What is the EU Corporate Sustainability Reporting Directive and what are its key steps?

The CSRD, for Corporate Sustainability Reporting Directive, is a new European Union directive relating to sustainability reporting and reporting by businesses. This new directive aims to remedy the shortcomings of the existing rules on the publication of extra-financial information, the quality of which was insufficient to allow investors to take them into account properly. However, these shortcomings hinder the transition to a sustainable economy.

To help you prepare for the new reporting directive, we've put together everything you need to know about the European CSRD directive:

• Understand the evolutions between the NFRD and the CSRD
• Who must comply with the European CSRD directive?
• What information must be disclosed to comply with the CSRD Directive?
• The CSRD calendar
• Why is this directive an opportunity for businesses?
• What are the main steps?
• The disadvantages of the directive
• How can Ditto support you in preparing your CSRD reporting?

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Understand the evolutions between the NFRD and the CSRD

In 2021, the European Commission (EC) published a proposal for a Corporate Sustainability Reporting Directive (CSRD) aimed at revising, extending and strengthening the current sustainability reporting framework of the Non-Financial Reporting Directive (NFRD).

The problems of the NFRD

As stated in the proposal, the EC discovered a gap between the sustainability information that companies publish under the current NFRD framework, and the needs of users (investors, funds, etc.) regarding this information. Ditto explains why.

• In its current form, this framework does not guarantee that the information provided by businesses is reliable, comparable, and relevant.

• The EC identified that the NFRD framework was problematic for reporting companies, as it lacked details about its requirements. In a context where there are a large number of norms, standards and private frameworks, makes this reporting even more difficult for businesses, they don't know exactly what information they should report.

• Added to this is the fact that these businesses often have difficulty obtaining the information they themselves need from suppliers, customers, and various stakeholders.

For example, under the NFRD, you have to report the carbon impact of your company, but nothing restricted this reporting, and one company could therefore report its carbon impact in terms of intensity, while another did so in absolute value, another could only count its scope 1 and 2, while another company counted its scope 3 as well. The CSRD therefore makes it possible to harmonize reporting.

The new CSRD framework

To address these problems, the EU has therefore created a new framework, the CSRD, which aims to ensure that businesses publish comparable, relevant, and reliable sustainability information, while clearly specifying the information they must provide.

Thus, the CSRD meets this demand for standardized data, supports investors to enable the creation of strategies around sustainable finance: valuation of climate risk, pricing of negative and positive externalities, but that is not possible if the data does not exist and cannot be compared from one company to another.

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Who must comply with the CSRD Directive?

The reporting rules introduced by the NFRD only apply to "public interest entities", i.e. listed companies, banks, and insurance companies with more than 500 employees. The new CSRD directive significantly expands the scope of companies subject to reporting requirements, from 12,000 companies to 50,000 companies covered, which corresponds to 75% of the turnover of companies in the EU.

1. All major companies and to all listed companies on regulated markets and which meet at least two of the following three conditions:

2. Small and medium-sized enterprises (SMEs) listed on regulated markets in the EU as from the financial year 2026. They will be subject to separate standards, less stringent than the standards applied to large companies, which they will have to declare in 2027 for the 2026 fiscal year.

3. All companies listed on regulated markets in the EU. This includes companies not established in the EU that are listed on regulated EU markets and European subsidiaries of non-European companies.

Companies that are not covered by the CSRD are companies with less than 10 employees or less than 20 million euros in turnover.

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What information must be disclosed to comply with the CSRD Directive?

To comply with the CSRD Directive, businesses must:

• Publish regular reports on the social and environmental impacts of their activities, in accordance with European standards for sustainable development reporting.
• The first set of standards will be adopted by October 2022 and will be adapted to EU policies, while building on and contributing to international standardization initiatives.
• Businesses should also ensure that sustainability-related information is published in their management report along with their financial information, and for this information to be verified by an independent third party appraiser.

As a result of the NFRD under the current Directive 2014/95/EU, large companies must publish information relating to:

• The protection of the environment;
• Social responsibility and the treatment of employees;
• Respect for human rights;
• The fight against corruption and bribery;
• Diversity on corporate boards (age, gender, educational and professional background)

With the adoption of the CSRD, the following additional requirements are added:

• The concept of double materiality : Sustainability risk (including climate change) affecting the business + Business impact on society and the environment;
• The process of selecting topics that are important for stakeholders;
• More forward-looking information, including goals and progress made;
• Disclose information relating to intangible assets (social, human and intellectual capital);
• Reports in accordance with the Sustainable Financial Reporting Regulation (SFDR) and the European Taxonomy Regulation (SFDR).

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The CSRD calendar

The proposed directive on corporate sustainability reporting is currently published for consultation until 8 August 2022 - and the first set of projects is expected to be submitted to the Commission by November 2022. If the project is approved, here are the dates to remember:

• October 2022: the European Commission adopts the first set of reporting standards.
• December 2022: EU member states will have to adopt the European directive in their national legislation.
• 2024: Businesses report and publish their sustainability information in accordance with the first set of sustainability reporting standards for fiscal year 2023.
• 2025: Businesses report and publish their sustainability information in accordance with the first set of sustainability reporting standards for fiscal year 2024.
• 2027: SMEs start reporting according to a separate and proportionate reporting standard for the 2026 fiscal year.

