Published: 10 Jan 2023 · Last updated: 11 Jan 2023
The Corporate Sustainability Reporting Directive (CSRD) is an EU Directive that expands upon the rulings set out by the Non-Financial Reporting Directive (NFRD). This legislation will require companies to report annually on the environmental, social, and governance (ESG) impact of their operations.
The Directive is mandatory for companies that operate in EU Member States and have over 500 employees, or an annual net turnover of over €20 million. Note that it explicitly extends to business headquartered outside of the EU, but with operations in the EU. The Directive outlines the steps that companies should take to assess, report, and disclose their sustainability performance, with the aim of promoting transparency and accountability. Specifically, firms will be required to produce annual sustainability reports in a digital and publicly accessible format. The European Parliament voted in favour of adopting the CSRD at the end of 2022. We expect that the first set of reporting standards will be adopted by the European Commission in June 2023. Reporting obligations will then be introduced gradually between 2024 and 2028, depending on the size of the company.
Although these dates seem a long way off, companies need to get ready for the implementation of the CSRD now. The 2024 reporting obligation will be based on 2023 data. This means you should start collecting your data and getting ready for reporting now!
Our ESG experts have outlined the three main factors that companies and fund managers need to consider.
Many first-time reporters will begin with no experience or knowledge on sustainability reporting. The CSRD operates over a broad scope. It encompasses both listed and non-listed entities, along with non-EU companies with businesses in the European Union. Even if your portfolio company has no headquarters in the EU, you will still be included if you carry out business within the EU. The regulation will affect over 50,000 companies - a dramatic increase from the 11,700 that are currently covered under sustainability disclosure rules.
The scope of the CSRD also extends to the information it requires. The CSRD demands that companies report on their ESG metrics in a comprehensive manner. Information on environmental policies, greenhouse gas (GHG) emissions, energy use, water use, waste management, product safety, product quality, and human rights policies must be disclosed. Companies must provide information on their governance practices, such as board composition, executive pay, and anti-corruption policies. The reporting requirements are designed to help companies better understand the impact of their processes. In making this information accessible, investors and other stakeholders are able to make more informed decisions and minimise risk.
The CSRD asks companies to report on double materiality. This means that each company must provide information on both the impact of their activities on ESG, and on the ESG matters affecting them. Examples of the former relate to carbon emitted from a company’s data center, or gender pay equality across its employee base. Examples of the latter could be the climate risk such as an airline needing to increasingly account for extreme weather conditions and the corresponding impact on ground operations.
The CSRD will rule that companies need to seek third-party assurance. This assurance will check a firm's methodologies, trace audit trails, and examine controls and processes.
Furthermore, companies must report digitally. The digital format allows investors and other stakeholders to better compare ESG performance between different portfolio companies, different departments, and different time periods.
Firms must publish this sustainability information in annual reports on their website for everyone to see! It is expected that this public transparency will further encourage portfolio managers to develop more sustainable practices.
The adoption of the CSRD is a major step forward in the EU’s commitment to sustainability. It marks an important milestone in the transition to a more sustainable economy. KEY ESG's software collates all of the new CSRD requirements and breaks it down into simple and actionable points that facilitate compliance. It sets out the processes required, and it optimises reporting systems.
The software gathers key information to provide clear audit trails, making it easy for third party assurers to review any relevant data they may require. In ensuring that all data is reported digitally from the outset, companies can ensure that they are getting off on the right foot and upholding the new digital reporting requirements from the start.
The team at KEY ESG are keeping a close eye on the CSRD reporting requirements. We'll be integrating them into our software as soon as they are available. In deferring to our experts, managers can simplify their reporting strategies and can rest assured that they remain fully compliant.
As always, if you have any questions - big or small - on the CSRD, feel free to contact our team. We're passionate about what we do, and we're always happy to help with all things ESG.
If you're unsure where to start with your ESG reporting, why not book a free demo of our software?