The Corporate Sustainability Reporting Directive (CSRD) is EU legislation intended to improve the quality of disclosure on corporate non-financial information to accelerate the transition to a sustainable economy by 2050, and combat greenwashing, by ensuring sustainability data are comparable, relevant and reliable. This will benefit all stakeholders.
The Directive, which was approved in early November, will apply from 1 January 2024 in a rolling programme of adoption to 2028. Affected in the first two years will be around 50,000 large companies (250+ employees and/or €40m turnover and/or €20m total assets) operating in the EU – listed large to go first, followed by all other large companies. Those businesses will need to report auditable data on the impact of their activities on people, the planet, and their exposure to sustainability risks whether the company is listed on stock markets or not. Non-EU companies with substantial activity in the EU will also have to report (by 2028), and smaller listed companies will follow, in FY2026.
How does it work?
The directive will be underpinned by European Sustainability Reporting Standards (ESRS). These standards will specify how companies report on sustainability matters, and how these affect the business’s development, performance and position. The disclosure requirements ensure greater transparency concerning the impact of business on human rights and the environment, amongst others, and leads the way on international standards for this class of reporting requiring both assurance and improved digital accessibility of information.
The ESG data will be published within in a dedicated section of company management reports, and this will be scrutinised by an accredited independent auditor or certifier. The reporting by non-European companies must also be subject to assurance. From April to August 2022, the European Financial Reporting Advisory Group (EFRAG) consulted with stakeholders and provided technical advice to the European Commission on the draft ESRS. On 22 November, 12 standards are advised by the Sustainability Reporting Board to the European Commission, covering: general principles; general, strategy, governance and materiality assessment disclosure requirements; climate change; pollution; water and marine resources; biodiversity and ecosystems; resource use and circular economy; own workforce; workers in the value chain; affected communities; consumers and end-users; and business conduct.
From 2024 onwards, sustainability reporting for many companies in the EU will logically fall within the domain of the CFO. The reporting will cover 50 mandatory data points specified within the standards on an all-or-nothing basis, meaning that failure to report on the required items could lead to a qualified audit report, or worse – reputational damage in the eyes of consumers and investors. It also requires material commentary on the ESG impact the company is leaving in its wake, in the short and medium term, plus a full analysis of how the company’s activities affect ESG matters along its value chain.
Complying with this reporting requirement will take some time to get right, and the sooner businesses start to adapt and test their capability the better. The scope of the ESRS goes way beyond the boundaries of the business itself (unlike financial reporting), to track its value chain and gauge its wider impact on society and the planet. Having the right systems and processes in place to generate the right quality of data will be a seismic change for most companies concerned. Even those with voluntary reporting experience will find this to be a stretch.
Wim Bartels, partner Deloitte Netherlands