CSRD in focus - navigating the new reporting standards

The Corporate Sustainability Reporting Directive (CSRD) is the successor of the Non-Financial Reporting Directive (NFRD) and has been enacted to increase the number of companies in scope for reporting. Not only was the scope widened for EU companies, but also non-EU companies with large subsidiaries in the EU or generating a revenue of EUR 150m in the EU, are newly in scope. The CSRD introduces the European Sustainability Reporting Standards (ESRS) as the mandatory standard to be used for sustainability reporting. The CSRD has been designed in response to investor and stakeholder demand for more abundant, trustworthy, and comparable sustainability information from companies to better inform their decision making.

The CSRD requires disclosures on sustainability matters generally, bringing both EU and non-EU parent companies and their operations within its scope, thus playing a key role in supporting the delivery of the EU Sustainable Finance Package as well as the European Green Deal. The CSRD also employs a “double materiality” perspective to the reporting obligations, namely, reporting on how sustainability matters affect the company (an outside-in perspective) as well as how the company’s activities affect sustainability matters, like the environmental and society (inside-out perspective). The extensive reporting requirements and future expanded scope make the CSRD comparable to other sustainability reporting requirements, such as the Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB). However, the CSRD goes further than other standards and regulations given its double materiality consideration.

The CSRD reporting requirements require mandatory reporting in accordance with ESRS 2 “general disclosures” and reporting following other ESRS standards until a conclusive double materiality assessment is available. The topic specific standards are as follows:

Within the general and topic specific standards, companies will be required to report on metrics, policies, actions, and targets related to material topics. It is also important to note that if a company does not find E1 Climate Change to be a material topic, it must disclose an explanation as to why the topic is not material.

The CRSD entered into force in January 2023. The first companies, which were already in scope from its predecessor regulation, the NFRD, will have to apply the new rules for the first time in FY2024 for reports to be published in 2025.

• From FY2025 (reporting in 2026) large EU companies not falling under NFRD need to publish their first reports.
• From FY2026 (reporting in 2027) listed SMEs have the possibility of opting-out until FY2028.
• From FY2028 (reporting in 2029) non-EU companies meeting certain revenue thresholds in the EU and non-EU parent companies of large EU companies come into scope.

Large EU companies in scope from FY2025 with the same non-EU parent can take advantage of the transition period until FY2028 and prepare consolidated sustainability reporting that includes all EU companies in scope.

CSRD presents companies with both challenges and opportunities. Those businesses affected by the legislation need to report auditable versions of the impact their activities have on people, the planet, and their exposure to sustainability risks. The European Sustainability Reporting Standard’s does require companies to report up to over 1000 datapoints, which demands considerable time and expertise. In the short term, new cross-functional reporting processes may increase costs. However, meeting the CSRD requirements positions companies as leaders in sustainability, strengthens investor confidence and enhances brand value. In the long term, the CSRD promotes innovation and operational efficiency, turns sustainability reporting into a strategic advantage, and ultimately supports a resilient, sustainable economy.

Effective CSRD reporting and data management can be achieved by using an integrated IT system landscape to connect financial and non-financial information. From data sourcing, storage, calculation, and reporting - whether statutory or managerial - a wide range of solutions now exist and can be adapted to organisations’ architecture and capabilities to facilitate regulatory compliance. Non-financial reporting can benefit from well-established data models, processes, and controls in financial reporting, ensuring high-quality compliance and auditability of the data. For example, hierarchies of ESG metrics can follow the same business dimensions used by finance and operations.