The CSRD: Revolutionizing Corporate Reporting in the EU
By Vishnupriya Chandramouli
Addressing the Climate Crisis: The Role of the CSRD
The Corporate Sustainability Reporting Directive (CSRD), enacted by the European Union (EU) in 2023, stands as a cornerstone of the European Green Deal. As the world grapples with the escalating frequency and intensity of climate-related crises, the CSRD's mandate for companies to disclose their environmental and social impacts becomes even more imperative. The CSRD, a significant enhancement over its predecessor, the Non-Financial Reporting Directive (NFRD), expands its scope to encompass a wider range of companies, ensuring that a greater number of businesses are subject to its requirements. Aligned with the EU's ambitious climate-neutrality target and Green Deal initiatives, the CSRD supports a more sustainable future through enhanced transparency and accountability.
The CSRD's Expanding Reach and Phased Implementation
The CSRD has a far-reaching impact, extending to a significant portion of companies operating within the European Union. All limited liability companies fall under its purview, which are categorized into micro, small, medium and large enterprises based on their financial performance (balance sheet total and net turnover) and number of employees. While the legislation primarily applies to EY companies, it also extends to consolidated non-EU parent entities that meet certain conditions.
To allow companies time to adapt, large listed companies, large banks, and large insurance undertakings must start reporting in 2024, while smaller entities have a more gradual phase-in. SMEs listed on EU-regulated markets exceeding certain thresholds must also comply by 2026, with an opt-out option until 2028. Non-EU companies with significant EU operations must comply from 2028. This phased approach ensures a smooth transition to greater sustainability reporting across the European business landscape.
ESRS: A Cornerstone of the CSRD
The CSRD mandates that companies report in accordance with the European Sustainability Reporting Standards (ESRS), adopted by the European Commission on July 31, 2023. These comprehensive standards, developed by the European Financial Reporting Advisory Group (EFRAG), provide a framework for sustainability disclosures, ensuring consistency and comparability across the EU.
The ESRS provide a comprehensive framework for companies to disclose their sustainability performance. There are 12 European Sustainability Reporting Standards (ESRS). These standards are divided into two categories:
Mandatory cross-cutting standards: These standards are integral to all organizations aiming for CSRD readiness. There are two standards in this group:
ESRS 1 General Requirements: This standard outlines the overall principles and concepts that must be followed when preparing sustainability reports. It provides guidance on the structure, content and presentation of sustainability information.
ESRS 2 General Disclosures: This standard specifies the essential information that must be disclosed across all sustainability topics. It covers areas such as governance, strategy, impact, risk and opportunity management, and metrics and targets.
Topical standards: Beyond the foundational requirements, the ESRS offer ten topical standards, providing specialized frameworks for disclosing specific ESG topics. These standards, along with their individual disclosure requirements and data points, are subject to a materiality assessment. This ensures that companies report only information relevant to their business model and activities, tailoring their disclosures to their unique circumstances.
Guiding the Application of ESRS: The Double Materiality Perspective
The ESRS require companies to disclose information about their sustainability performance from a double materiality perspective. This means companies must report on both their impacts on people and the environment, as well as how social and environmental issues affect their financial risks and opportunities. This holistic approach offers several key benefits: a comprehensive understanding of sustainability risks and opportunities, effective risk management, enhanced stakeholder engagement, future-oriented decision making and alignment with global trends.
A Positive Development: The Alignment of ESRS and ISSB
Another promising aspect of the ESRS is their close alignment with the International Sustainability Standards Board (ISSB) standards, fostering a more harmonized global landscape for sustainability reporting. The IFRS Foundation, which oversees the ISSB, and the EFRAG, the body responsible for developing the ESRS, have published guidance on the interoperability of these two sets of standards. This guidance underscores the significant alignment between the ESRS and ISSB standards, particularly in the realm of climate-related disclosures. This convergence fosters a more harmonized global landscape for sustainability reporting, reducing the burden on companies operating in multiple jurisdictions and enhancing investor confidence.
Net Zero Certifications and CSRD/ESRS Compliance: A Synergistic Relationship
The ESRS offer ten topical standards, including five focused exclusively on environmental factors: Climate, Pollution, Water and Marine Resources, Biodiversity and Ecosystems and Resource Use and Circular Economy. These standards align closely with the metrics and goals of net zero certifications, such as the Global Network for Zero’s. External validation and assurance provided by these certifications can enhance the credibility of sustainability reports.
Additionally, pursuing net zero certifications can enhance a company's reputation, attract investors and talent, and inform strategic planning. By aligning with net zero goals, companies can streamline their compliance with CSRD and ESRS, demonstrating their commitment to sustainability and achieving a more sustainable future. Ultimately, this helps contribute significantly to the ambitious goals of the European Green Deal. This includes achieving net-zero greenhouse gas emissions by 2050 and reducing emissions by 55% compared to 1990 levels, paving the way for the EU to become the world's first climate-neutral bloc.
Vishnupriya Chandramouli is an associate with the Global Network for Zero. With four years of diverse audit experience across manufacturing, banking, insurance and services sectors, she honed her financial acumen, leading her to pursue the ACCA qualification. Driven by a passion for driving sustainable growth and spreading awareness about ESG, she transitioned from a four-year audit career to focus on the intersection of finance and sustainability. As an ACCA member, she joined GNFZ to contribute to the development of innovative solutions at the forefront of net zero and climate reporting. Her role involves in-depth research, strategic analysis and close collaboration with the technical team to ensure GNFZ’s offerings align with the evolving regulatory landscape. Connect with Vishnupriya on LinkedIn.