What is the EU Corporate Sustainability Reporting Directive?
Summary
The Corporate Social Responsibility Directive (CSRD) promotes corporate sustainability and transparency in line with the Paris Agreement. Replacing the NFRD, it mandates companies to measure, disclose, and reduce their GHG emissions. T
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Introduction to the term CSRD
The CSRD (Corporate Sustainability Reporting Directive) is a legislation aiming at regulating and promoting corporate social responsibility (CSR) with regard to environmental issues.
This European directive will come into force in 2024 and will replace the NFRD (Non-Financial Reporting Directive).
Its objective is transparency and disclosure of environmental practices (anti-greenwashing). This directive requires companies to measure, report, and reduce their GHG emissions, thus committing to the fight against climate change. Therefore, it is essential to consolidate their statements in order to ensure a precise and compliant environment accouting.
The concept of Double Materiality
The notion of double materiality is a key concept of the CSRD Directive. It aims to integrate two essential perspectives when evaluating a company's performance: financial materiality and environmental and social materiality.
Financial materiality:
Financial materiality refers to financial indicators that have a significant impact on a company's financial results. These aspects can include revenue, costs, profit margins, cash flow, and more. Financial materiality has traditionally been at the heart of financial reporting and the decisions of stakeholders such as investors, shareholders, and financial analysts.
Environmental and social materiality:
Environmental and social materiality refers to the non-financial aspects of a company's business that have a significant impact on the environment, society, and stakeholders. This can include greenhouse gas emissions, water management, working conditions, diversity and inclusion, social responsibility, and more. These aspects are crucial for the company's collaborators, customers, employees, local communities, and regulators. In order to easily collect and organize those data, companies can rely on the digital tagging methodology.
The concept of double materiality implies that the company must take into account these two aspects, namely financial and non-financial aspects when assessing its overall performance and communicating with its employees and investors. Along these lines, we understand how important it is to require an external audit to verify the information provided.
Application: What's changing
The CSRD requires companies to disclose in more detail about their CSR performance. This includes data on the social and environmental impact of their activities.
The CSRD establishes harmonised standards and methodologies for the disclosure of such CSR information, which ensures greater comparability and consistency of reporting between companies.
This new directive requires the verification of disclosed information, which increases the reliability and credibility of the reports. Penalties for non-compliance are introduced, encouraging companies to comply with disclosure requirements.
The application of the CSRD aims to improve the quality, transparency, and impact of CSR information disclosed by companies, thus contributing to better monitoring of their performance in terms of social responsibility.
Affected companies
Large companies are targeted by environmental regulations because of their significant impact on society and global warming. This includes companies in industries such as finance, manufacturing, energy, technology, food, consumer products, and more.
The CSRD therefore applies to large companies that meet at least 2 of the following criteria:
- Having more than 250 employees;
- With a balance sheet of €20 million or more;
- Generating €40 million or more in turnover.
It also concerns small and medium-sized enterprises (SMEs) listed on the stock exchange and non-European companies with an annual turnover of more than €150 million on the European Union market.
As a result, more than 50,000 companies will have to comply with the obligations implemented by this directive. I you wish to know more about companies directly or indirectly concerned by CSRD, feel free to explore our article.
Deadlines
CSRD has been voted in November 2022 by the European Comission. It took place in January 2024. However, this is a progressive approach, which may last till January 2029.If you desire to know when you company needs to be ready for CSRD, feel free to read our article addressing the topic.
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CSRD: An imperative for businesses, a concrete response to the Paris Agreement's call for a 1.5°C world.
Carbon footprint and CSRD
The Directive on Corporate Social Responsibility (CSRD) and the Corporate Social Responsibility Directive (CSRD) are two separate tools related to corporate environmental responsibility. They can, however, be interconnected and complementary.
As a reminder, carbon footprint is a tool for accounting for GHG emissions generated by an organization's activities, whether direct or indirect. It assesses an organization's carbon footprint by taking into account carbon dioxide (CO2) and other GHG emissions related to its activities, goods, services, travel, etc.
Relationship between CSRD and Greenhouse Gas Emissions Assessment
Part of the reporting imposed by the CSRD is present in the company's office. Companies affected by this new directive are therefore strongly encouraged to prepare for and anticipate these changes by carrying out a carbon footprint.
Use of the for CSRD compliance
Companies can use data as an essential component of their CSRD report. This makes it possible to include detailed information on GHG emissions, reduction targets, sustainability initiatives, and measures taken to mitigate their environmental impact.
Definition of GHG measurement criteria and indicators
Measuring greenhouse gas (GHG) emissions involves the use of specific criteria and indicators to quantify and evaluate these emissions.
The European Sustainability Reporting Standards (ESRS) are European sustainability reporting standards developed by the European Financial Reporting Advisory Group (EFRAG) in collaboration with the European Sustainability Reporting Association (ESSA) and the European Commission. These universal standards will be used in the implementation of the CSRD. They cover a wide range of sustainability-related topics, including greenhouse gas emissions, water management, working conditions, diversity, circular economy, and many more.
