The landscape of corporate reporting on sustainability and ethics is poised for significant transformation with the shift from the Non-Financial Reporting Directive (NFRD) to the more robust Corporate Sustainability Reporting Directive (CSRD). This evolution reflects a deepening understanding of the role of business in societal and environmental stewardship, and it brings with it a set of enhanced obligations that businesses must navigate.
The Current State: NFRD’s Framework
Introduced in 2018, the NFRD set a precedent by requiring large entities such as listed companies, banks, and insurance companies with more than 500 employees to report on a variety of non-financial matters. These included environmental protection, social responsibility, employee treatment, human rights, anti-bribery, corruption, and diversity within board governance. However, despite its groundbreaking intent, the NFRD often fell short of creating the standardized, transparent reporting environment it envisioned. This can be primarily attributed to its relatively broad guidelines that allowed for significant variability in how companies interpreted and reported their data.
Transition to CSRD: A Stride Toward Stringency
Recognizing the shortcomings of the NFRD, the European Union has taken decisive steps to tighten and expand its reporting requirements under the CSRD, which will be fully applicable in January 2024. This directive not only broadens the scope of companies affected—now including large companies with more than 250 employees or exceeding financial thresholds of €40 million in turnover or €20 million in total assets—but also intensifies the reporting rigor.
Key Enhancements in CSRD
1. Expanded Scope and Applicability
The CSRD’s extended reach means that more companies are now obligated to disclose their sustainability practices. This inclusivity aims to foster a more comprehensive and uniform landscape of sustainability reporting across the EU.
2. Double Materiality Consideration
One of the cornerstone features of the CSRD is its emphasis on ‘double materiality’, which mandates that reports should cover not only the impact of the company on the environment and society (external materiality) but also how environmental and social issues affect the company’s performance (financial materiality). This dual perspective ensures a holistic view of sustainability within corporate operations.
3. Detailed Reporting Requirements
The directive specifies that companies must integrate sustainability information directly into their management reports with clear reporting principles, formats, and timing. This includes detailed information on key performance indicators (KPIs), targets, due diligence, and risk management related to environmental, social, and governance (ESG) aspects, tailored to sector-specific standards.
4. Mandatory External Assurance
In a significant departure from the NFRD, the CSRD mandates limited third-party assurance to validate the reported information. This requirement is aimed at boosting the credibility and reliability of sustainability reports, with potential to extend the scope of assurance over time to ensure comprehensive external validation.
Preparing for CSRD Implementation
For companies transitioning from NFRD to CSRD, the road ahead involves substantial preparation. Businesses are encouraged to begin by assessing their current reporting frameworks against the CSRD’s stringent criteria. This includes establishing robust mechanisms to gather comprehensive ESG data, setting tangible sustainability targets, and evaluating their entire value chain’s impact on sustainability objectives.
Furthermore, companies must rethink their external assurance strategies to comply with CSRD’s verification demands and recalibrate their management reports to incorporate the required sustainability details.
Conclusion
As we advance towards 2024, the CSRD is set to redefine corporate responsibility through more rigorous and transparent reporting standards. This transition not only enhances the quality of information available to stakeholders but also underscores the evolving expectations placed on businesses in the realms of ethical conduct and sustainability. Companies proactive in adapting to these changes will likely find themselves well-positioned to meet the demands of an increasingly conscientious global market.
