As part of the Green Deal, the European Commission decided in 2021 to review and renew the status of the current Sustainability Reporting Documents (NFRDs).
The Green Deal, adopted in 2020, includes the European Union’s sustainability targets, which aim to eliminate net greenhouse gas emissions by 2050, decouple economic growth from resource use, and protect biodiversity and natural capital, among other things.
The European Commission has recognized the importance of the sustainability reporting quality and quantity of data relevant from an ESG (environmental, social, and governance) perspective for assessing sustainability risks and their impact on companies. As a result, the EU has reviewed its sustainability reporting practices and designed measures to help companies provide more accurate and reliable data on sustainability risks and their impact on people and the environment.
Exactly who will be affected, when and how, and what can those involved do to prepare for the new sustainability reporting requirements? In this blogpost, we explore the issues raised by the new rules in more detail.
The basics: What are ESG and CSRD?
The concept of ESG has become popular in the investment world, and more and more companies and investors are using it to define sustainable and responsible investment strategies. ESG factors assess companies’ environmental impacts (e.g., emissions, use of natural resources), social responsibility (e.g., employee well-being, human rights, community impacts), and governance practices (e.g., corporate governance, risk management, ethics).
Why do we need CSRD?
The availability and transparency of sustainability reporting data are currently inadequate at the national and company levels. Many companies do not disclose sustainability information, while large companies regularly do so in PDFs of hundreds of pages. For this reason, sustainability reports are often difficult to interpret and process.
There are also problems with the quality of the data in the sustainability reports, which are usually insufficiently detailed or unreliable. In addition, companies often make subjective decisions about which areas to disclose information on, further complicating the comparison and analysis of sustainability reports.
Furthermore, rating systems based on sustainability criteria often give companies different ratings, which is a problem for both companies and investors. In addition, it is often difficult for companies to access information about their suppliers and customers, which leads to significant costs for them in data collection and sustainability reporting.
This situation highlights the need to improve regulations and make companies’ sustainability practices more transparent and comparable to improve the availability and quality of sustainability reporting data.
CSRD through the eyes of investors
The CSRD is a major benefit for investors as it contributes to more comprehensive and accurate information on sustainability risks. Sustainability factors are becoming increasingly crucial for companies’ long-term performance and stability. Investors are keen to invest in sustainable companies that manage and minimize environmental, social, and governance risks. With the information provided by the CSRD, investors can choose investments that align with ESG (environmental, social, and governance) considerations with greater confidence and awareness.
Furthermore, the Green Deal adopted by the European Union involves significant investments that can only be made with the involvement of financial investors. The CSRD will help attract financial investors and channel capital more effectively towards sustainability projects.
However, companies also benefit from the introduction of CSRD. It allows them to provide more reliable and accurate data to investors and lenders, which helps to build market confidence and strengthen long-term business relationships.
CSRD vs. NFRD
The Non-Financial Reporting Directive (NFRD) is the European Union’s current sustainability reporting directive. However, due to the lax regulation of the NFRD, the format of the reports varies widely, and are difficult to compare, making it problematic for decision-makers and investors to assess individual companies considering ESG factors.
The CSRD is an improved version of the NFRD, which includes new requirements and rules for sustainability reporting, addressing the problems of its predecessor.
How exactly do they differ in practice?
Scope of application: The NFRD focuses primarily on large companies and public interest entities, while the CSRD extends the reporting obligation to smaller and non-public interest companies. The CSRD aims to increase the quantity and quality of sustainability information about companies and thus contribute to building a greener and more sustainable economy.
- EU companies:
- Balance sheet total: EUR 20 million
- Net turnover: EUR 40 million;
- Average number of employees in the financial year: 250.
- Large non-EU companies (from 2028 only):
- Net turnover: EUR 40 million
- Have at least one subsidiary in the EU
Sustainability reporting requirements
The NFRD focused on five main areas of non-financial disclosure: environment, social and employee affairs, human rights, anti-corruption, and corporate governance. The CSRD sets more detailed reporting requirements and requires the full integration of ESG factors into corporate sustainability reporting. In this way, the CSRD ensures the comparability and reliability of sustainability data.