GHG emissions reporting requirements
These ESRS standards include, among other things, the obligation to disclose the company's greenhouse gas emissions, scopes 1, 2, and 3 covered by the carbon footprint.
- Scope 1: Direct GHG emissions from sources controlled by the organization, such as company vehicles, combustion equipment, etc.
- Scope 2: Indirect emissions related to the production of electricity, heat, or steam purchased and consumed by the organization.
- Scope 3: Other indirect emissions associated with the organization's activities, such as employee travel, supply chain, waste, etc.
Companies must set GHG emission reduction targets and present plans to achieve them, thereby fostering a commitment to sustainability.
The importance of CSRD in the accurate calculation of GHG emissions
The CSRD aims to establish common reporting standards for companies within the European Union (EU). This standardization ensures that companies use consistent methodologies and indicators to measure and report their GHG emissions, facilitating comparability of data across companies and sectors.
Benefits of using CSRD
The CSRD is a crucial instrument to ensure that companies measure and report their GHG emissions in an accurate, transparent, and standardized manner. This contributes to more effective management and mitigation of GHG emissions, which are essential in the fight against climate change.
Promoting transparency and accountability
The CSRD requires companies in the European Union to disclose transparent information about their activities, policies, performance, and impacts in areas such as environmental, social, human rights, and other sustainability-related aspects. It holds them accountable and socially responsible by reporting on their performance in these key areas.
Companies need to set concrete and measurable sustainability goals, including greenhouse gas emissions and other environmental issues. These objectives serve as a basis for reporting to stakeholders on progress.
Improved risk and performance management
The CSRD encourages companies to better assess and manage the risks associated with their CSR (Corporate Social Responsibility) activities. This generates significant improvements in the company's overall performance, including sustainability, production ethics, and environmental management.
Boosting innovation and competitiveness
With a focus on CSR, CSRD incentivizes companies to innovate in the development of more sustainable products, services, and business practices. This gives them a competitive advantage by meeting the changing needs of consumers who are increasingly focused on sustainability and eco-responsibility.
Banks and other financing institutions are also showing increasing interest in these aspects. Companies that meet positive environmental criteria are offered preferential interest rates and financing facilities.
Strengthening the confidence of stakeholders (investors, customers, financing, etc.)
By showing a formal commitment to sustainability, companies gain the trust of stakeholders, which positively influences brand perception. The company can thus rely on CSR to convince investors, employees, or partners.
Engagement of internal and external collaborators (suppliers, employees, etc.)
By further involving employees, suppliers, customers, and other stakeholders, CSRD creates an ecosystem where different actors work together towards common goals.
Encouraging a more responsible supply chain
CSRD's transparency and compliance requirements incentivize companies to ensure that their suppliers and partners also meet high CSR standards, contributing to a more responsible supply chain. This creates a virtuous circle around the company.
The constraints of the CSRD
While CSRD has many benefits, both for companies and for society as a whole, it comes with constraints, making its implementation complex and demanding.
In addition, rapidly changing environmental standards create uncertainty for businesses about future requirements and the constant adaptations needed to remain compliant.
Compliance costs
Companies with limited resources face a significant challenge in complying with CSRD requirements. Significant costs and resources are generated by these new obligations for data collection, analysis, and processing:
- Hiring consultants;
- Hiring of an in-house project manager;
- Formation;
- Data collection and analysis;
- Implementation of new monitoring and reporting systems;
- Carbon footprint software;
- Etc.
Complexity of reporting
Companies are faced with increased complexity in preparing reports on their CSR performance. The reporting criteria set by the CSRD may require specific methodologies, precise skills, and detailed documentation, which can be a challenge for some organizations.
Involves organizational changes
Companies may face barriers that require them to make significant organizational changes in order to comply with the standards and requirements set out by the CSRD.
This implies upheavals in:
- Governance;
- Policies;
- Business processes;
- Decision-making;
- The choice of collaborators and partners;
- Etc.
Penalties for non-compliance
Companies that do not comply with the requirements of the CSRD may face sanctions, fines, or other legal consequences.
These fines can be fixed or calculated based on a variety of factors such as the size of the company or the nature of the violation. Non-compliant companies may also have their subsidies or state aid suspended or reduced.
Since they pose a threat to organizations that do not comply, these sanctions may encourage them to comply with the CSRD.
Get support
The application of the CSRD should not represent a constraint but should be seen as a strategic advantage. It is essential for companies to be supported in anticipating this directive and implementing effective processes today to meet the reporting obligations of the CSRD.
Anticipating the evolution of reporting standards
Bringing in experts can help develop CSRD-compliant reports. These professionals are able to help collect, analyze, and present relevant data in a transparent and accurate manner.
Organizing training for relevant personnel within the organization can help better understand the requirements of CSRD and implement them in a relevant way. These trainings can be delivered by internal or external experts such as D-Carbonize carbon consultants. These carbon experts are familiar with the challenges of applying the CSRD.
D-Carbonize offers a carbon footprint calculation software and a GHG management tool that makes it possible to find the right compromise between carbon impact and financial impact. This solution helps companies and SMEs become autonomous in the management of their decarbonization strategy.
