The CSRD & ESRS: everything you need to know [update]

The EU’s Corporate Sustainability Reporting Directive (CSRD) marks a revolutionary development for sustainability’s place in the corporate landscape – and for your organization, in particular. Here is everything you need to know to apply the ESRS correctly and reap all the benefits that come with it.

What is the CSRD?

The Corporate Sustainability Reporting Directive (CSRD) is a part of the EU Green Deal, which aims to make Europe the first climate-neutral continent by 2050. It requires EU companies to report on their environmental, social, and governance (ESG) performance in a consistent way.

The CSRD’s main goal is transparency towards governments, stakeholders and - perhaps most importantly - investors. As the reports will make it possible to assess a company’s ESG performance in a heartbeat, companies will be encouraged to prioritize and improve their sustainability efforts. In this way, the directive is bound to play a vital role in the battle against global warming and greenwashing.

62,000

By 2028, no fewer than 62,000 EU organizations will have to disclose and audit their ESG information on a yearly basis.

The CSRD: what’s in it for you?

The CSRD presents the ideal opportunity to consider your company’s strengths and weaknesses, as well as your strategy, vision, and targets. How do you tackle ESG issues right now? And how should you adjust your sustainability efforts in the (not-so-distant) future?

Yes, that calls for investments upfront. However, those will reduce your costs over time, as you will use natural resources more responsibly, minimize waste, and improve your operational efficiency. CSRD compliance will also help avoid fines, provide a healthy work environment, and boost relationships with partners and stakeholders – including financial institutions.

As a consequence, the CSRD can reinforce your employer brand and overall image. From employees and customers to consumers and investors: they all expect sustainability efforts. They could sway green investors, enhance customer loyalty, and possibly help you win the war for talent. And they could even lead to other innovative projects (e.g., redesigned products) and new business partnerships.

Who should adopt the CSRD?

Never miss a beat in the CSRD story with our CSRD Update Radar.

• Early 2025 (i.e., reporting on 2024 data): companies that are already subject to the Non-Financial Reporting Directive (NFRD)
• Early 2026: large EU companies and parents of large EU groups that are not subject to the NFRD
• Early 2027: listed SMEs (but they can choose to opt out until 2028)
• Early 2028: third-country companies
• Early 2029: large non-EU groups

For many EU companies, this timeline means that they should start preparing now. Does your organization fall beyond that scope? Feel free to adopt the CSRD anyway, and enjoy its many benefits for your (green) growth.

Small, Medium, Large: who’s who?

To be considered a large company or group, an organization should meet two out of three criteria: a balance sheet total of more than €20m, a net turnover of more than €40m, and/or more than 250 employees (on average) during the financial year.

SMEs exclude micro-enterprises that tick two out of the following three boxes: a balance sheet total of €0.35m max., a net turnover of €0.7m max., and ten employees or fewer during the financial year.

EU subsidiaries and branches with a non-EU parent company will have to report (at group level) if they have had an EU turnover of more than €150m during the last two consecutive financial years. Additionally, the group needs to contain an EU branch with a turnover of more than €40m, or a ‘large’ EU subsidiary.

[NEW] What should you report for the CSRD?

CSRD reports will have to respect the EU Sustainability Reporting Standards (ESRS). After a development phase, the European Financial Reporting Advisory Group (EFRAG) submitted the first set of ESRS to the European Commission in June 2023. The feedback period ended on July 7.  As of July 31, the Commission has adopted those first reporting requirements.

By October 2023, EFRAG will provide drafts tailored specifically towards SMEs. These regulations will be more lenient compared to the current standards, in order to ease the administrative burden for these companies. A second set of ESRS, including additional standards for specific sectors and non-EU companies, will be drafted by June 2024.

The first set of ESRS consists of two generic standards and ten topical standards.

ESRS: generic standards

·  General requirements (ESRS 1): an explanation of the most important concepts, such as double materiality, reporting across the value chain, and how sustainability information should be collected and reported.

·  General disclosures (ESRS 2): sustainability reporting requirements regarding Governance (GOV), Business Model and Strategy (SBM), Impact, Risk and Opportunity Management (IRO), and Metrics and Targets (MT).

These are mandatory for all companies.

What is double materiality?

Organizations should (1) disclose how their business affects the environment, the planet and society as a whole (impact materiality); and  (2) report on sustainability issues that influence their business and business value (financial materiality).