The format and structure of sustainability reports
While the NFRD did not prescribe a specific format or structure for non-financial reporting, the CSRD is introducing a single European reporting framework based on guidelines developed by the European Financial Reporting Advisory Group (EFRAG). This framework ensures comparability and analysis of data between companies and within countries.
External verification and authentication
The NFRD did not require companies to verify and ensure sustainability reporting externally. In contrast, the CSRD requires companies to have reports verified by external experts and to ensure their credibility and accuracy. This will help improve the quality of sustainability reporting and meet the information needs of investors and other stakeholders.
Sanctions and consequences of the CSRD
The CSRD tightens the effects of inadequate reporting and allows Member States to impose effective, proportionate, but dissuasive sanctions on offending companies. Introducing sanctions and consequences will encourage companies to comply with CSRD requirements and help to improve the quality and credibility of sustainability data.
The CSRD significantly improves the NFRD, as it introduces wider application, more detailed reporting requirements, a single reporting framework, external audit, and sanctions. It aims to promote sustainable economic growth and corporate responsibility on environmental, social, and governance issues and to increase the quality and quantity of information available to investors and other stakeholders.
The CSRD is being introduced and implemented in several steps to ensure that companies are adequately prepared and apply the new requirements effectively.
- 2021: The European Commission adopts the CSRD – The adoption of the CSRD sets out new sustainability reporting requirements and rules in the EU legal framework.
- 2022: Member States transpose the CSRD into national law – EU Member States should transpose the CSRD into their own legislation to ensure that the Directive is enforced and applied to local companies.
- 2023: Companies adapt to CSRD requirements – Companies need to prepare for the new reporting requirements, including changes to the format and content of reports, the introduction of external audit processes, and the integration of ESG factors into their decision-making processes.
- 2024: Publication of the first CSRD reports – Companies will be required to publish their sustainability reports under the CSRD from 2024 onwards, including data from the previous year (2023).
- 2025-: Ongoing application and review of the CSRD – Companies must comply with the CSRD on an ongoing basis, and the European Commission regularly reviews the effectiveness and impact of the Directive to propose amendments and further improvements where necessary.
- 2028-: From 2028, large companies outside the EU will also have to comply with reporting obligations.
Knowing the CSRD timeline will help companies, investors, and stakeholders to prepare for the new requirements and enable them to understand the evolution of the sustainability reporting process and its expected impacts.
Double materiality in sustainability reporting
At the heart of sustainability reporting is the principle of double materiality, which facilitates dialogue between companies and stakeholders on ESG factors. This principle means that companies need to consider not only the environmental, social, and governance impacts on their own operations, but also how these factors affect the long-term preservation and growth of the company’s value.
Double materiality requires companies to consider the interests and expectations of stakeholders, including investors, employees, customers, suppliers, and other stakeholders. Applying the principle will help companies improve their sustainability performance and increase transparency and trust among stakeholders, contributing to the company’s long-term success and promoting sustainable economic growth.
CSRD – First steps
The CSRD requirements will bring significant changes for companies, including thousands of employees and other stakeholders in their organizations. Because of the new challenges, it is crucial that companies gradually familiarize themselves with the requirements and start processing data that has yet to be reported.
To prepare effectively and successfully, being informed and developing the right attitude is crucial. Finding the right partners, such as auditors or software support companies like Denxpert, can help you manage the vast amount of data, produce sustainability reports, automate the data collection and analysis process, and monitor compliance with your obligations.
CSRD is our common interest
Compliance with CSRD requirements is not just a responsibility for companies, but also an opportunity for future growth, competitive advantage, and sustainable operations. With the proper preparedness and practical tools, companies will be able to meet sustainability requirements in the long term and positively impact the environment, society, and the economy.
Denxpert’s CSRD solution
Our CSRD solution and network of experts will help you throughout the reporting process to achieve the best results in compliance with regulations.
- As a first step, we will review sustainability issues and assess gaps in data collection processes.
- We will strengthen data collection to accurately measure environmental, social, and governance indicators.
- We can help you publish your sustainability report and prepare your audited report.
- The CSRD framework is used to ensure transparent communication with shareholders and to help identify ESG risks.
- We support the testing and development of processes and the improvement of the ESG strategy.