What the New Corporate Sustainability Reporting Directive Implies for Businesses

How did this directive evolve?

The Corporate Sustainability Reporting Directive (CSDR) was proposed by the EU to amend the reporting requirements of the Non-Financial Reporting Directive (NFRD) which was earlier adopted by the EU in October 2014. The objective of NFRD was greater business transparency and accountability on both Social and Environmental issues, known as double-materiality for large listed companies like banks and insurance companies. After several years, the EU reviewed the outcome of enforcing the NFRD and concluded that the information provided by the corporates was insufficient. For fostering sustainable growth, it is key to direct financial and capital flows to sustainable investments, which can be achieved by improving data availability and disclosure of adequate information through the disclosure of non-financial information.

The EU Commission thus decided to review the NFRD, and its efficiency, and propose a revision of the directive. This paved way for the proposal of the Corporate Sustainability Reporting Directive to address the gaps faced in NFRD by 21st April 2021. After the political agreement of the directive by June 2022, the first draft was published in late November 2022 and the CSRD was finally published by December 2022. On 5th January 2023, the NEW Corporate Sustainability Reporting Directive came into effect. The older directive NFRD will be in effect until CSRD is adopted by the organizations which were earlier under NFRD’s scope.

To whom does this apply?

The CSRD will be applicable to the following companies:

• Companies already covered under NFRD such as large public-interest companies (with over 500 employees) will be covered from 1st Jan 2024. The report for these companies is due by 2025.
• From 1 January 2025 for large companies that have not been covered under NFRD. These rules apply to large public-interest companies with more than 500 employees, which covers more than 11 700 large companies and groups across the EU. The report for these companies is due by 2025
• The CSRD does not place any new reporting requirement for listed SMEs and can report using simplified standards. This will be applicable from 1 Jan 2026 with reports due by 2027.

How CSRD bridges the gap:

The new Corporate Sustainability Reporting Directive (CSDR) will ensure that companies will provide sufficient disclosure of their business impacts on the environment and social aspects and have an audit of the information that they report on. This is a key step to a stronger framework.

The new Corporate Sustainability Reporting Directive rule will:

• Strengthen the rules that govern the social and environmental records businesses must disclose.
• Assure that stakeholders and investors have access to the vast information they require to evaluate the investment risks associated with climate change and additional sustainability-related problems.
• Facilitate greater business transparency.
• Integrate the information that must be provided and enable a reduction in reporting costs over the long run.

Will there be any challenges to reporting based on this new CSRD?

The CSRD requires companies to report in accordance with the European Sustainability Reporting Standards (ESRS). The EFRAG, formerly known as the European Financial Reporting Advisory Group, is an independent organization that brings together numerous stakeholders and is responsible for developing those proposed standards.

Additionally, CSRD also mandates that companies handle an audit of the sustainability data they report and enables the digitalization of sustainability-related data. The reporting based on the CSRD's guidelines presents both opportunities and difficulties, such as:

1. Lack of high-quality data and data consistency: Due to the complex nature of sustainability and ESG data and the lack of transparency in the definitions, it is difficult to comprehend what the data points measure.
2. A major element of CSRD reporting the double materiality assessment largely defines the reporting scope. Due to the requirement that companies recognize both their impacts on humans and the environment (effect materiality) along with the sustainability issues that have a financial impact on the undertaking, the assessment's execution is more complicated than many companies are used to (financial materiality).
3. We must understand the nature of the directive; though this is a step forward towards the sustainability journey, there is a need for the standards to align globally.
4. While CSRD determines who must report, European Sustainability Reporting Standards (ESRS) define what information must be reported, and how it must be reported. ESRS is still evolving and will be in line with other EU policies like EU Taxonomy, TFCD etc. To accommodate varied information, changes to the existing reporting structure may be required.
5. The CSRD demands organizations define targets, choose a baseline, and review and report performance and improvement towards the targets, in addition to revealing information on policies and practices.
6. The information that must be revealed should be both retroactive and forward-looking, and its scope should be broadened to include the entire value chain.
7. To enable the adoption of all CSRD requirements, companies must acquire and integrate sustainability (technical reporting) information into their company.

How does it add value to the business?

• New prospects for cost savings (notably energy reduction) and production process innovation.
• Helps us progress towards Net Zero emissions related to EU climate aspirations.
• Provides scope for the company's own production and supply chain to be more sustainable by requiring long-term sustainable reporting and prompt compliance.
• Describe techniques to build strategic partnerships and spot potential bottlenecks early on.
• Assures the supply chain's continuity when the directives get into effect.

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