The Corporate Sustainability Reporting Directive (CSRD) will replace the NFRD (Non-Financial Reporting Directive) in 2024, bringing several changes for companies subject to non-financial reporting obligations. These changes include a broader scope, richer reporting content, more detailed impact assessment, and stricter data verification.
The CSRD introduces standardized norms known as the European Sustainability Reporting Standards (ESRS). These standards will enable European companies to adhere to specific and harmonized reporting criteria.
What are the ESRS?
ESRS are the new non-financial reporting standards established by the EFRAG (European Financial Reporting Advisory Group) as part of the implementation of the CSRD. Assigned to this task, the EFRAG worked closely with the European Commission to develop harmonized ESG (Environmental, Social, and Governance) reporting criteria for all European Union countries.
The ESRS project was submitted by the EFRAG in the fall of 2022. The European Commission worked on this proposal until June 2023, leading to the adoption of the ESRS standards in late July 2023.
The CSRD directive is scheduled to be gradually implemented between 2024 and 2029, depending on the type of business. Initially, for smaller affected companies, the reporting obligation will only apply to a portion of the ESRS standards.
Which companies are affected by the ESRS?
The European Sustainability Reporting Standards apply to all companies within the scope of the CSRD directive, totaling more than 50,000 companies (compared to approximately 11,000 for the NFRD). The companies affected include:
Large companies exceeding at least 2 of the following criteria: more than 250 employees, €50 million net turnover, or €25 million balance sheet total.
Listed SMEs exceeding at least 2 of the following criteria: more than 10 employees, €900,000 net turnover, or €450,000 balance sheet total.
Non-European companies operating within the EU whose turnover in Europe exceeds €150 million. The ESRS requirements will be initially streamlined for companies with fewer than 750 employees.
A CSRD implementation schedule defines four major dates based on the criteria outlined above.
Focus on the 12 European Sustainability Reporting Standards
The 12 ESRS are grounded in the three pillars of CSR (Corporate Social Responsibility), specifically focusing on ESG criteria: environmental impact, social impact, and governance practices. The ESRS are divided into two cross-cutting standards (ESRS 1+2) and ten topical standards (E1 to E5, S1 to S4 and G1).
In their reporting process, companies subject to the CSRD will be required to disclose general information, data related to the environmental aspect, information related to the social aspect, and finally, governance information.
Only the disclosure of ESG data from the general section is mandatory for companies. For the other criteria, the themes to be considered and published are determined through the analysis of double materiality (financial materiality and impact materiality), a central concept of the CSRD.
General Information
The general criteria encompass ESRS 1 and 2, aiming to provide an overall view of the company's sustainability performance. An annual report is expected, outlining the company's strategy and objectives to enhance its ESG performance.
Environmental Information
The environmental section includes ESRS E1, E2, E3, E4, and E5, focusing on climate change, pollution, marine and water resources, biodiversity and ecosystems, and resource utilization in a circular economy. In this part, the company must disclose, among other things, its greenhouse gas emissions, the actions taken to reduce them, and practices aimed at mitigating pollution risks.
Social Information
The social section includes ESRS S1, S2, S3, S4 dedicated to the workforce, employees in the value chain, communities affected by activities, consumers, and the use of products or services. These criteria address various issues related to inclusion, safety and health, and fair labor practices. The reporting primarily focuses on the company's HR data.
Governance Information
The governance section comprises a single ESRS criterion (G1), focusing on business conduct. The data pertains to transparency and internal control systems implemented to ensure integrity in practices.
How to conduct a double materiality assessment within the ESRS framework?
The first step is to compile a comprehensive list of relevant environmental, social, and governance (ESG) issues for the company. This can be done by analyzing industry standards, current regulations, known risks, etc. It is advisable to involve various stakeholders (employees, customers, suppliers, NGOs, etc.) to anticipate potential controversies and identify risks and opportunities.
For each identified issue, two aspects need to be evaluated according to the EFRAG methodology:
Impact materiality (inside-out): This evaluates the real and potential positive and negative impacts of the company's activities on the environment, society, and the economy.
Financial materiality (outside-in): This examines how sustainability issues (environmental, social, governance) affect the company's financial performance and value creation.
This dual assessment helps determine "double material" issues. Issues identified as doubly material must be included in the ESRS reporting and presented in a double materiality matrix.
The double materiality assessment will determine the European Sustainability Reporting Standards on which the company must report.
How to prepare for the ESRS?
The implementation of the ESRS, though gradual, represents a new era of ESG reporting for European companies. It is crucial to prepare for this transition by becoming acquainted with the standards and understanding their structure: a mandatory cross-sectional block and three blocks covering the ESG aspects that form the three pillars of CSR.
The cross-cutting standards, or general information (ESRS 1 and 2), provide the framework and structure for the final report. This comprehensive section serves as a reference point for suitable and systematic reporting practices, offering relevant insights into how companies identify risks, impacts, and opportunities in the context of double materiality assessment.
It is essential to involve all stakeholders in the reporting process, rather than relying on a single sustainability-focused team. The data collection process will be optimized if every department comprehends and actively participates.
To report for the year 2024, the identification and collection of data should commence at the beginning of the fiscal year. Therefore, decisions regarding the data to be published and how it will be collected need to be made as early as possible. Conducting a carbon footprint assessment and a double materiality analysis will help anticipate reporting requirements effectively.
Conclusion
Compliance with the European Sustainability Reporting Standards (ESRS) poses a significant challenge for European companies, requiring adherence to a complex reporting framework that may encompass over 82 disclosure requirements and more than 1,000 data points, structured into a maximum of four standard groups. In this context, anticipation is crucial. This is facilitated by the introduction of a gradual implementation schedule for the CSRD directive, providing businesses with more time and flexibility, especially those previously not subject to the reporting obligations outlined by the NFRD.
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