Starting in January 2024, companies operating in the European Union will be subject to new non-financial and sustainability reporting requirements under the EU’s Corporate Sustainability Reporting Directive (CSRD). This advancement reflects a shift in how governments view the reporting of Environmental, Social, and Governance (ESG) data, including carbon emissions. ESG reporting is crucial for stakeholders, particularly investors, as it allows them to evaluate the risks associated with their investments by understanding a company’s impact on people and the planet. It also helps them assess how climate change disasters can affect businesses. Furthermore, robust sustainability reporting plays a vital role in establishing trust and enhancing a company’s reputation. In the United States, the Securities and Exchange Commission is also working on climate disclosure regulations that will require companies to report climate risk for the first time.
The CSRD, which came into effect in January, represents a significant expansion of required sustainability or ESG reporting. In July of this year, the European Commission adopted the first European Sustainability Reporting Standards (ESRS) for entities subject to the CSRD. These standards are currently under scrutiny by the EU Council and the EP for approval or rejection. If approved, they will replace the current Non-Financial Reporting Directive (NFRD) framework. The CSRD aims to improve the quality of sustainability reporting throughout the region, applying to both EU and non-EU businesses. The directive will broaden the scope of companies covered, increasing the number from the initial 11,000 to 50,000. Companies that earn $166 million or €150 million annually and have listed securities on the EU’s regulated market fall under the scope of the Corporate Sustainability Reporting Directive. Starting in 2024, the new directive will extend the scope of the EU taxonomy and require disclosure against ESG indicators.
The CSRD has several objectives. It aims to channel capital flows into sustainable businesses, playing a critical role in the region’s Sustainable Finance Strategy. This is essential for achieving the European Green Deal goals, including reducing net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels and reaching climate neutrality by 2050. Meeting these targets is only possible if financiers have access to sufficient information on a company’s sustainability data and performance. By providing this information, the CSRD enables investors to make informed decisions and invest in sustainable businesses. The binding framework creates a comprehensive, transparent, and uniform reporting system for companies in the EU. The development of the directive has been informed by international references such as the Task Force on Climate-related Financial Disclosures (TCFD), the Carbon Disclosure Project (CDP), and the EU taxonomy, which promotes investments in sustainable activities to achieve net zero targets. Failure to comply with the new reporting framework will result in significant fines.
The ESRS are the ESG quantitative and qualitative indicators used to report under the new directive. The reporting requirements are divided into three major ESG categories: double materiality, scope, and time horizon. The double materiality principle requires companies to assess the significance of topics related to both financial and ESG matters. The scope encompasses the company’s entire value chain, and the time horizon includes qualitative and quantitative information for short-term, medium-term, and long-term periods as necessary. The directive also emphasizes due diligence, requiring companies to identify, prevent, mitigate, and account for their impacts on the planet and people. Additionally, the reports must be verified annually by a third-party, independent audit firm accredited by each member state.
The CSRD applies to large EU companies, listed or not, as well as non-EU large companies listed on EU regulated markets. These businesses typically have 250 or more employees and a total balance sheet of over €20 million. Small and medium enterprises (SMEs) listed on the EU’s regulated markets, both EU and non-EU, are also affected. Micro-enterprises are exempt, but small and non-complex credit providers and captive insurance companies are not. The CSRD will also impact large non-EU entities with significant activity in the EU, a turnover of over €150 million, and a large branch or subsidiary in the region.
Reporting under the new directive will follow a similar structure to the existing framework, requiring non-financial information to be included in companies’ annual reports. The report can be in a single consolidated format or divided into four separate sections: general information, environmental, social, and governance. Companies may also use references from the ESRS guide, such as ESRS E2-5, paragraph 22. The reporting is annual and must adhere to specific timelines. One major difference between the existing framework and the CSRD is the requirement for companies to share their reports in certain digital formats. Additionally, companies must use digital tags to ensure their reports are machine-readable under the European Single Access Point (ESAP). Digitalization is crucial for enhancing access to and reuse of the data. The ESAP will handle information accessibility, analysis, and comparability of these reports. Companies that have been following the CDP may find it easier to align their reporting with the CSRD, as up to 90% of the indicators in the new climate change reporting standard align with the CDP Climate Change 2023 Questionnaire.
In summary, the EU’s Corporate Sustainability Reporting Directive represents a significant shift in ESG reporting, expanding the scope and depth of sustainability disclosures. By providing comprehensive and transparent reporting guidelines, the CSRD aims to channel investments into sustainable businesses, contributing to Europe’s ambitious net zero goals.
