust data pipeline to support investors' own reporting requirements.
Specifically, the CSRD requires large companies and listed SMEs to report standard metrics which are necessary information to understand the company’s ESG performance through a double materiality lens - i.e. what is the impact of the firm on its shared environment, and how does the firm incorporate and respond to ESG risks.
The full scope of companies that will be mandated to report on sustainability under the CSRD includes companies that fulfil at least two out of three of the following requirements:
This will lead to more disclosures than under the NFRD regime; as we mentioned in a previous article, according to estimates, more 55.000 companies will be under the scope of new regulatory requirements.
The first reporting year for the CSRD will take place in 2025 for the reference year 2024. Only companies that are currently under the NFRD regime (large listed firms with more than 500 employees) will be required to report in the first year. The next step is the integration of large companies – those that fulfill two out of the three above mentioned criteria – who will have to report on their sustainability in the financial year 2026 for 2025 reference period. Finally, listed SMEs will be brought under the regulation and will need to report on their sustainability performance in 2027 for the 2026 reference period. However, it is important to note that SMEs can choose not to report on their sustainability for financial years starting before 2028. Nevertheless, in such cases, the SMEs must state in their management report why the sustainability reporting was not provided.
The ESRS set the requirements for detailed corporate reporting on a range of sustainability issues. The draft standards were developed by EFRAG, an independent advisory body of various stakeholders working to develop sustainable finance requirements. The standards are built around EU policies but also seek to include international standard metrics to support global comparability. The European Commission will adopt the first set of standards in the middle of this year, based on the draft delivered by EFRAG at the end of 2022.
The CSRD also mandates that companies have their sustainability information audited, and report their data in a digital format to support greater usability.
The EU Taxonomy – a classification system for sustainable economic activities – is closely linked with the CSRD, as companies reporting on their sustainability matters will have to ensure that their claims are aligned with the EU Taxonomy. In other words, companies will have to substantiate their claims on environmental sustainability by ensuring alignment with the EU Taxonomy. You can read our guide on the EU Taxonomy here.
Briink has recently launched a program that helps you complete your EU Taxonomy disclosure pursuant to the CSRD in just 60 days. The program gives you unlimited access to Briink’s EU Taxonomy reporting software, plus exclusive 1-on -1 advisory with seasoned EU Taxonomy experts.
Get in touch to learn more about the program.