Last update on October 19, 2023
In a nutshell:
- CSRD replaces the previous reporting directive with the aim to improve the consistency and comparability of sustainability reporting
- The first wave of companies are required to follow the guidelines for the 2024 reporting period (with reporting in 2025)
- Double materiality assessment represents one of the central practices that is introduced with the new directive
- It is recommended that you start preparing the implementation of the directive’s reporting standards well in advance
The Corporate Sustainability Reporting Directive, or CSRD, is a hot topic right now among EU-based companies. With its ongoing development and approaching implementation, the directive will require a great deal from these companies when it comes to sustainability reporting.
If you’ve already had a look at the 60+ page legislation, you may have felt a sense of stress when trying to interpret what the new, stringent requirements will mean for your business. Rightly so, as the CSRD is the most extensive set of sustainability laws passed by the EU to date.
To prepare for the upcoming changes, it is crucial to
- get familiar with the requirements and standards outlined in the directive,
- allocate necessary resources,
- and establish robust processes to prepare your reporting.
In this article, we tell you the basics of the CSRD, from when the changes go into effect to what the directive’s reporting standards, also known as the European Sustainability Reporting Standards (ESRS), will encompass, and how you can ensure compliance and begin to prepare yourself for the first reporting cycle.
If you want to continue reading about the steps to prepare for CSRD, you can jump right to the section on the 3 steps for preparation. But first, let’s learn more about the CSRD basics.
From NFRD to CSRD: The Basics
What is the CSRD and why is it Important?
As highlighted in one of the European Parliament sessions, the meaning of CSRD cannot be underestimated: For the first time, sustainability reporting will be put on an equal footing with financial reporting.
The introduction of the CSRD reflects the European Commission's commitment to advancing sustainable development and corporate accountability. By providing a more robust and modernized reporting framework, the directive aims to encourage responsible business practices, drive progress, and achieve sustainability goals, such as reaching net zero carbon emissions by 2050.
This complex new EU legislation, which companies must comply with starting in 2024, seeks to enhance and replace the existing sustainability reporting regulations under the Non-Financial Reporting Directive (NFRD).
The primary objective of the CSRD is to standardize corporate ESG (Environmental, Social, and Governance) reporting. This will be achieved through adherence to standardized reporting requirements, the introduction of a mandatory double materiality assessment, and an audit process to prove the accuracy and reliability of the reported information.
When Do the Directive’s Changes Go into Effect?
The CSRD came into force in January 2023, allowing companies a one-year preparation period to align with the directive's standards.
The guidelines must be followed by the first affected companies during the 2024 fiscal year, with a corresponding report due in 2025.
Initially, this reporting requirement applies to all large companies already covered by the NFRD, but it will gradually begin to include other entities such as listed SMEs, smaller companies, and EU-affiliated companies over the next four years.
Who Does the CSRD Apply to?
The CSRD will apply to:
- All large companies covered by the NFRD, which meet at least two of the following three criteria for two consecutive financial years:
- An average number of employees of greater than 500
- A balance sheet total of more than €25 million
- Net turnover of more than €50 million
-> Starting in the financial year 2024, with reporting in 2025
- All other large companies, which meet at least two of the following three criteria for two consecutive financial years:
- An average number of employees of greater than 250
- A balance sheet total of more than €25 million
- Net turnover of more than €50 million
-> Starting in the financial year 2025, with reporting in 2026
- All listed companies listed on an EU-regulated market, including small and medium-sized enterprises (SMEs), which meet at least two of the following three criteria for two consecutive financial years:
- Over 10 employees
- A balance sheet total of more than €450 000
- Net turnover of more than €900 000
-> Starting in the financial year 2026, with reporting in 2027
- Non-EU parent companies, which meet the following criterion:
- 150 million EUR in net turnover in the EU if they have at least one subsidiary or branch in the EU
-> Starting in the financial year 2028, with reporting in 2029
What Practices are Required Related to CSRD Reporting?
Double Materiality Assessment
In terms of reporting within the scope of the ESRS, companies are required to disclose on sustainability matters that are material to their business and stakeholders. Double materiality considers the financial and the impact dimension of materiality. Both must be assessed and reported according to the relevance for your organization.
