On November 10, 2022, the European Parliament adopted the Corporate Sustainability Reporting Directive (CSRD). The directive came into force on 04/01/2023. CSRD is a directive, a piece of legislation that defines a goal that EU members must achieve. The directive will legally oblige companies to report on ESG issues.
Under the CSRD, affected companies will be legally required to report in accordance with the European Sustainability Reporting Standards (ESRS). The CSRD aims to align sustainability reporting with financial reporting, making businesses more accountable as Europe seeks to achieve the headline goal of the European Green Deal of becoming the world’s first climate-neutral economy by 2050.
Don’t panic – together with Klappir we can help you prepare
SPCleantech has been providing its Members and Partners with information about their non-financial reporting obligations – ESG for a long time. It is clear that more companies will need to master and understand their ESG commitments and related data in the coming years. The first step is to familiarize yourself with the ESRS project and how it will affect your organization.
Together with Iceland-Danish company Klappir, which is a leading provider of digital sustainability management solutions that enable companies and other stakeholders to align their sustainability accounting and reporting processes with various standards, guidelines and regulations, including ESRS and CSRD, we help stakeholders companies in the process of creating ESG strategies and ESG reporting.
The Klappir platform allows you to collect all relevant data from sources in your organization and supply chain, including scope 1, 2 and 3 emissions and other ESG data. It can help you understand your data and report it accurately, transparently and effectively so you can take the right steps towards compliance and a sustainable future.
ESRS in a nutshell
While the CSRD is a directive that will require companies to report extensively on their sustainability, the ESRS is a set of standards to complement the CSRD on Environmental (Environment E), Social (Social S) and Governance G issues that detail specify how companies will be required to collect data and issue reports using the double materiality reporting standard, i.e. reporting simultaneously matters that are financially significant, affecting business value and environmentally and socially significant; i.e. relating to the environment and people.
The ESRS standards were developed by EFRAG, the European Accounting Group for Financial Reporting, which was appointed technical advisor to the European Commission (EC). The EFRAG projects were submitted to the EC on November 23, 2022 after public consultations and are available here. The EC will adopt the draft ESRS in the form of delegated acts by 30 June 2023.
Who will be affected?
It is estimated that 49,000 European companies will be subject to and directly affected by the CSRD, an increase from the 11,700 companies already subject to the Non-Financial Reporting Directive (NFRD).
This figure of 49,000 includes all companies listed on an EU regulated market, including SMEs but excluding micro-enterprises. The CSRD also applies to large companies, whether or not listed, provided they meet two of the three following criteria:
- Revenues exceeding EUR 40 million in a financial year
- Assets exceeding EUR 20 million in a financial year
- Over 250 employees
Non-EU companies with significant activities, i.e. with a turnover of more than €150 million in the EU, will also have to adapt, as will small and non-complex financial institutions and captive insurance and reinsurance companies.
The figure of 49,000 does not include the various companies in the value chains of directly affected companies that can be expected to be indirectly affected as their suppliers and customers will no doubt need their cooperation to meet the increasing ESRS reporting requirements across the entire value chain.
What will I have to report?
The first set of twelve ESRS draft standards consists of two cross-cutting standards, which list general requirements and general disclosures respectively, and ten thematic standards on environment (5 draft standards), social (4 draft standards) and corporate governance (1 draft standard) matters ; covering a wide range of topics from climate change to doing business. In short, the ESRS will guide companies what information they must disclose in their CSRD reports and how to report it.
Proportional standards for listed small and medium-sized enterprises (SMEs) and sectoral standards are currently under development and are expected to be developed by EFRAG in 2023.
Even companies that are already ambitious and used to reporting under the current rules will feel the impact of CSRD and ESRS and will need to prepare. CSRD aims not only to multiply the number of companies subject to the reporting obligation and to introduce the obligation to report according to the double materiality standard, but also to extend the scope of reporting ESG information. It is clear from the current ESRS design that they are intended to cover more ESG-related topics than companies are currently used to reporting. In addition, the boundaries of reporting will be extended beyond the organizations themselves and into the value chain, both upstream and downstream, to better understand an organization’s true ESG impact.
When will the rules come into effect?
The CSRD will primarily apply to large listed companies that are already subject to the NFRD from January 1, 2024 (obliging them to submit data for 2024 in 2025). After that, large companies that are not subject to the NFRD will be subject to the directive from 2025. Then, small and medium-sized enterprises and captive insurance companies will follow suit by submitting 2026 data in 2027, and finally third country companies will be required to report in 2029 .