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Why is CSRD an opportunity for SMEs?

Extra-financial performances are only becoming more important for investors, by not disclosing their ESG information, SMEs are therefore likely to be excluded from investment portfolios. With the CSRD, they must now also comply.

While SMEs are not yet required to comply with the CSRD, starting to report under the new directive will only help your organization better prepare and make the process easier. In addition, SMEs that do not report their ESG information risk being excluded from investment portfolios, especially as ESG is only gaining in importance for investors.

Bruno le Maire, former Minister of Economy, Finance and Industrial and Digital Sovereignty said:

"This agreement is great news for all European consumers. They will now be better informed about the impact of businesses on human rights and the environment. It is therefore more transparency for citizens, consumers and investors. It is also more readable and simple in the information provided by companies. They must play their full role in society. Greenwashing is over. With this text, Europe is positioning itself at the forefront of the international race for standards, setting high standards in line with our environmental and social ambitions."

What are the main stages of the CSRD?

To prepare for the Corporate Sustainability Reporting Directive (CSRD), companies must follow a structured approach in order to meet new sustainability reporting obligations. This directive aims to increase transparency on sustainability practices by requiring companies to regularly publish information on their environmental, social and governance impacts.

Here are the steps to follow to prepare for the CSRD:

1. Understanding sustainability requirements

The CSRD requires companies to provide detailed information on their ESG impacts (Environment, Social, Governance).

To fully understand the requirements, become familiar with European Sustainability Reporting Standards (ESRS), which specify the criteria to be met for sustainability reporting.

2. Assess if your business is affected

Evaluate if CSRD applies to your business and, if you are concerned, When will your company be required to publish its sustainability report compliant with the CSRD.

Attention, the CSRD will apply to all large companies in the EU and gradually to some SMEs. Check if your company meets the criteria of the directive (employees, turnover, balance sheet).

We have a tool available to help you find out if your business is affected by CSRD.

3. Set up an ESG data collection system

Identify the information needed for sustainability reporting. This includes environmental (CO₂ emissions, use of resources), social (working conditions, diversity), and governance (transparency, fight against corruption) indicators, etc.

Centralize this data to ensure a reliable collection and continuous monitoring, you can use tools like Ditto.

4. Adopting ESRS standards

CSRD's obligations are based on ESRS, which structure sustainability relationships. Ensure that your business is able to meet these standards by adapting your internal processes. Each year, you will need to publish a report that follows these standards.

5. Preparing an external audit

The CSRD requires that the published information is verified by an independent third party. Prepare your business for this obligation by working with specialized auditors.

The aim is to ensure the reliability and transparency of the information provided as part of the reporting.

6. Train your teams and adapt the strategy

Involve your teams so that they understand sustainability issues and the importance of these new obligations. It is essential that your employees are trained in collecting and monitoring ESG data.

Adjust the overall business strategy to align your actions with the expectations of the CSRD and ensure that you can provide the required information.

7. Plan the publication of the sustainability report

Prepare your company for the first mandatory publication of its sustainability report by following the schedule defined by the CSRD (the first large companies will have to publish in 2025 for the fiscal year 2024).

Make sure that your report is clear, compliant with ESRS standards, and includes all required information to meet sustainability reporting criteria.

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The disadvantages of CSRD

The implementation of the Corporate Sustainability Reporting Directive (CSRD) has some disadvantages for businesses, especially when it comes to sustainability, reporting, and reporting. While this directive aims to improve transparency and accountability, there are several challenges that need to be considered.

1. Increased administrative burden

One of the main disadvantages of CSRD is the increase in the administrative burden associated with the collection, analysis and publication of information on sustainability. Businesses will have to mobilizing additional resources to meet reporting requirements, in particular in terms of external audit and compliance with ESRS standards.

It may be particularly cumbersome for the smallest businesses, even if they benefit from additional time, as they do not always have the internal resources to manage this new obligation.

This is why you can get help from external consultants or keep the skills in-house and use a tool.

2. Additional costs

Compliance with CSRD reporting obligations, including the adoption of ESRS standards, leads to significant financial costs for businesses. This may include the establishment of new data management systems, staff training, or the hiring of consultants to ensure compliance

External audit of extra-financial information, required by the CSRD, also represents an additional cost for companies, especially if they need to correct shortcomings or errors in their sustainability report.

3. Complexity of ESRS standards

Businesses must comply with ESRS standards that are complex and cover a wide range of sustainability topics (climate, biodiversity, equality, etc.). Understanding and implementing these standards can be difficult, especially for companies that are not yet familiar with extra-financial reporting criteria.

4. Time pressure

Businesses can feel pressure to quickly comply with CSRD obligations. The time between the adoption of the directive and the first deadlines (2024 for some companies) is relatively short, leaving little time to adjust the systems and prepare for the publication of reports.

Managing this time pressure, while maintaining daily operations, can create an imbalance in business priorities.

Preparing your CSRD reporting - How can Ditto support you?

Ditto can help your organization:

• Identify the necessary indicators for CSRD
• Help you identify the right people internally and onboard them on the solution
• Define a collection schedule with you
• Help you get organized to collect data
• Assisting you in justifying this data

Is your organization looking for a solution? Contact us for a demo call on the platform and to find out how Ditto can help your business.