Contained in this article:
- Background on the CSRD and EFRAG
- What is the Corporate Sustainability Reporting Directive (CSRD)?
- What is the difference between NFRD and CSRD and does CSRD replace the NFRD?
- Who is subject to the CSRD and what is the timeline?
- Is CSRD mandatory?
- What should I report according to CSRD?
- When will the final ESRS documents be published?
- What happens if my company doesn’t comply with the CSRD?
Details on the European Sustainability Reporting Standards (ESRS)
- What are the ESRS standards?
- What is double materiality and is it mandatory?
- How does my company conduct a materiality assessment according to the ESRS?
- Are the ESRS disclosures mandatory?
- Is a decarbonization plan mandatory?
- What methodology should companies use to measure their GHG emissions?
- What diversity indicators are included in the ESRS?
- What format must a CSRD report be in?
- Will my report have to be assured by a third party?
- Is assurance required from the beginning?
- Are value chain disclosures required from the beginning?
Background on the CSRD and EFRAG
What is the Corporate Sustainability Reporting Directive (CSRD)?
The CSRD is a new EU directive that will make the reporting of ESG disclosures, also known as “non-financial” data, mandatory for small, medium and large companies operating in Europe. The CSRD was adopted by the European Parliament on 10 November, 2022 and by the Council of the European Union on 28 November, 2022. Once implemented into the national law of EU member states, its requirements will be phased in from 2024 (for reports published in 2025).
What is the difference between NFRD and CSRD and does the CSRD replace the NFRD?
The CSRD replaces the Non-Financial Reporting Directive (NFRD). The main difference between the two directives are the inclusion criteria described above, which in the case of CSRD cover a larger number of companies. CSRD will require environmental, social and governance (ESG) reporting from 49,000 companies in Europe, compared to the 11,000 covered by the NFRD directive. In the Czech Republic, our home base, the number of companies required to report will go up from 25 to 1,500.
Among the other differences are the requirement for third party assurance, new ESRS reporting guidelines, digital “tagging” to create machine-readable reports, and implementation of the double materiality principle. Read more details about the ESRS below.
Who is subject to the CSRD and what is the timeline?
Companies currently falling under the NFRD will start having to comply with CSRD starting from 2024, meaning for reports published in 2025.
In addition, the CSRD covers all large companies who meet at least two of the following criteria: a) Over 250 employees and either b) over EUR 40 million in net turnover or c) over EUR 20 million in assets. These companies will have to comply starting in 2025, for reports published in 2026.
The CSRD also covers SMEs traded on EU markets. For small SMEs, companies meeting at least two of these criteria are included: a) 10-49 employees, b) EUR 700K-8M in net turnover, 3) EUR 350K-4M in assets. For medium SMEs, companies meeting at least two of these criteria are included: a) 50-249 employees, b) EUR 8M-40M in net turnover, c) EUR 4M-20M in assets. Listed SMEs will have to comply starting in 2026, for reports published in 2027, but they will be able to opt out until 2028.
It is not yet known when non-listed SMEs will fall under the scope of the CSRD or a follow-on EU directive, but it is likely to happen.
As well as non-listed SMEs, the CSRD currently excludes listed micro-enterprises with ten or fewer employees and less than Euro 700K in net turnover or Euro 350K in assets.
EFRAG’s Standard-setting roadmap (source: EFRAG.org, Report: Proposals for a relevant and dynamic EU sustainability reporting standard-setting, February 2021)
Is CSRD mandatory?
The CSRD is mandatory for all companies meeting the above-described criteria. These companies will have to publish a non-financial, or ESG report on an annual basis, using the EFRAG’s sustainability reporting standards (the ESRS).
What should I report according to CSRD?
The CSRD requires companies to closely follow the EU’s new sustainability reporting standards (ESRS) to disclose information about their environmental and social risks and impacts, as well as the governance structures they have in place to manage those risks and impacts. Read more below to find out what exactly is contained in the ESRS.
When will the final ESRS documents be published?
The first so-called “exposure drafts” of the EU’s ESRS was published in April 2022, with comments from a broad range of stakeholders due in August 2022. In November 2022, revised versions of the draft were made public. The major change to these drafts was the removal of the rebuttable principle, which required companies to explain the omission of any disclosures. The standards were also significantly shortened, reducing the number of documents from 13 to 12 and the number of disclosures from 136 to 84.
