An introductory guide to the Corporate Sustainability Reporting Directive (CSRD)
Published: 29 Aug 2023 · Last updated: 15 Oct 2023
The Corporate Sustainability Reporting Directive (CSRD) is a new ESG reporting framework set to come into force on 1st January 2024 for organisations and business entities operating in the European Economic Area (EAA).
From 2024 onwards, the European Union (EU) will be ramping up efforts towards sustainability reporting through, and businesses falling into the remit of the new directive will need to improve their reporting processes in order to comply.
This blog provides an explanation into CSRD eligibility criteria, timelines for implementation, and some of the new requirements such as double materiality assessments. For those looking to take the first step towards CSRD compliance, you can download our whitepaper for more detail: here.
Which companies will be affected by the CSRD?
CSRD will primarily affect companies based in the EU. However, non-EU firms with a turnover of above €150 million in the EU will also have to comply. Over 50,000 companies – from SMEs to listed firms – will need to disclose ESG data. This is an increase from around 10,000 companies who were required to report on ESG metrics under the Non-Financial Reporting Directive (NFRD). For many of these companies, this will be their first time going through an ESG reporting process.
The new regulations will apply to public companies (excluding micro-enterprises) and private organisations that are deemed “large”. To be considered large, they must meet at least two of the following three criteria:
(1) Over 250 employees;
(2) Over €40m in annual revenue;
(3) Over €20m on their balance sheets.
CSRD is due to be phased in over the next five years, starting with those companies that already report on NFRD in 2024; “large” undertakings following in 2025; with listed companies and certain financial institutions being required to report in 2026.
What is the timeline for CSRD implementation?
The CSRD was introduced in January 2023, and the European Commission released the final European Sustainability Reporting Standards (ESRS) in July 2023.
The diagram below demonstrates the phasing in of CSRD. To speak to an expert about your company’s eligibility or timeline for implementation, please contact us.
What is Double Materiality?
One of the unique features of the CSRD is its emphasis on "double materiality”, which essentially means that companies need to report on two facets of their operations:
- Impact Materiality: the impact of their activities on ESG factors.
- Financial Materiality: how ESG matters affect their operations and their finances.
For example, following a double materiality audit, an infrastructure company might need to report on the health and safety of its staff at a particular site, as well as the risk of flooding of the site to the company’s profitability. Similarly, a clothing brand might be required to report on employee churn in its factories, as well as the risk of civil or political unrest on its ability to produce clothing items and subsequent financial profitability.
Below is an example case study of some of the double materiality assessments of a clothing company.
Impact Materiality:
How the firm impacts ESG
Environmental: The company uses irrigation on certain cotton farms, relying on local water reserves.
Action Taken: The firm collaborates with local farmers to introduce sustainable farming techniques at the most water-intensive sites, like rainwater harvesting and drip irrigation.
Social: By sourcing materials from certain regions, there's a risk that the company is indirectly supporting unfair wages and poor working conditions.
Action Taken: The company runs third-party audits of their supply chain, ensuring that all suppliers comply with ethical labour practices.
Governance: There might be concerns about the company's oversight of its supply chain, since the company has scaled into new regions rapidly.
Action Taken: A committee is brought together to oversee ethical sourcing, ensuring supply chain practices are reviewed and reported on correctly.
Financial Materiality:
How ESG impacts the firm:
Environmental: If the local water reserves are depleted due to excessive water use, cotton yields might decrease, leading to increased costs.
Mitigation Strategy: Understanding the impact of a potential water shortage to its profitability enables the company to put contingency plans in place to reduce its dependency on the local water reserves.
Social: The brand's reputation could be at risk if customers find out about its potential endorsement of unethical labour practices.
Mitigation Strategy: By adhering to ethical protocols and promoting community engagement initiatives, the firm aligns itself with customer values and removes the financial risk of corporate reputation damage.
Governance: Shareholders might be concerned about the company's potential legal liabilities or sanctions due to unethical sourcing.
Mitigation Strategy: A governance committee is appointed to maintain corporate governance policies and proactively resolve issues which may negatively impact the company’s financial performance.
Getting started with CSRD
With the first set of metrics due to be recorded next year, many firms are making the decision to start recording the relevant ESG data now. This will ensure their teams are equipped to do the job properly in 2024, when reporting becomes a legal requirement.
KEY ESG's software collates all of the new CSRD requirements and breaks them down into simple and actionable points that facilitate compliance. If you're unsure where to start with your CSRD reporting, why not book a free demo of our software.
Take a look at our Ultimate guide to CSRD compliance whitepaper for a more comprehensive overview of what’s coming from 2024 onwards. And, as always, feel free to contact our team if you have any questions at all.
