Emerging Lessons on Corporate Sustainability Reporting from the EU

By James Bourne

The CSR Directive and what it means for business

As ESG has become increasingly tied to financial metrics and performance, ‘corporate sustainability’ is in – and ‘non-financial’ is out.

The Corporate Sustainability Reporting Directive (CSRD), a new piece of legislation from the European Union (EU), aims to ensure that all large companies in the EU will need to disclose data on the impact of their activities in a management report.

The CSRD was adopted by The European Council on November 28th of this year with a goal of ‘transparency on environmental, social affairs and governance matters becoming the norm for large firms.

What are the Corporate Sustainability Reporting Directive (CSRD) requirements?

The management report needs to disclose both actual or potential impacts related to a company’s own operations, as well as across the value chain, including products, services, business relationships and supply chain. It needs to discuss any management or supervisory boards the company is utilising regarding matters of sustainability, and it needs to be wrapped up in a forward-looking, time-bound manner and provide progress on achieving environmental targets.

Much like ESG reporting, there is also an obligation for ‘double materiality’, meaning sustainable activities of the company and sustainability activities affecting the company need to be reported. Reports need to be freely available.

Why has this come about?

The legislation aims to improve upon the current, NonFinancial Reporting Directive, (NFRD). The CSRD looks not only to introduce more detailed reporting requirements but puts it more in line with the EU’s climate goals and the European Green Deal, which includes no net emissions of greenhouse gases by 2050 among other metrics.

More widely, the evolution of ESG has helped precipitate this legislation. The European Commission has argued that NFRD was no longer sufficient in terms of the needs and language in which many organisations were now speaking. As ESG has become increasingly tied to financial metrics and performance, ‘corporate sustainability’ is in – and ‘nonfinancial’ is out.

What standards will the Corporate Sustainability Reporting Directive (CSRD) use?

The CSRD will use the European Sustainability Reporting Standards (ESRS), which were released in final form on July 31, 2023. The ESRS were developed by the European Financial Reporting Advisory Group (EFRAG), they are a set of common standards that the EFRAG say will “reduce reporting costs in the medium and long term, by avoiding the use of multiple voluntary standards as this is the case today.”

The key features of the ESRS include a double materiality component, reporting across a broad range of topics, and reporting on impacts, risks, and opportunities across the value chain. The ESRS are final, but they are subject to a two-month scrutiny period by the European Parliament and EU member states, who can only reject but not amend them.

What potential problems are there with CSRD?

Not everyone is happy with the legislation as proposed, with concerns from small business stakeholders. Luc Hendrickx, enterprise policy director at European SME organisations, said Hendrickx, would ‘need sufficient time to raise awareness amongst their members on the new obligations, organise information sessions, train entrepreneurs and personnel, and develop tools.’ Hendrickx added that ‘some big companies [were] already cancelling their contracts with SMEs as they are not able to report.’

Tomas van der Heijden, co-founder and CEO of German startup Briink explained in a recent feature, many organisations will not so much find trouble in having the data, but collecting, organising and structuring it, and tying it back to the regulations. Sustainability data is ‘basically a large mess of unstructured documents.’

What do organisations need to do now?

To prepare, institutions should look to legal or professional services organisations who can assist. Getting the ball rolling with ESG reporting efforts – if not started already – will be beneficial. Deloitte, for example, has an ESG corporate reporting accelerator programme, while Marsh has a detailed ESG rating tool.

Existing reporting frameworks, such as the Global Reporting Initiative (GRI) and CDP, are already aligned with the CSRD and its ESRS standards. The GRI has stated that “most larger companies, in the EU and elsewhere, already report with GRI and will be reassured that their current GRI-based reporting practices should best prepare them for the ESRS. The topics and requirements in the ESRS will be expanded over time; using the GRI Standards means companies can be ready to comply with future requirements.”

James Bourne is a journalist, editor and content specialist. Formerly of Packt (EiC Cloud) and Editor in Chief of TechForge Media, a publisher of online technology and business titles. He was named as one of the top 20 UK technology influencers by Tyto, 2019.