CSRD reporting: What you need to know

CSRD reporting: What you need to know

CSRD et Taxonomie européenne
The European Commission (EC) has issued the final regulation supplementing the Corporate Sustainability Reporting Directive (CSRD) regarding sustainability reporting standards to be followed in the European Union (EU). The European Sustainability Reporting Standards (ESRS) apply to all companies within the scope of CSRD. As the final text of the ESRS is now available, companies within their scope need to get ready now as some reporting entities within the scope of CSRD will have to apply ESRS for reporting periods commencing on or after 1 January 2024. The following FAQs will help you understand a bit more about the CSRD and the ESRS that have been released.
What is the CSRD?

On 5 January 2023, the Corporate Sustainability Reporting Directive (CSRD) entered into force. It builds upon its predecessor the Non-Financial Reporting Directive (NFRD), which was issued in 2018. The CSRD expands the range of entities who will have to disclose sustainability information and introduces detailed reporting across a number of categories: preparation, strategy and business model, due diligence, governance, risk and opportunity management, and targets and metrics.

 

What is the objective of the CSRD?

The objective of the CSRD is to improve the existing requirements of the EU’s Non-Financial Reporting Directive (NFRD), to better harness the potential of the EU in the transition to a fully sustainable and inclusive economic and financial system, in accordance with the European Green Deal and the UN Sustainable Development Goals.

 

What is the timeline for CSRD?

Which entities will be in scope for CSRD?

· Insurance and Banking firms

· Companies listed on EU-regulated markets

· “Large EU Companies (Listed and not Listed)"

· EU companies that are a Parent of a “Large Group”

· Small-medium sized EU undertakings

· Subsidiaries and branches in the EU

The scoping criteria must meet at least two of the following:

1. Total assets exceeding €20 million

2. Net turnover exceeding €40 million

3. 250+ employees.

Additional rules and scoping criteria apply for Group and EU Subsidiary entities of non-EU parents as defined within the CSRD.

What are the key consolidation considerations?

· Parent undertakings of a large group need to report on a consolidated basis

· Consolidated financial reporting is not the same as consolidated sustainability reporting

· Entities need to provide an adequate understanding of the risk / impacts of the subsidiaries and disclose based on materiality which may go beyond control

· Subsidiaries may be able to apply an exemption from preparing its own sustainability statements where the parent in the Group is consolidating across the structure

· A temporarily available variant of the subsidiary exemption is available for certain EU subsidiaries with non-EU parents

Consolidated sustainability reporting also applies to sustainability statements and goes beyond consolidation requirements covered within the financial statements with entities needing to provide an adequate understanding of the risk / impacts of the subsidiaries across any material topics.

What is the difference between NFRD and CSRD?

The most significant difference is the introduction of mandatory reporting standards under the CSRD in the form of the European Sustainability Reporting Standards (ESRS). Entities reporting under CSRD must apply these EU sustainability reporting standards and bring sustainability information into their annual management report, applying the same reporting period for both.

Which ESRS will apply to the first entities reporting under CSRD?

The EU Commission is at the final stages of approval of the first tranche or Set 1 of the ESRS. The last public consultation on the final amendments closed on 7 July 2023 and the final text was issued within the EU Delegated Acts on July 31 2023.

The first set of ESRS includes two 'cross cutting' and ten topical standards across the three ESG areas as outlined below:

 

What is the 'double materiality' principle?

The CSRD and ESRS introduce the concept of double materiality. Entities applying ESRS must report material impacts, risks and opportunities or 'IROs' across each topical area within their sustainability statements that are both financially impactful (outside in) and have an impact to people and the environment (inside out).

Double materiality concept: Summary overview and concepts

What is the relevance of Stakeholders to the materiality assessment process?

Within ESRS, stakeholders are defined as both users of sustainability statements and other stakeholders or information users. Stakeholders are those who can affect, or be affected by, the organisation and both need to be incorporated into the due diligence process.

What phase-in reliefs have been provided?

A summary of phased-in Disclosure Requirements for all reporting entities is outlined below:

For reporting entities with less than 750 employees:

In addition, until 2030, EU subsidiaries of non-EU parents can prepare just one report, which includes subsidiaries that would ordinarily be required to report separately, due to size or if they are listed.

What's a reporting boundary and what needs to be considered?

CSRD expands the reporting boundary for undertakings beyond their own operations to include both upstream and downstream value chain activities. An undertaking must report material impacts, risks and opportunities within the value chain against ESRS disclosures or if other material impacts exist not covered by ESRS include entity specific disclosures. This applies to all tiers of the value chain.

Readiness assessment

Depending on when you come into scope for CSRD and what your maturity level is with respect to your sustainability strategy, structures and reporting process,  you may have a number of areas to consider including:

Develop appropriate skills

CSRD Maturity Level: Do you have an established sustainability reporting process (previously reporting voluntarily or under NFRD) and what is the awareness, skills available and knowledge to transition into CSRD and ESRS requirements?

Communication with the statutory auditor

Other areas to consider include early engagement with your statutory auditors to ensure a smooth process and timeline agreement for year one reporting.

Appoint responsible individuals

Who owns the sustainability reporting process and has that ownership been established within the internal operational structure (CFO, CRO, internal project team)?

Determine timeline

What is your timeline on implementation and have you established your scoping requirements as a large entity, SME, EU subsidiary or as part of the value chain of upstream or downstream business partners?

Identify gaps

What needs to be put in place to ensure readiness and compliance with CSRD and other new regulatory reporting requirements? This includes a review, gap analysis and / or initiation of strategy around people, process and technology. Areas to consider include data strategy, availability and systems capabilities, people and resourcing capabilities and any required uptick in either or both to ensure you are ready to comply.