Sustainability reporting has emerged as a critical aspect of corporate reporting in recent years due to its potential to improve transparency and accountability regarding environmental, social, and governance (ESG) factors. The EU has been at the forefront of implementing policies that mandate sustainability disclosures, and its latest initiative, the Corporate Sustainability Reporting Directive (CSRD), is set to expand the scope and detail of ESG reporting requirements. As the CSRD will enter into force in January 2023, it is crucial for companies within the EU to prepare appropriately to meet the enhanced ESG disclosure mandates. In this blog post, we will delve into the details of the new EU CSRD and provide insights into how companies can prepare to comply with the new reporting requirements.
Understanding the EU CSRD
The CSRD is an updated version of the EU’s existing sustainability reporting regulation, the Non-Financial Reporting Directive (NFRD). The CSRD aims to improve the quality and comparability of sustainability disclosures by expanding the scope of reporting requirements and introducing standardized reporting frameworks. The directive will introduce a single set of ESG disclosure standards that will apply to all qualifying companies. The CSRD will also require companies to disclose sustainability information more frequently and fully, adopting a more robust and consistent approach to sustainability reporting.
Companies Affected by the CSRD
The CSRD will expand the scope of companies that need to comply with the ESG reporting standards. The current NFRD only applies to large public-interest entities (PIEs), while the new CSRD has expanded to cover all companies that meet at least two of the three threshold criteria: more than 250 employees, a balance sheet exceeding €20m, and an annual net turnover exceeding €40m. This expansion will cover around 49,000 additional companies within the EU, bringing the total number of covered companies to over 50,000.
Enhanced ESG Disclosures
The CSRD introduces more detailed and comprehensive requirements for sustainability disclosures, covering a wide range of environmental, social, and governance factors. Companies will also have to provide disclosures in a digital format and, in some cases, comply with external audit requirements. The CSRD’s enhanced ESG disclosures include resource-use, energy consumption, greenhouse gas emissions, social issues such as diversity, inclusion, and employee relations, and governance factors such as political contributions, remuneration, and whistleblowing policies. The disclosure obligations are applicable to all qualifying companies, including home member states and third-country companies with securities listed on the EU’s regulated markets.
How Can Companies Prepare For The CSRD?
To comply with the new EU CSRD regulations, companies need to proactively prepare by assessing their current ESG reporting practices, identifying any gaps, and developing strategies to address them. Companies must also assess how the new disclosures align with their existing ESG reporting requirements and make necessary adjustments in their ESG reporting processes. As the reporting standards will be standardized, companies will need to focus on implementing high-quality ESG data collection processes and enhancing their reporting systems’ capabilities. Developing robust ESG policies, programs, and management systems may also help companies to improve ESG disclosures and avoid any potential compliance risks.
The EU Corporate Sustainability Reporting Directive (CSRD) is a game-changing initiative that will significantly impact how companies within the EU report on ESG factors. The new regulations will expand on earlier sustainability reporting initiatives’ requirements and require a more thorough and consistent approach to sustainability reporting. The enhanced disclosures requirements and expanded scope of the CSRD will transform ESG reporting’s landscape, making it more detailed, standardized, and useful for stakeholders. Companies need to prepare early and adequately by analyzing their current ESG reporting processes, identifying gaps, and implementing strategies to address compliance risks. The CSRD can be a transformative opportunity for companies to demonstrate their commitments to ESG and enhance stakeholder trust and confidence if approached strategically and proactively.
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