Impact materiality: Impact on people and environment
How your company’s actions affect people and the planet over the short, medium and long term, including the impacts of your entire value chain.
Financial materiality: Impact on company value
How sustainability matters impact your company’s development and financial performance in the short, medium and long term.
Digital Reporting
Companies are required to report their sustainability information electronically, using a common reporting format.
Reports in XHTML format according to a digital system of categorization, which is developed together with the standards.
Assurance
Companies are required to ensure the accuracy and reliability of the information they’ve reported through a third-party audit.
Limited assurance (initially required)
Acceptable level of assurance for the intended stakeholders, resulting in a negative conclusion (Nothing indicates that information is misstated).
Reasonable assurance (moving forward)
Level of assurance that requires sufficient evidence, resulting in a positive conclusion (Sustainability information is prepared as required by all applicable reporting standards).
What Are the Consequences of Not Complying with the CSRD?
The decision regarding the specific sanctions to be imposed on companies that fail to comply with the CSRD lies with each member country. However, the EU has provided a set of sanctions as guidance:
- Disclosure of non-compliance to the public;
- Mandate to cease the activities in question;
- Financial penalties.
Understanding the Directive's Standards
The ESRS (EU Sustainability Reporting Standards) encompass a wide range of reporting areas, offering guidance across cross-cutting (general) and topical (environment, social, governance) standards.
There are a total of 12 standards (currently exposure drafts), each outlining how companies should report on specific subject areas. By focusing on the sustainability matters relevant to their operations, companies will track and disclose designated data points within the reporting topics.
- 2 cross-cutting standards
- 5 topical environmental standards
- 4 topical social standards
- 1 topical governance standard
How to Prepare for the CSRD Requirements in 3 Steps
Even though you might not be affected as early as the 2024 reporting year, it's important to start setting up processes for CSRD reporting well in advance to identify what is missing and what needs to be collected in a timely manner
Follow these 3 steps to efficiently prepare CSRD reporting:
1. Identify the Gaps Between Your Current Sustainability Reporting & the CSRD Requirements
-> Compare your current sustainability reporting and frameworks to the requirements set by CSRD.
-> Assess how much information and processes are in place or are lacking. If you already report according to standards and frameworks such as the GRI, TCFD, EU Taxonomy or SFDR, additional requirements might be less numerous.
With Sunhat, you can use your previous GRI, TCFD, EU Taxonomy, SFDR (and many others) disclosures as input for your CSRD preparations with the push of a button.
Key processes to have in place:
- Double materiality assessment (for topical standards)
- Due diligence processes
- Required data collection (What metrics and qualitative information do you need to collect to comply with the disclosure requirements?)
Rely on Sunhat’s embedded requirements checklist and pre-structured guidance on content, layout and metrics to get an overview of what you need and start reporting right away.
2. Set Up a System for Data Collection Processes
-> Build a system where information is collected and maintained in an organized and continuous manner.
-> Make sure you are able to explain how the data was collected and analyzed.
-> Plan for buffer time to collect the required data from third parties, such as your suppliers or partners.
Use Sunhat’s centralized workspace to collect and maintain data from internal and external colleagues and partners for your reporting disclosures. Implement automated workflows that will alert you if the collected evidence is out of date.
3. Don't Wait, Get Started With Your Implementation Plan Early
-> Based on the final ESRS texts, list out all the tasks you must complete to fulfill the requirements you are subject to within each ESRS.
Sunhat’s CSRD module breaks down all the disclosure requirements into more digestible and manageable parts. Get automated updates and notifications on any changes and updated guidance within the module.
-> Set clear timelines and deadlines for when every task needs to be completed.
Sunhat’s automated system will alert you if your evidence is out of date or doesn’t meet certain standards and needs your attention.
-> Make teams, divide up tasks for disclosures and assign them to your team members and other colleagues involved in the reporting process.
Collaborate seamlessly with your team in assigning responsibilities for each disclosure.
👉 If you’d like to learn more about how to get started with CSRD requirements, feel free to reach out to us and request a trial of our CSRD module.
