Episode 2 Introduction to Corporate Sustainability Reporting Directive (CSRD)
From NFRD to CSRD: Evolution of Sustainability Reporting in the EU
In our previous blog post, we discussed the European Union’s Green Deal, a set of proposals aimed at transforming the EU into a modern, resource-efficient, and competitive economy by 2050. Today, we delve into the Corporate Sustainability Reporting Directive (CSRD), a significant step towards achieving the goals of the Green Deal.
The Evolution from NFRD to CSRD
Before the introduction of CSRD, sustainability reporting in the EU was governed by the Non-Financial Reporting Directive (NFRD). The NFRD required certain large companies to provide non-financial disclosure documents, commonly known as sustainability reports. However, the CSRD, which came into force on January 5, 2023, has expanded the scope and strengthened the rules concerning the social and environmental information that companies have to report.
The Added Value of CSRD
The CSRD is a response to the need for sustainable finance, which involves redirecting capital flows towards sustainable activities. For this, we need qualitative information and rules for this information, which is precisely what CSRD provides. It imposes rules for sustainability information, ensuring that investors and other stakeholders have access to the information they need to assess the impact of companies on people and the environment.
The Objectives of CSRD
The overarching objective of the CSRD is to ensure the same level of quality for sustainability information as for financial statements. This objective will be achieved by expanding the number of companies concerned compared to NFRD and imposing a greater number of information requirements.
How CSRD Achieves Its Objectives
The CSRD introduces two key concepts: European Sustainability Reporting Standards (ESRS) and Materiality Assessment.
ESRS
The ESRS are a set of standards developed by the European Financial Reporting Advisory Group (EFRAG) for corporate sustainability reporting. These standards apply to companies under the scope of the CSRD regardless of which sector they operate in.
Materiality Assessment
Materiality Assessment is based on the double materiality concept. It involves identifying and categorizing material issues that affect a company’s regulatory compliance and performance. It considers both the impacts from companies on the environment and society, and the financial consequences for companies.
New Governance Responsibilities
Under CSRD, the responsibilities of governance will be extended to sustainability information. For example, the audit committee will have the same level of responsibility for sustainability information as for financial information. This could be an audit committee or another committee by delegation of the board.
Assurance Requirements
The CSRD mandates the audit of the sustainability information. This will have a significant impact on IT systems and processes, with a big focus on internal controls and IT systems. They will need to be reinforced for sustainability information, similar to a financial audit.
CSRD: A Strategic Exercise
It’s important to note that CSRD is not a compliance exercise but a strategic exercise. It imposes an obligation to report, not an obligation to behave, even though there are some requirements on what companies do. The obligation to behave is captured by another directive currently under development, the Corporate Sustainability Due Diligence Directive (CSDDD).
In conclusion, the CSRD is a significant step towards achieving the goals of the EU Green Deal. It fosters sustainable and responsible corporate behavior and anchors human rights and environmental considerations in companies’ operations and corporate governance . As we move towards a more sustainable future, the CSRD will play a crucial role in ensuring transparency and accountability in corporate sustainability reporting.