It's part of a broader regulatory effort which steers decisively towards a more sustainable future: building on the Sustainable Finance Disclosure Regulations (SFDR) and linking to the EU Taxonomy, the CSRD is intended to facilitate transparency and help stakeholders assess investment risks associated with climate change and other sustainability issues. The acceleration of climate action efforts comes with challenges as well as benefits: this blog unpacks the key implications of the CSRD and explains why it will pay off to take decisive steps now to align with the new requirements, helping your company take action on climate in the short and long term.
Who will be affected?
CSRD will apply to all:
- Companies listed on regulated markets in the EU (apart from listed micro-enterprises), and large companies. The CSRD classifies a large company as one that meets two out of three of the following criteria: more than 250 employees, a turnover of over EUR 40 million and over EUR 20m total balance sheet. These companies will also have to take into account information at subsidiary level.
- Listed SMEs, although there will be a transitional period when SMEs can opt out until 2028. However, there are big benefits for SMEs to comply with the reporting.
- Non-EU companies with a net turnover of EUR 150 million in the EU, and with at least one subsidiary or branch in the union.
Let's take a closer look at the details
The new directive builds on previous regulation (read our 'Hitchhiker's Guide to the EU Taxonomy & SFDR here) as part of the European Green Deal. However, one of the most important changes is the concept of 'double materiality'. This means that companies will now have to report on how their business is financially impacted by climate change (financial materiality), in addition to identifying their impact on people and the environment (impact materiality).
This means a more complex reporting process than many companies are used to: corporate entities will need to disclose future and retrospective information while extending the scope to include the entire value chain. What to report is described in European sustainability reporting standards (ESRS) drafts: a set of more than 20 detailed standard documents.
While this represents a greater reporting burden, the shift is a crucial step forwards for safeguarding biodiversity and human rights. The CSRD means companies are now bound by law to disclose their impacts transparently and consistently, reducing the risk of greenwashing. This is a great chance to show a company's positive steps toward addressing its impact on the environment – improving investor confidence and aligning with other stakeholders' expectations around clear, objective reporting – and creating a positive, sustainable future.
Target setting and beyond
The climate crisis won't be solved by short-term solutions and the CSRD recognises this long-term outlook: companies must now set long-term ESG targets and baselines and show consistent progress toward meeting these goals. They'll also need to go through a third-party audit on their reporting as part of the CSRD's push to create high-quality, reliable reporting.
The actual emissions being measured and reported are now broader in scope, too, and reporting must include value chain emissions, commonly known as scope 3 – in addition to scopes 1 and 2 – in order to capture the impact of a company's upstream and downstream activities, but also possible areas of risk. Robust data on scope 3 emissions and the 'double materiality' will better stand up to the scrutiny of investors, among others, who want to know how their investee companies can not only survive but thrive in a low-carbon world.
Increased transparency is enshrined in the CSRD. Companies should indicate which department is responsible for its ESG target and detail its protocols for reducing emissions. It's critical that these protocols be incorporated into the company's overall vision and strategy. All CSRD-related information must be displayed simultaneously in the annual and management reports: this ensures that financial and ESG information are being considered as a holistic picture.
Looking ahead and how to prepare
Getting started as soon as possible is key. The CSRD requires substantially more information than previous ESG reporting, calling for the cooperation of C-level executives, the board of directors, all affected departments and other stakeholders.
The CSRD was released in November 2022 but the new rules will start kicking in over the coming years:
- 1st of January 2024: for all companies subject to the Non-Financial Report Directive (NFRD) (reporting in 2025 on 2024 data)
- 1 of January 2025: all large companies not subjected to the NFRD (reporting in 2026 on 2025 data)
- 1st of January 2026: all listed SMEs (except for micro undertakings),. SMEs can still choose to opt-out until January 2028
That means it's crucial to get started now. Developing the right ESG reporting system will be challenging for many organisations, particularly as ESG metrics vary by industry, company size, and complexity. The key to successful CSRD reporting will be around good data management: gathering, securing and verifying the information accurately and consistently and keeping track of it for future reporting cycles.
While the additional reporting may seem burdensome, early compliance with CSRD will enable insights into benefits and cost-savings associated with the enhanced requirements, and can help kickstart innovation. It can also open opportunities for partnership alignment along the corporate supply chain, which is key for future proofing business operations.
How we can help
If you're within the 50,000 affected companies, contact South Pole today to learn more about the CSRD. We can get you started with an ESG report that meets these requirements, including the EU Taxonomy and the Task Force on Climate-Related Financial Disclosures (TCFD).