Corporate Sustainability Reporting Directive (CSRD): Unwrapped
Who it affects and how to prepare
The European Corporate Sustainability Reporting Directive (CSRD) is a game-changer, impacting approximately 50,000 businesses, including larger companies, alongside listed SMEs. Yet, almost 80% of businesses have not started preparing for new Environmental, Social and Governance (ESG) reporting requirements.
At Connect Earth we want to make sure that every affected business is prepared for this upcoming change. We’ve put everything we know about the CSRD in one place, making compliance as easy as possible.
Read on for:
- Who it affects
- What the CSRD means for you
- The importance of ‘double materiality’
- Aligning with the ESRS
- When the directive comes into play
- How Financial Institutions can support their SME members
- A step by step guide on how to prepare
Who does it affect?
EU based companies meeting two of the following three conditions:
- €40 million in net turnover
- €20 million in assets
- 250 or more employees
The CSRD also includes listed SMEs. However, listed “micro” companies – with fewer than 10 employees or below EUR 2 million in turnover – are currently excluded from mandatory sustainability reporting.
While it originates as an EU directive, the CSRD extends its jurisdiction to include foreign companies that maintain a presence within the EU.
Approximately 50,000 organisations are expected to participate in the CSRD’s reporting requirements once all groups have begun reporting.
What is the CSRD?
The CSRD directive will require companies to disclose non-financial information related to their environmental, social, and governance (ESG) performance. The ultimate goals of the CSRD aim to make significant contributions to Europe’s 2050 climate-neutrality objective, aligning with the overarching objectives of the European Green Deal. This includes supporting a globally competitive and resilient industry, renovating energy-efficient buildings, promoting cleaner energy sources, and driving innovation in cutting-edge clean technologies.
The CSRD replaces the former NFRD, adopted in 2014 by the EU, which lacked specificity and scope. The CSRD will affect as much as 5x the amount of organisations – including listed SMEs and non EU companies – as the NFRD and requires a third-party assurance and external auditing; this was optional for most businesses under the previous directive.
There’s also ‘double materiality’ to consider
Like the NFRD, the CSRD operates under ‘double materiality’. A concept requiring companies to disclose information regarding how sustainability issues impact their operations and their influence on people and the environment. In interpreting the draft regulations, it’s likely that the double materiality assessment will need to encompass all levels of the value chain and assess impacts over short, medium, and long timeframes.
While conducting double materiality assessments is essential for crafting a robust sustainability strategy that delivers tangible outcomes and safeguards the business from sustainability-related risks, it’s important to note that these assessments can be time-consuming and require significant administrative efforts. For businesses that will fall under the CSRD’s mandatory compliance from the 2024 financial year onwards, the time to initiate preparations for conducting double materiality assessments is now.
Aligning with the ESRS
The CSRD will enforce disclosures of sustainability related information according to the European Sustainability Reporting Standards (ESRS), the first draft of which was released in late 2022. The ESRS are new standards aiming to standardise non-financial reporting practices globally. They consist of 12 documents covering various aspects: Cross-cutting, Environment (E), Governance (G), and Social (S). Sector-specific ESRS indicators are expected to be published soon.
Benefits of the ESRS:
- Provide a global framework for consistent sustainability reporting.
- Improve transparency and trust in sustainability reports.
- Focus on materiality to enhance information relevance.
- Encourage continuous sustainability improvement.
The ESRS applies to all companies that are affected by the CSRD.
When will the CSRD take effect?
The European Commission adopted the CSRD in late 2022. The rules will start applying as soon as 2024 with the last group beginning participation in 2028.
Though these dates may feel far away now, the sooner you prepare the easier it will be to comply and meet your reporting date.
How can financial institutions support their SME customers?
By supporting SMEs in achieving CSRD compliance, financial institutions not only contribute to a greener future but also open avenues for mutual growth. It’s a strategic move that strengthens brand loyalty, attracts investors, and positions institutions as leaders in sustainable banking practices.
Our product, Connect Report, integrates seamlessly inside your digital banking application and provides your SMEs with the tools to measure, reduce and report on their emissions.
How can SMEs prepare for the CSRD?
These steps provide a structured approach for businesses to prepare for the CSRD, ensuring compliance and alignment with sustainability goals.
- Understand your organisation’s impact.
- Align scope of sustainability reporting with financial reporting.
- Identify gaps by comparing past sustainability efforts with the ESRS.
- Perform Double Materiality Assessment.
- Create a roadmap for data collection.
- Establish governance framework.
- Prepare for ESRS and CSRD requirements.
- Enhance transparency and ensure accurate data collection using our product Connect Report.
Participating in reporting doesn’t just help you gain compliance, it is a strategic business move that can attract partners, investors, and create access to EU funding.