CSRD Sustainability Reporting: The Impact of New Obligations

The CSRD (Corporate Sustainability Reporting Directive) is a European directive, adopted in November 2022, aimed at harmonising corporate sustainability reporting. Notably, it introduces the concept of "double materiality" and strengthens ESG (Environmental, Social, and Governance) standards.

The implementation of this regulation represents a major step forward for financial transparency and the consideration of companies' environmental impact. Which companies are affected, and how should they prepare? Discover what this new reform entails in this article.

Definition of the CSRD (What is the CSRD?)

The CSRD establishes a legal framework for the disclosure of CSR-related information, requiring companies to provide detailed data on how their activities affect society and the environment.

It relies on the principles of transparency and accountability to improve the quality and comparability of the information published.

History and Adoption of the CSRD

Adopted to succeed the Non-Financial Reporting Directive (NFRD) dating from August 2017, the CSRD is the result of a growing European consensus on the need for a unified and detailed approach to sustainability reporting.

The European Commission launched and validated the final text of the CSRD at the end of December 2022. The new directive will apply from 2024.

Objectives and Application of the CSRD

The main objective of the Corporate Sustainability Reporting Directive (CSRD) is to establish increased transparency in the communication of ESG performance, which includes:

• Environmental;
• Social;
• Governance.

This standardisation aims to provide investors, customers, and all relevant stakeholders with reliable information to make informed decisions.

Until the adoption of the CSRD, there was no harmonised framework at the European Union level, making it difficult to compare ESG performance across different companies and sectors.

The CSRD aims to address this gap by establishing detailed reporting standards and requiring companies to provide information on how they manage the social and environmental impacts of their activities, as well as how they integrate governance principles.

The directive is far from being a mere compliance exercise; it proves to be a strategic management tool, shedding light on the company's performance beyond financial aspects. It is envisioned as a lever for ecological transition and access to sustainable financing.

In this perspective, the CSRD foresees convergence with international standards such as those of the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI), thereby reducing the reporting burden for the entities concerned and optimising their operational efficiency.

Who is Affected by the CSRD?

The CSRD affects a wide range of companies across Europe. Firstly, all companies listed on regulated European markets are concerned, with the exception of micro-enterprises. This includes listed SMEs, which benefit from simplified reporting standards.

The directive applies to approximately 50,000 companies, compared to 11,700 previously under the NFRD. This means that many companies that were not previously subject to non-financial reporting obligations will now be affected.

It should be noted that for non-European companies, the deadline is set for 2029 for the 2028 fiscal year. Finally, special attention should be paid to the legal forms that will be affected, for example, SAS (Société par Actions Simplifiée) which were exempt from producing a non-financial performance statement (DPEF) under the NFRD.

When to apply the CSRD?

Planning your non-financial report should be done in consideration of recent directives and the resulting obligations. Depending on the structure and scale of your company, here is a guide to determine the appropriate time to prepare and submit your report, based on the year preceding the relevant fiscal year.

*Until 2028, listed SMEs benefit from a two-year transitional period during which they can choose not to comply with the reporting obligations imposed by the CSRD. Nevertheless, during this period, they must still briefly explain in their management report the reasons for this non-application.

We recommend referring to the table provided by the European Commission, specifically section 10 of the ESRS 1 standard, to:

• Gain a thorough understanding of the transitional measures concerning certain companies
• Consult the detailed schedule of the progressive application of certain standards

What was the role of the European Commission in the development of the CSRD?

The European Commission, in developing the CSRD, responded to the growing demand for increased corporate transparency on ESG issues. It established robust standards, with transitional measures, to guide companies towards a deeper integration of sustainability into their financial reports, thus contributing to the European Green Deal (making Europe climate-neutral by 2050) and the EU's sustainable finance strategy.

Understanding the CSRD Delegated Act

The CSRD Delegated Act represents a major advancement in the European regulatory framework. Let's delve into the different facets of this act.

The Adoption Process of the Delegated Act

The adoption of the Delegated Act is a step within the European legislative framework. This process involved the review of the European Commission's proposals by Member States and the European Parliament, followed by public consultations.