The revised ESRS drafts will be discussed by the EFRAG Sustainability Reporting Board and are still subject to validation by the EU Commission.
What happens if my company doesn’t comply with the CSRD?
Not complying with the CSRD could lead to financial sanctions and public statements about the non-compliance, but also could lead to your company being excluded from investor portfolios.
Get in touch with us to find out how we can help you make sense of the alphabet soup and become CSRD compliant!
Details on the European Sustainability Reporting Standards (ESRS)
What are the ESRS standards?
The ESRS standards are the EU’s new sustainability reporting standards that will help companies know what kinds of indicators they should report in their ESG reports. The standards were developed to align with the EU’s Green Deal and Taxonomy, as well as the Global Reporting Initiative (GRI), the most widely-used international ESG reporting standards.
The standards are comprised of 12 documents covering the topics in the below table.
The 12 documents of the ESRS
Below, we answer some frequently asked questions about ESRS.
What is double materiality and is it mandatory?
Double materiality means looking at both the impact of the outside world on a company (“financial materiality”) as well as a company’s impact on the outside world (“impact materiality”). Double materiality is a central part of the ESRS and is a required part of ESG reporting. In the process of analyzing double materiality (also known as a materiality assessment), the company finds out which topics should be included in their ESG report.
A visual representation of double materiality
In the world of the ESRS, the two components of double materiality, impact materiality and financial materiality, are defined as followed:
“Impact materiality and financial materiality assessments are inter-related and the interdependencies between the two dimensions shall be considered. In general, the starting point is the assessment of impacts. A sustainability impact may be financially material from inception or become financially material when it translates or is likely to translate into financial effects in the short-, medium-, or long-term. Irrespective of them being financially material, impacts are captured by the impact materiality perspective” (ESRS 1 General principles, p. 11)
“A sustainability matter is material from an impact perspective when it pertains to the undertaking’s material actual or potential, positive or negative impacts on people or the environment over the short-, medium- or long term. A material sustainability matter from an impact perspective includes impacts caused or contributed to by the undertaking and impacts which are directly linked to the undertaking’s own operations, its products, and services through its business relationships. Business relationships include the undertaking’s upstream and downstream value chain and are not limited to direct contractual relationships.” (ESRS 1 General principles, p. 11)
“A sustainability matter is material from a financial perspective if it triggers or may trigger material financial effects on the undertaking’s development, including cash flows, financial position and financial performance, in the short-, medium- or long-term. This is the case, in particular, when it generates or may generate risks or opportunities that significantly influence or are likely to significantly influence its future cash flows. Future cash flows, together with other critical factors such as business model, strategy, access to finance and cost of capital, are likely to influence the financial position and financial performance of the undertaking in the short-, medium- or long-term.” (ESRS 1 General principles, p. 12)
How does my company conduct a materiality assessment according to the ESRS?
The ESRS provide guidance on how double materiality should be assessed, with a step-by-step guide provided in Appendix B of the ESRS 1 General requirements document (ESRS 1, p. 30)
The steps of an ESRS materiality assessment include:
- Mapping the context of the company’s business activities, business relationships and stakeholders.
- Considering the list of topics covered by the topical ESRS (see ESRS 1, p. 34-37 for full overview of topic and sub-topics).
- Identifying actual and potential positive and negative impacts of the company on people and the environment based on:
- Sustainability due diligence process, including input from affected stakeholders and experts
- Assessment of impacts according to how the company is involved with the impact (i.e. through own activities or as a result of its business relationships) and how severe the impact is along three variables: a) its scale (how serious it is), b) its scope (how widespread it is) and c) its irremediability (how hard it is to correct). For potential impacts, it should include an assessment of their likelihood.
- Defining a threshold, above which an impact becomes material to the company.
- Making a list of the ESRS sustainability topics that cross that threshold.
- Making a list of any ESRS sustainability topics not meeting the threshold, with a brief explanation of the conclusions of the materiality assessment for that topic.
- Adding any company-specific disclosures that arose from the above sources that are not covered by the standard disclosures in ESRS.
- Assessing the financial materiality of each of the above material topics by considering how it may be either a risk or opportunity, and then determining the likelihood and magnitude of financial impact of each risk and opportunity.
Materiality assessment is a relatively complex process that requires a significant time investment. We can help you conduct your stakeholder dialogues, industry benchmarking, materiality assessment and prioritization of topics.
