Diving into the Depths of Corporate Sustainability Reporting Mandates
The Corporate Sustainability Reporting Directive (CSRD), an initiative of the European Union, is set to usher in a new era of corporate reporting with an intensified focus on environmental, social, and governance (ESG) factors. Building upon the foundations laid by the Non-Financial Reporting Directive (NFRD), the CSRD will significantly expand the number of companies obligated to disclose non-financial information. Double materiality an an integral part of CSRD is also required.
What is the CSRD?
The Corporate Sustainability Reporting Directive is a groundbreaking EU initiative designed to enhance the reporting requirements of companies operating within the European Union. It officially came into effect on January 5, 2023, replacing the pre-existing NFRD. However, it’s worth noting that the NFRD remains effective until the CSRD is fully implemented.
The CSRD’s significance lies in its expansion of reporting obligations, encompassing a more extensive range of environmental and social aspects. The directive is projected to increase the number of companies required to report from approximately 11,000 to over 50,000, which includes 10,000 non-EU entities with substantial operations within the EU. Companies falling under the scope of the CSRD must apply the new rules for the financial year commencing in 2024, with reports due to be published in 2025.
Who Does the CSRD Apply To?
The application of the CSRD is not uniform; rather, it follows a phased approach. Initially, it applies to all EU-based public companies, with exceptions for micro-enterprises. Additionally, it encompasses EU-based private companies categorised as ‘large,’ defined as companies meeting two or more of the following criteria: having 250 or more employees, a turnover of over €40 million, and total assets of over €20m.
As the directive takes effect, it will gradually expand to include consolidated reporting for non-EU parent companies with substantial EU revenue and specific qualifying criteria. The overarching objective is to provide stakeholders, especially investors, with access to accurate and transparent information, enabling them to assess the impact of companies on both people and the environment. This, in turn, helps investors evaluate the financial risks and opportunities arising from sustainability issues.
Required Disclosures under the CSRD
One of the defining aspects of the CSRD is the imposition of specific reporting standards, known as the European Sustainability Reporting Standards (ESRS). These standards outline the requirements for disclosing information on various sustainability topics. The CSRD mandates reporting under twelve standards, with two covering general disclosures relevant to all companies falling under its scope. The other ten standards are referred to as ‘topical standards’ and require more detailed and specific disclosures. However, companies are only obliged to report on these topical standards when they are considered ‘materially’ relevant to their operations.
This is where the concept of the ‘double materiality assessment’ becomes essential, as it helps companies determine which of these topical standards are material and require disclosure. To comprehend the double materiality assessment better, let’s first examine the sustainability topics covered by the ESRS.
Understanding the Sustainability Topics Covered by ESRS
General Disclosures: These disclosures are mandatory for all companies within the scope of the CSRD and encompass a wide range of aspects, including governance, strategy, impact, risk and opportunity management, metrics and targets. Additionally, companies are required to share information regarding their ESG policies, alignment with EU taxonomy, stakeholder engagement, and details on how the material impact of environmental, social, and governance standards was assessed.
Environmental Standards: There are five environmental standards under the ESRS, each addressing specific aspects of environmental impact:
ESRS E1 – Climate Change Standard: Covers scope 1, 2, and 3 emissions, climate-related risks, carbon pricing, energy mix, and the organisation’s transition plan to align with the Paris Agreement targets, such as achieving net-zero emissions by 2050.
ESRS E2 – Pollution Standard: Pertains to disclosures regarding air, soil, or water pollution arising from a company’s operations, including its value chain.
ESRS E3 – Marine Resources Standard: This standard concerns water consumption, recycled or reused water, and the adverse impacts of the company on marine ecosystems.
ESRS E4 – Biodiversity and Ecosystems Standard: This standard addresses the impact of organisations on biodiversity and ecosystems, requiring companies to disclose a plan to address any biodiversity loss.
ESRS E5 – Resource Use and Circular Economy Standard: Companies must disclose information on waste generated and relevant circular resource flows within their operations.
Social Standards: The ESRS includes four social standards, each focusing on a different aspect of social impact:
ESRS S1 – Own Workforce Standard: Companies must share quantitative information, such as employee location and gender breakdown. Additionally, they are required to provide information demonstrating compliance with child labor policies and alignment with UN Guiding Principles on Business and Human Rights.
ESRS S2 – Workers in Value Chain Standard: This standard necessitates the disclosure of policies related to upstream workers in the value chain, such as human trafficking policies and how value chain workers are considered in operational decision-making.
ESRS S3 – Affected Communities Standard: This standard focuses on the impact of the organisation on communities and the policies in place to ensure these communities can effectively raise issues with the company.
ESRS S4 – Consumers and End-Users Standard: Similar to S3, this standard concentrates on issues raised by end-users of goods or services produced by the company.
Governance Standard: The final standard in the ESRS is ESRS G1 – the Business Conduct Standard. This standard mandates both qualitative and quantitative disclosures. Qualitative disclosures include procedures to create organisational transparency and information on how issues such as corruption and bribery are addressed. Quantitative aspects of the standard include key metrics like the number of bribery incidents and the value of political contributions.
Double Materiality in the Context of the CSRD
Double Materiality assessment is required under the Corporate Sustainability Reporting Directive (CSRD). The CSRD requires companies to undertake a double materiality assessment to identify which sustainability matters are most material to the organisation and its stakeholders. The double materiality assessment not only determines the scope of the organisation’s sustainability reporting but also enables an efficient allocation of the resources needed to achieve CSRD compliance and provides indispensable insights for shaping company strategy. Undertaking a ‘double materiality’ assessment is mandatory under the Corporate Sustainability Reporting Directive (CSRD) for reporting entities that must report under the CSRD. The double materiality concept requires companies reporting on sustainability to consider the relevance of a sustainability matter from two perspectives, i.e., from an impact point of view and/or from a risk and opportunity perspective.