These steps culminated in the Delegated Act, published on July 31, 2023, which reflects a consensus and addresses CSR issues in a balanced manner. It sets the 12 new European standards for corporate reporting and sustainability.

Implication of the Delegated Act in the Application of the CSRD

Once adopted, the Delegated Act plays a guiding role in the application of the CSRD. It determines the specific reporting standards that companies must follow.

This implication ensures a harmonised implementation of the directive across the European Union, thus meeting the information needs of certain actors, who themselves are subject to ESG reporting obligations, such as financial actors.

Link Between the Delegated Act and ESRS Standards

The ESRS standards are intrinsically linked to the Delegated Act, which serves as the regulatory framework for their application.

The standards precisely define the information that companies must disclose, ensuring the transparency and comparability necessary for analysing ESG performance.

ESRS Standards and Their Importance in the CSRD

The ESRS standards prove to be the foundation of the sustainability reporting mandated by the CSRD.

Let's examine in detail the impact of these standards.

Definition and Objectives of ESRS Standards

The ESRS standards (European Sustainability Reporting Standards) constitute a set of guidelines and criteria detailing how companies should report information.

Established by EFRAG (the European Financial Reporting Advisory Group), these 12 standards cover three main themes:

• Environmental impact (pollution, climate, biodiversity, circular economy, water preservation);
• Social impact (consumers and employees);
• Governance impact (business conduct).

The objective is to standardise ESG reporting across Europe. The ESRS standards require that the reported data be analysable, whether in a quantitative or qualitative form.

Each standard is broken down into "Disclosure Requirements" (DR), which specify the data to be collected and included in the report.

For example, the climate-related standard includes DRs such as decarbonisation strategies, climate change adaptation initiatives, transition plans, and the financial means associated with them.

Although the entirety of the ESRS standards is still being finalised, companies can refer to the Impact platform developed by the French government to get a preview of these standards and start preparing for future requirements. This allows them to proactively position themselves and adapt accordingly to meet upcoming sustainability expectations.

Link Between ESRS Standards and Sustainability Reporting

The link between ESRS standards and sustainability reporting is fundamental. The ESRS standards serve as a reference for structuring the content of sustainability reports. They provide a framework that guides companies in collecting and disclosing relevant and reliable information. These standards are essential for ensuring that the reporting meets the requirements of the CSRD and the expectations of stakeholders.

Impact of ESRS Standards on Companies Affected by the CSRD

The impact of ESRS standards on companies targeted by the CSRD is significant. They must now integrate into their strategy and internal management mechanisms for monitoring and analysis that meet the criteria of the ESRS standards. This may involve:

• Changes in internal reporting systems;
• Training of their staff;
• Redefining company objectives to align with sustainability principles.

Some ESRS standards will be universal and applicable to all companies. Others will be sector-specific (depending on the industry) and determined from June 2024, along with standards specific to SMEs.

What are the CSRD indicators?

Sustainability Report According to the CSRD

The CSRD redefines the contours of the sustainability report. Let's delve into the implications of this directive for the content and preparation of these reports.

Content of the Sustainability Report

The content of the sustainability report, in accordance with the CSRD, must include a thorough analysis of CSR impacts. This encompasses the disclosure of information on sustainability strategy, ESG risks and opportunities, as well as results and performance in these areas.

Companies are also encouraged to communicate their policies, objectives, and commitments regarding sustainability, including key performance indicators. The sustainability report must be published in electronic format in a dedicated section of the management report.

Role of the Sustainability Report within the CSRD Framework

The sustainability report plays a crucial role in the overall strategy of the CSRD. It serves as a showcase for the company's transparency and responsibility regarding ESG issues.

By providing verifiable and reliable information, the report allows investors and customers to assess the company's commitment and performance in terms of sustainability.

How to Prepare a CSRD-Compliant Sustainability Report

To prepare a CSRD-compliant sustainability report, companies must follow several steps. They must first fully understand the directive's requirements and the corresponding ESRS standards.

It is also essential to involve all parts of the company: from management to operational staff, in the collection and analysis of ESG data.