Are the ESRS disclosures mandatory?
Not all of the ESRS disclosures are mandatory, however, in its latest version the EFRAG has defined a list of disclosures that are mandatory for all companies, including:
- ESRS 2 General disclosures (all disclosures)
- ESRS E1 Climate Change (all disclosures)
- ESRS S1 Own Workforce (disclosures S1-6 Characteristics of the Undertaking’s Employees, S1-7 Characteristics of non-employee workers in the undertaking’s value chain and S1-8 Collective bargaining converge and social dialogue)
- For companies with over 250 employees, disclosures S1-1 to S1-5 on policies, actions and targets are also required
After a first round of stakeholder feedback, the EFRAG removed the “rebuttable principle”, which required that companies provide reasonable and supportable evidence for any disclosures that they exclude.
Now, companies are expected to include disclosures for those topics they deemed to be material according to their double materiality assessment. However, companies can omit “Metrics and Targets” disclosures without providing any explanation for the omission (with the exception of the above listed mandatory disclosures, which cannot be excluded). Companies can also omit “policies, actions and targets” disclosures if they have nothing, however in this case they must disclose a timeline of when they expect these policies, actions and targets to be in place.
If a company decides that one of the ESRS sustainability topics is not material to their business according to a double materiality assessment, they can exclude all disclosures for that topic but must “briefly explain the conclusions of its materiality assessment for the topic” (ESRS 1, p. 10). However, again, the above list of mandatory disclosures cannot be excluded.
Is a decarbonization plan mandatory?
The short answer is: yes.
Reporting scope 1, 2 and 3 greenhouse gas (GHG) emissions are among the ESRS’s mandatory disclosures in the ESRS E1 Climate change chapter.
The climate change chapter of the ESRS also requires companies to disclose:
- Integration of climate change strategies into performance and incentive schemes
- Transition plan for climate change mitigation
- Resilience of strategy and business model
- On description of processes to identify and assess material climate-related impacts, risks and opportunities
- Policies related to climate change mitigation and adaptation
- Action plans and resources in relation to climate change policies and targets
- Targets related to climate change mitigation and adaptation
- Energy consumption and mix
- Gross scope 1, 2 and 3 and total GHG emissions
- GHG removals and GHG mitigation projects financed through carbon credits
- Internal carbon pricing
- Potential financial effects from material physical risks, material transition risks and climate-related opportunities
What methodology should companies use to measure their GHG emissions?
The ESRS suggests that companies consider using the methodology of the GHG Protocol, GRI or the requirements of ISO 14064-1:2018. As they write:
“Consider the principles, requirements and guidance provided by the GHG Protocol Corporate Standard (version 2004 or the latest one) and GRI 305 (version 2016 which is directly based on the requirements of the GHG Protocol). The undertaking may consider the requirements stipulated by ISO 14064-1:2018. If the undertaking already applies the GHG accounting methodology of ISO 14064-1: 2018, it shall nevertheless comply with the requirements of this standard (e.g., regarding reporting boundaries and the disclosure of market-based Scope 2 GHG emissions).” (ESRS E1 Climate change, p. 34)
What diversity indicators are included in the ESRS?
Diversity disclosures are covered in ESRS S1 Own workforce, and includes these disclosures:
- The gender distribution in number and percentage at top management level amongst its employees.
- The distribution of employees by age group: under 30 years old, 30-50 years old; over 50 years old.
- Percentage gap in pay between women and men and the ratio between the compensation of its highest paid individual and the median compensation for its employees.
- Percentage of persons with disabilities in its own workforce.
- The extent to which employees are entitled to and make use of family-related leave.
What format must a CSRD report be in?
A CSRD report will have to be in a machine-readable format. The details of the exact format have yet to be released.
Will my report have to be assured by a third party?
Yes, the ESRS requires that companies receive third party assurance for their report to ensure the quality of the data reported, as is done for financial reporting. Assurance can be provided by auditors or third party assurance services.
Is assurance required from the beginning?
Initially only limited assurance is required, with the aim of moving towards reasonable assurance in time.
Are value chain disclosures required from the beginning?
Given the difficulty in collecting data on the full value chain, companies will be able to omit these disclosures for the first three years. However, after that point they will be expected to report on the full value chain.
Have any other questions about preparing a compliant ESRS report? Get in touch with us today!