On 5 January 2023 the Corporate Sustainability Reporting Directive (CSRD) came into force. Member States will have 18 months to transpose the directive into the national law requiring companies to publish detailed information on sustainability issues.
This will increase a company's accountability for its impacts on the environment and society, and provide financial institutions with comparable, verified information on sustainability performance that should facilitate the allocation of finance to sustainable activities.
On the other side, this will of course bring up new operational challenges in process, data and analytics, governance, pre-assurance checks and technology enablement. But if companies get it right, they will benefit in multiple ways, for example in cost reduction, shared value creation and risk mitigation. Done correctly, it will help companies to secure the long-term resilience of their business and access a whole range of benefits including green finance, investment, and low credit and insurance rates.
CSRD extends the scope and detail of the Non-Financial Reporting Directive (NFRD). In short, it will apply to all large EU and non-EU companies (listed and non-listed) operating within the EU market. Companies covered by the new rules will have to disclose how sustainability is embedded across the business and how material ESG impacts, risks, and opportunities are identified and managed.
Companies subject to CSRD will need to:
· Disclose principal actual or potential impacts related to the company’s own operations and the implementation and outcome of the due diligence process of the company’s value chain
· Describe the role of management boards and supervisory boards regarding sustainability matters
· Disclose set time-bound targets on sustainability matters and report on the progress of achieving such targets (KPIs)
· Assess and report both impacts of the company’s activities on sustainability matters and on sustainability matters affecting the company (the double-materiality principle)
· Obtain limited assurance opinion by a statutory auditor of reported sustainability information.
The major benefit of the CSRD will be its push on the companies to go beyond just reporting. To comply with the CSRD companies will need to revisit their strategic focus and bring a greater systematic approach to corporate sustainability, using common standards and frameworks.
The required double-materiality assessment, for instance, can identify important topics that have previously been overlooked in corporate strategy and risk management. Double materiality can assist the company in developing an effective management strategy as well as reporting on both internal and external issues to various stakeholders in a relevant manner. For example, when creating a strategy to manage an effect, such as labour rights in the supply chain, a company will be able to determine whether this is a genuine risk for the organisation or whether it is part of the company's obligation to mitigate any impact on people.
Companies need to start planning their journey to becoming fully compliant by the time the Directive is mandatory to them, ranging from between 2024 to 2026. That may appear like a lot of time, however, getting all the required elements in place will be a significant exercise for many companies.
The first set of the European Sustainability Reporting Standards (ESRS) are expected to be adopted in June 2023. These standards developed by the European Financial Reporting Advisory Group (EFRAG) are setting out the detailed disclosure requirements under the CSRD.
The second set of standards which are sector-specific are planned for release shortly after. These will be of great importance as assessing the impacts of business activity will be very different in sectors where assets are mostly intangible, like the tech or entertainment industries, in comparison to in an industry that has substantial tangible assets. For example, appropriate measures in highly competitive industries may not be suitable for regulated industries. Figuring all of this out will take time and close collaboration between companies and regulators, value-chain partners and industry bodies. It will get easier as the practice builds, with companies benefiting from the learning experience of early adopters. But even with the existing set of standards ( like GRI framework and Task Force on Climate-related Financial Disclosures (TCFD) recommendations) much of the detail is still to be defined.
What about the WB6 region?
Without doubt, CSRD is relevant to companies based outside the EU. The Directive undeniably applies to companies registered in third countries whose turnover was generated in the EU, and it is in accordance with the CSRD rules. Most importantly the definition of "company" in CSRD is comprehensive and from the perspective of our region includes both public and private companies, as well as partnerships, limited partnerships and companies with unlimited liability. It also includes financial institutions, regardless of their legal form (credit institutions, financial institutions, alternative investment funds and insurance companies, to name just a few).
Although small and medium-sized enterprises are not in the direct scope of the Directive, they will certainly be covered by its scope if they do business with the companies covered by CSRD. As it is the duty of large companies to pass due diligence requirements through their value chain, small and medium-sized enterprises will certainly feel the burden and pressure to adapt and build their operational and financial capacity. In this regard, associations of small and medium-sized enterprises and chambers of commerce, which should provide key support in the education and organization of this work, will play an important role.
