On 10 November 2022, the European Parliament marked a significant moment in corporate governance by overwhelmingly passing the Corporate Sustainability Reporting Directive (CSRD). This new regulation aims to bring a new level of transparency and accountability to Environmental, Social, and Governance (ESG) reporting.
We will explore what this means for business, especially those in the UK, and what new disclosure requirements businesses will face, all while focusing on the timeline for implementation.
What is ESG?
1. Environmental
The environmental aspect of ESG focuses on how a business interacts with the natural world. This includes its carbon footprint, waste management, and efforts to combat climate change. Businesses are increasingly expected to transition to sustainable practices, such as reducing emissions and waste, to mitigate their environmental impact.
2. Social
The social component deals with a business’s relationships with its employees, customers, and the communities where it operates. This includes fair working practices, diversity and inclusion, and community engagement. Businesses with strong social practices are often seen as more sustainable and are generally more attractive to both consumers and investors.
3. Governance
Governance involves the ethical conduct of a business, including how it is managed and how it deals with its shareholders. This can range from board diversity to executive compensation and shareholder rights. Good governance practices are essential for a business’s long-term success and can significantly influence investor trust.
What is CSRD?
Who Will Be Affected and When?
The CSRD will have a phased rollout affecting different types of organisations:
• FY’24: Businesses already subject to the Non-Financial Reporting Directive (NFRD) will need to comply starting in fiscal year 2024. This is the first wave of Businesses that will need to adapt to the new regulations.
• FY’25: “Large” organisations with a net turnover of €40 million or more, and at least €20 million in assets and 250+ employees, will need to comply starting in fiscal year 2025. This expands the scope to include Businesses that may not have been subject to such detailed reporting requirements before.
• Later Phases: All listed Companies, with some exceptions for very small enterprises, will be affected in subsequent phases. This indicates that the regulation will eventually become standard practice across the board.
Timeline for Assurance
• October 2026: Limited assurance standards will be provided for auditors to use when assessing sustainability reports. This is a significant step as it adds a layer of credibility to the reports.
• October 2028: Reasonable assurance standards will be introduced, depending upon feasibility assessments. This will further strengthen the reliability of ESG reporting.
What’s New in Reporting?
1. Broader Scope: The CSRD expands the types of businesses that need to report, including private businesses and those based outside the EU but operating within it. This is a monumental change as it brings a larger number of businesses under the scrutiny of standardised ESG reporting.
2. Enhanced Topics: Businesses will now also need to report on new areas such as biodiversity, resource use, and the conduct of their workers and suppliers. This means that businesses will need to have a more holistic approach to gathering and reporting data.
3. Mandatory Assurance: All reports will need to be audited for accuracy, similar to financial audits. This is a critical change as it adds a layer of accountability and reliability to ESG reports.
Why should businesses care?
1. Legal Compliance: Failure to adhere to CSRD could result in legal penalties. Businesses must take this into account when planning their ESG strategies to avoid any legal repercussions.
2. Investor Attraction: Transparent ESG reporting is increasingly becoming a criterion for investment decisions. Businesses that adhere to these new standards are likely to be more attractive to investors who are looking for sustainable options.
3. Reputation Management: Compliance with CSRD can enhance a business’s reputation and social standing. In an age where consumers are increasingly looking at the ethical practices of the Businesses they engage with, this can be a significant advantage.
Challenges and Concerns
1. Increased Workload: The new requirements will necessitate the involvement of more people and the collection of more data. Businesses will need to invest in resources and training to meet these new demands.
2. Data Integrity: Ensuring the accuracy and reliability of this additional data is a significant concern. Robust data management systems will be essential to maintain the integrity of the reporting process.
3. Time Constraints: All these changes need to be incorporated within existing reporting timelines, posing logistical challenges. Businesses will need to start their preparations well in advance to meet these deadlines.
How to prepare for CSRD
1. Trust: Businesses will need to ensure that their ESG data is as reliable as their financial data. This will involve implementing rigorous data verification processes.
2. Transparency: A clear oversight mechanism for both data and processes will be essential. Businesses will need to be transparent not just in their reporting but also in how they arrive at the data.
3. Collaboration: Cross-departmental collaboration will be crucial to streamline the reporting process and ensure accuracy. Breaking down silos within the organisation will be key to meeting the new requirements efficiently.
How can Sustainable X help?
Sustainable X offers a range of services to help businesses transition smoothly to the new CSRD requirements:
1. Gap Analysis: Identifying areas where your current reporting falls short of CSRD requirements. This will provide businesses with a roadmap for compliance.
2. Materiality Assessment: Prioritising the ESG and sustainability topics most relevant to your business. This will help businesses focus their efforts on areas that are most impactful.
3. Readiness Checks: Ensuring that you have all the necessary data and processes in place before the reporting deadlines. This will be crucial for Businesses to meet the new requirements without any hitches.
The introduction of CSRD is a key event in corporate reporting, affecting not just businesses within the EU but also those with significant operations in the region.
The phased timeline for implementation and assurance standards adds another layer of complexity but also provides a roadmap for Businesses to follow. It’s a complex but necessary shift towards greater transparency and accountability in ESG reporting. With expert guidance from Sustainable X, Businesses can navigate this new landscape effectively, ensuring not just compliance but also a more sustainable and responsible business model.