Corporate Sustainability Reporting legislation and standards approved

Thursday, 10 November, the European Parliament approved the new CSRD – Corporate Sustainability Reporting Directive, which will replace the current Nonfinancial Reporting Directive. European Sustainability reporting Standards have also been finalized and released on November 15 form EFRAG – European Financial Reporting Advisory Group. Standards will be approved by the European Commission by June 2023. CSRD and the upcoming standards will bring major changes in business, risk assessment, risk management, transparency, reporting and company compliance.

Main changes

• The Directive is very inclusive and will directly cover about 75% of the European economy, while other companies will also be impacted through value chains.
• The powers of the Directive extend beyond the EU border and include companies doing business with or within the EU, also compliancy through the value chains.
• The CSDR requires companies to disclose information about the impact of their activities on the society, the environment and governance disclosures, and information about all climate risks to which the companies are exposed (i.e., double materiality matrix) – the company’s impact in the whole value chain is considered.
• The CSRD requires consistent communication in all three aspects – Environmental, Social and Governance (ESG).
• The Directive requires the identification of risks, a sustainable strategy to eliminate the risks, and quantitative targets. In this process company needs to engage its stakeholders and use methodology of double materiality matrix.
• One single, i.e., integrated report is required (management, financial and sustainability report in one), the reported results and definitions of an undertaking must be consistent, clear, and demonstrable, transparency must be guaranteed.
• The reporting format is XHTML in line with the ESEF regulation (European Single Electronic Format).
• The first year of compliance is the financial year 2024 for companies with more than 500 employees, while in 2025, compliance will be required for all companies with more than 250 employees.
• The powers of the Directive extend beyond the EU border and include companies doing business with or within the EU.
• The Directive requires a look into the future and the responsibility of the management.
• Most important: the integrated report must be audited by an independent expert (limited assurance, which will turn into reasonable assurance in 3 years).

2024 will be the first year of compliance with CSRD, for companies 2023 year should be a year of assessing readiness and compliance, gap analysis and a year of developing of strategies, methodologies, and tools. Developing a sustainable strategy, goals and activities is both strategic and technical process that requires broad knowledge, new competences, and innovative approaches. The future competitive edge in relation to investors, the market, talent acquisition and company reputation will be the result of your sustainability strategy results, which should be clearly and transparently communicated in your company's report.

Advice form Deloitte: the approach to implementation of sustainability, solely through the angel of compliancy and detached form business is flawed, as it will not create value and therefore contribute to business development of your company, your industry, and your region economy.

We are available to you for more information and support when:

• Building competences and knowledge within your teams
• When forming an ESG strategy, actions, methodologies
• Performing gap analysis on ESG standards or report
• Developing ESG report
• Performing ESG report Assurance to confirm your statements and data & strengthen relationship with your customers and investors
• Or when facing any other specific business challenges in the context of ESG and sustainability

A glimpse into the future:

• After the Corporate Sustainability Reporting Directive (CSRD), the Directive on Corporate Sustainability Due Diligence (CS3D) will be adopted, which brings even bigger responsibilities for companies and will require compliancy & reporting in company annual integrated report.
• The Carbon Border Adjustment Mechanism (CBAM) and many policies that stem from EU's circular strategy, such as the Sustainable Product Initiative, are also in the process of approval.
• The powers and the scope of the described CSRD and of the reporting standards will be revised every 2 years.