ESRS: topical standards

·  Environmental factors (ESRS E1-5): climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use, and circular economy.

·  Social factors (ESRS S1-4): own workforce, workers in the value chain, affected communities, consumers, and end users.

·  Governance factors (ESRS G1): business conduct. Examples include business ethics, corporate culture, partner management and relationships, risk management, anti-corruption attitude, etc.

Reports should focus on all ESG themes that matter the most to your organization – financially and impact-wise. In particular, your mandatory topical standards will depend on the outcome of your double materiality assessment (see below).

How should you report for the CSRD?

Your sustainability statements should be presented in a single section of your management report. Structure them into four parts: general information, environmental information, social information, and governance information. Keep in mind that this should happen in one single XHTML format with digital tags (see below).

The first section contains general statements regarding the four reporting areas mentioned earlier (GOV, SBM, IRO, and MT). The other three segments (the topicals) discuss your impact, risk and opportunity management – as well as your metrics and targets – concerning the ESG issues that are most relevant to your organization.

Some requirements can be particularly time-consuming, such as the double materiality assessment, calculating your EU Taxonomy alignment and carbon footprint, and setting (SBTi-)aligned targets.

The EU Taxonomy

As a part of the Green Deal, the EU wants to stimulate organizations to invest in sustainable projects. To help identify such initiatives, the Union developed the EU Taxonomy: a classification system that judges the environmental sustainability of an economic activity, based on six environmental objectives:

1. Climate change mitigation
2. Climate change adaptation
3. Sustainable use and protection of water and marine resources
4. Transition to the circular economy
5. Pollution prevention and control
6. Preservation and restoration of biodiversity and ecosystems

A business activity is considered ‘environmentally sustainable’ when it substantially contributes to at least one objective and inflicts no significant harm on any of the other five.

The sustainability statements in your management report should mention how many of your activities are in line with the EU taxonomy – including those projects’ turnover, capital expenditures, operating expenses, etc.

Topical example: climate change

Is your company required to report on climate change (ESRS E1), and how your operations affect it? Then your report should include the following information:

E1-1: Climate change mitigation transition plan

E1-2: Climate change mitigation/adaptation policies

E1-3: Climate change policies: actions and resources

E1-4: Climate change mitigation/adaptation targets

E1-5: Energy consumption and mix

E1-6: Gross Scope 1, 2, 3 and total greenhouse gas (GHG) emission

E1-7: GHG removal/mitigation projects and their finances via carbon credits

E1-8: Internal carbon price

E1-9: Potential financial effects of your climate-change policies

Moreover, your transition plan and mitigation/adaptation policies must respect the Paris Agreement, so global warming won’t exceed 1.5 degrees Celsius.

What are Scope 1, 2 and 3 emissions?

• Scope 1: Emissions from sources that you control or own (e.g., a non-electric fleet)
• Scope 2: Emissions that you cause indirectly (e.g., electricity, cooling, and heating systems)
• Scope 3: Indirect emissions in your value chain (e.g., employee commuting, waste disposal)

How to get started with Futureproofed

Preparing for the CSRD starts today and will require a lot of time and resources. The tips below help you kick off your journey. Moreover, you can count on Futureproofed’s expertise for all of them:

1. Conduct a double materiality assessment: which ESG topics matter the most to your business and its entire value chain? What are your material risks, impact, and opportunities?
2. Identify which activities align with the EU Taxonomy, and which proportion of your business they constitute
3. Calculate your corporate carbon footprint (and let us help you)
4. Scan your datapoints and make a gap analysis
5. Define clear KPIs and actionable reduction targets
6. Make sure your ESG information is quantitative and qualitative, retrospective and prospective (short, medium, and long term)
7. Brush up on your digital savviness: CSRD reporting happens in one single XHTML format with digital tags
8. Ensure a third-party audit: your CSRD reports need to be independently audited

However, our expertise at Futureproofed covers more than those eight useful tips. Every day, we help cities and organizations measure, reduce, and report on their CO2 emissions. Thanks to our climate-tech SaaS and expert advice, we can calculate your emissions, boost your transition plan, formulate metrics and targets in our carbon footprint tool, and more – so you are completely CSRD-ready.

Need help to prepare for the upcoming CSRD? Get started with our whitepaper.