The Corporate Sustainability Reporting Directive (CSRD) significantly extends the former Non-Financial Reporting Directive (NFRD), increasing both the reach of companies mandated to comply and the extent of the necessary disclosures. The directives encapsulate larger and publicly traded European Union organizations, along with non-EU firms producing a net turnover exceeding €150 million within EU’s jurisdiction and possessing at least one EU-based branch or subsidiary.
Large firms are stipulated as those with €40 million net turnover or more, or those with a balance sheet totalling above €20 million. The quantity of companies encompassed under the NFRD has grown considerably from 11,000 to nearly 50,000 due to the implementation of the CSRD.
Additionally, more exhaustive reporting requirements have been introduced, involving obligatory EU sustainability reporting standards which necessitate the verification of all sustainability data. Emer Keaveny, EY Ireland’s partner in sustainability reporting and assurance services, highlights that firms are not only obligated to report on their own sustainability performance, but also to provide insights on sustainability throughout their supply chains.
Keaveny affirms, “This is anticipated to boost transparency and enhance the comparability of sustainability performance among firms”. The revised directive mandates firms to disclose information on over 1,000 different data points, encompassing environmental, social, and governance (ESG) elements.
Keaveny explains, “Environmental factors, for instance, will investigate aspects such as carbon footprint, greenhouse gas emissions, water conservation and management, energy usage and efficiency, pollution, as well as impacts on biodiversity and ecosystems. Social factors will examine employee wellness, diversity and inclusion, human rights due diligence, impacts and labour practices including fair wages and working conditions, community engagement and consumer satisfaction, and product security”.
In terms of governance, the directive will scrutinise corporate structures and governance practices, anti-bribery and anti-corruption initiatives, risk management policies concerning sustainability issues, and the connection between executive remuneration and sustainability performance.
Compared to the variety of voluntary frameworks and guidelines currently employed by businesses, such as the Global Reporting Initiative and the Sustainability Accounting Standards Board, the CSRD introduces more thorough, detailed, and standardised obligatory EU sustainability reporting standards.
Keaveny elaborates that the Corporate Sustainability Reporting Directive (CSRD) stretches beyond existing norms with a broad spectrum approach encapsulating the full value chain, inclusive of supply chains. CSRD is projected to make sustainability reports across the European Union more reliable, widely comparable, and consistent, enhancing stakeholders’ abilities to make well-informed decisions. Moreover, this directive will likely shape the global reporting trends, since non-EU firms active within the EU market will be obligated to comply with these novel mandates.
According to Keaveny, the upcoming CSRD means companies need to take both strategic and operational methods into serious consideration, especially within the domains of data governance and data collection. The directive’s expanded remit and intricate reporting obligations necessitate companies have effective mechanisms and operations set up to deliver accurate data on sustainability matters.
The CSRD will be gradually implemented across organisations, with differing roll-out dates contingent on each organisation’s specifics and the firm guidelines impacting diverse groups. The new directive will impact companies already under the Non-Financial Reporting Directive (NFRD), starting from 1st January 2024. Consequently, these companies will see their initial CSRD reports out in 2025, covering the fiscal year 2024.
Keaveny emphasises the importance of organisations familiarising themselves with upcoming deadlines, making preparations early for compliance. This necessitates understanding the detailed obligations under the CSRD, refining existing sustainability reporting protocols, augmenting data governance, and involving stakeholders right from the beginning.
Unprepared organisations open themselves to multiple risks and potential difficulties, which can negatively impact operational capacity, reputation, and financial performance. These effects might include fines, reputational harm, obstacles to investor interactions or access to capital, potential operational interruptions, supply chain risks, or competitive disadvantage.
Keaveny urges organisations to start preparing early and set up effective structures with clearly defined roles and responsibilities for sustainability reporting. Firms are advised to create strong systems for data management, data collection, and analysis, which may need investments in high-tech solutions or improvements in current systems to guarantee data reliability and quality.
Thus, by actively mitigating these risks and addressing challenges, not only will organisations ensure compliance with the Corporate Sustainability Reporting Directive, but they can also weaponise sustainability reporting as an instrument for strategic decision-making and creating value.
Sarah Moran, who leads the ESG advisory at KPMG in Ireland, anticipates that the Corporate Sustainability Reporting Directive will bring radical transformation to the layout of the yearly report. As a result, it will boost transparency, comparability, and responsibility concerning the sustainability-related qualifications revealed in the market.
Moran asserts that structures related to governance, resources, and data will require considerable adjustment to align with these new reporting criteria. They aim to illustrate the linkage between financial and non-financial performance, and simultaneously, assess the resilience of business models towards already shifting climate, societal, and economic parameters.