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How to prepare for the EU’s Corporate Sustainability Reporting Directive

Current EU rules on non-financial reporting are undergoing a major refit, and, once approved by Parliament and Council, this will transform how companies are held accountable for their sustainability impacts. The EU’s Corporate Sustainability Reporting Directive (CSRD) requires a broader range of companies to disclose their environmental impact and ensures this information is released in a more structured and comprehensive way.

Companies should get ready for a major overhaul of reporting standards.

In this article, we’ll tell you everything you need to know about the Corporate Sustainability Reporting Directive recently proposed by the European Commission. By staying on top of the emerging legislation, you can prepare for the new requirements and get your sustainability strategy aligned.

The Ohana approach is all about supporting companies in working with – and influencing – new EU rules like the CSRD in order to become real environmental changemakers.

Want someone with deep experience and EU connections to help guide your sustainability strategy? Get in touch!

Why is the Corporate Sustainability Reporting Directive necessary?

In 2014, the Non-Financial Reporting Directive (NFRD) established important reporting requirements for companies. It requires larger companies to publish annual reports outlining their impact on the environment and society and considering how sustainability issues affect their business.

But the NFRD didn’t go far enough in building a culture of transparent, reliable and comparable disclosure of sustainability data. Reporting styles and priorities continued to vary from company to company, making it easy for companies to omit important information. This makes it hard to compare sustainability performance across different companies, and means stakeholders, such as investors, often struggle to get the right information they need about a company.

To fill these crucial gaps the European Commission has proposed a Corporate Sustainability Reporting Directive (CSRD). The CSRD is expected to standardize sustainability reporting across companies and obliges a wider range of organisations to publicise information around their environmental impact.

This is particularly important in enabling investors and other stakeholders to evaluate reliable sustainability data that can help them to, for instance, make investment decisions. The Directive is specifically designed to link with sustainable finance initiatives, in particular the Sustainable Finance Disclosure Regulation (SFDR), which mandates reporting obligations in the financial sector. It also connects with the EU Sustainable Finance Taxonomy, which promotes green investment across the EU by clearly delineating which economic activities are environmentally sound.

This is all great news for the EU’s 2030 climate targets – more accountability means higher effort on climate and sustainability.

It’s also great news for companies committed to effective climate action. Complying with the EU’s new requirements will take some work. However, the CSRD will ultimately streamline the reporting process and allow companies to showcase their sustainability impacts to potential investors, customers, civil society and other stakeholders.

What does the Corporate Sustainability Reporting Directive propose?

Expanded scope

The Corporate Sustainability Reporting Directive covers a significantly larger number of companies. While the Non-Financial Reporting Directive applied primarily to public interest entities (banks, insurance firms, and listed companies), the CSRD will include all large companies, whether or not they are listed.

The proposed rules will change the definition of who is counted as a large company for CSRD purposes to companies with more than 250 employees, more than €40 million annual turnover, or more than 20 million on the balance sheet, though micro-enterprises are still excluded.

This means more large companies will be held publicly accountable through comprehensive, standardized reporting accessible to investors and other stakeholders. Small companies, for the most part, won’t face any additional reporting requirements though it’s advisable for organizations of all sizes to standardise their sustainability reporting to keep up with the market and growing demands for transparency around environmental impacts.

New reporting standards

Under the CSRD, sustainability reports will be standardized, so it will be easier to make side-by-side comparisons of how different companies stack up in terms of environmental action and trajectories. Companies will have to provide clear information on specific aspects of their environmental performance and sustainability strategy, which will boost transparency and give stakeholders a reliable data source.

The reporting standards should be drafted, approved and adopted by the end of 2022, with a second set of standards released a year later.

It’s likely that entities will need to report on:

How their business model and corporate strategy support the transition to a sustainable, climate-neutral economy.
What their concrete sustainability targets are and whether they are meeting them.
Their major negative environmental impacts.
The main risks climate change poses to their company, and how these are being managed.
Their corporate governance process for sustainability, including both social and environmental impacts.
The risks and impacts present across their value chain, including the supply chain, production phase, and relationships with other companies they engage with.
The company’s social impacts, including matters of gender equality, equal opportunities for those with disabilities, and workforce conditions.

Third-party audits

The CSRD proposal introduces an audit requirement for sustainability reporting throughout the EU. This means third-party audits will be run on reports to assure high-quality, consistent information. The initial proposal is for a “limited” assurance requirement, which is less stringent than a “reasonable” assurance requirement – though this stricter form of audit may become necessary at a later stage.

Digital transparency

The EU Commission has outlined its commitment to making sustainability reporting information easily accessible by digital means. Under the CSRD, companies will use a single electronic reporting format. They will make use of a digital categorization system to tag the information they submit.

What are the next steps?

The EU Commission’s proposal now moves to the European Parliament and the EU’s member states for feedback and adaptations to the text. Take a look at our guide on how the EU works for a reminder of the main institutions and their role.

While those legislative negotiations are in the works, the European Financial Reporting Advisory will draft a first set of sustainability reporting standards, which will be sent to the European Commission for adoption.

If this all goes smoothly, the new reporting standards should be adopted by the end of 2022, meaning companies would have to comply with the new rules in the reports published in 2024, covering the year 2023.

The Corporate Sustainability Reporting Directive will mean big changes for many companies. In a changing market, where more and more investors, consumers and civil society are seeking transparent, reliable information on sustainability performance, reporting is a necessity – and the new EU proposal reflects that.

By staying connected to the legislation and reporting standards as they emerge, you can get prepared and use the CSRD as an opportunity to position your company as a sustainability leader.