Companies must also establish internal processes for evaluating and verifying the reported information. A governance body must collectively ensure that the sustainability report complies with the CSRD, ESRS standards, and the requirements of Article 8 of the Taxonomy Regulation.

Finally, the CSRD requires that the sustainability report be subject to external verification by a statutory auditor or an independent auditor. Initially with a moderate level of assurance, it is possible that from 2028 this assurance will be raised to a reasonable level.

Double Materiality in the Context of the CSRD

Double materiality is a central element of the CSRD. It highlights the necessity for companies to evaluate the impact of their actions on social and environmental responsibility (CSR) issues, and conversely, the effect of these issues on their own performance. Let's break down this essential principle.

Definition of Double Materiality

Double materiality is an approach that requires companies to consider two perspectives:

• The impact of sustainability issues on their financial performance;
• The impact of their activities on society and the environment.

It involves recognising that financial and non-financial performances are interdependent.

Importance of Double Materiality in Sustainability Reporting

The concept of double materiality is fundamental for sustainability reports. It allows for the alignment of economic objectives with sustainability principles. By highlighting the interactions between external and internal impacts, double materiality enhances strategic decision-making and communication with stakeholders.

How to Account for Double Materiality in the Sustainability Report

To effectively integrate double materiality, companies must conduct a cross-sectional analysis of their activities, identifying areas of convergence between economic interests and environmental and social impacts.

They must evaluate not only the resulting risks and opportunities but also measure and communicate the effectiveness of their responses. This strategic approach must be documented transparently, highlighting the analysis methods and indicators used to illustrate the company's commitment to sustainable and responsible growth.

Dialogue with stakeholders is also essential to refine this analysis and ensure that the sustainability report accurately reflects material concerns. By following these guidelines, companies will not only meet the requirements of the CSRD but also enhance their commitment to sustainable management

Threshold for the Application of the CSRD

The CSRD marks a significant advancement by requiring European companies to publish detailed information on ESG issues.

Starting in 2024, it will apply to entities already covered by the NFRD, including listed companies with more than 500 employees and significant balance sheets or revenues.

Then, in 2025, the obligation will extend to large companies meeting specified financial or size criteria. Listed SMEs will have until 2026 to comply, benefiting from adapted standards and an additional grace period if necessary.

Large non-European entities with significant activities in the EU will need to comply, starting in 2028, ensuring extensive coverage and increased transparency for nearly 50,000 companies.

The threshold for the application of the CSRD is thus designed to capture a wide spectrum of companies and ensure that sustainability information is available to investors and other concerned entities. The goal is to promote informed decision-making in sustainable investment.

The SFDR Taxonomy and Its Link with the CSRD

The existing SFDR taxonomy aligns with the CSRD to enhance transparency in sustainable finance practices. Let's see how:

What is the SFDR?

The SFDR (Sustainable Finance Disclosure Regulation) is a European regulation aimed at clarifying the presentation of information related to sustainable finance.

It requires financial actors to disclose how they integrate sustainability risks into their investment decision-making processes and the sustainability characteristics of their financial products.

It was implemented to combat greenwashing, increase the transparency of financial activities, and direct investments towards more environmentally friendly assets. This regulation applies to all market participants in the European Union.

How Does the SFDR Influence the CSRD?

The SFDR complements the CSRD by imposing similar disclosure requirements, but specifically tailored to the financial sector. The information published under the SFDR can provide useful data for corporate sustainability reporting under the CSRD, establishing a framework for assessing the impact of economic activities on environmental objectives.

Impact of the SFDR Taxonomy on Sustainability Reporting According to the CSRD

The SFDR taxonomy enhances sustainability reporting by providing clear criteria for determining whether an economic activity can be considered sustainable.

By aligning the information to be disclosed with these criteria, companies can provide more structured and accurate sustainability reports, facilitating the assessment of their sustainability practices and strategies.

The CSRD marks a turning point in European regulation, with a progressive application until 2028 that will extend transparency and strengthen sustainability at the core of companies.

By deploying unified reporting standards and emphasising ESG data, this directive aims not only to hold companies accountable for their environmental and social impact but also to provide them with the means to demonstrate their commitment to responsible governance.