Mythbuster on CSRD: Understanding CSRD and its implications

Let's first understand where it comes from

The origins of the CSRD can be traced back to a growing global recognition of the essential role companies play in solving environmental and social problems. Its predecessor, the Non-Financial Reporting Directive (NFRD), introduced in 2014, was one of the first steps taken by the European Union to mandate corporate reporting on non-financial aspects such as environmental impact, social responsibility and governance. However, as the world changed, as many companies trying or not to do good were accused of greenwashing, and as the demand for corporate transparency increased dramatically, the NFRD proved insufficient. Reporting was inconsistent, difficult to compare across sectors and often seen as superficial, leading to widespread criticism of “greenwashing” practices.

CSRD has emerged as a more robust response to these shortcomings, aligning corporate reporting with the European Green Deal and its commitment to achieving climate neutrality by 2050. By broadening the scope of reporting requirements and standardizing sustainability information to enable comparisons. The CSRD seeks not only to improve transparency, but also to anchor sustainability at the heart of corporate strategy. This change reflects a broader understanding that sustainable business practices are essential not only for the planet, but also for long-term financial success. The directive aims to make sustainability reporting as rigorous and essential as financial reporting, creating a new standard of corporate responsibility.

Launched in January 2023, the CSRD represents a major overhaul of corporate reporting standards, requiring European companies to publish detailed information on their environmental, social and governance (ESG) performance.

The scope and reach of the CSRD

Unlike its predecessor, the NFRD, which applied to around 11,000 large EU companies, the CSRD significantly expands the number of companies required to submit a sustainability report. By 2025, almost 50,000 companies, including large corporations, listed SMEs and non-European companies operating in the EU, will be subject to CSRD obligations.

The main areas of focus are:

- Environmental impact: carbon emissions, energy consumption and biodiversity.

- Social factors: Human rights, labor practices and diversity.

- Governance issues: Corporate ethics, anti-corruption measures and board diversity.

The scale of these requirements underlines the EU's commitment to driving change in all sectors, from finance and manufacturing to technology and consumer goods.

A Unified Reporting Framework

At the heart of the CSRD is the creation of the European Sustainability Reporting Standards (ESRS), designed to harmonize corporate sustainability reporting across the EU. These standards, developed by the European Financial Reporting Advisory Group (EFRAG), provide companies with a clear and consistent framework for presenting their sustainability data, ensuring comparability and reliability of information across countries.

They are divided in 10 key subjects across ESG scope, as follow.

In a radical departure from previous practice, the CSRD requires sustainability reports to be verified by external bodies, putting them on an equal footing with financial information. This is seen as crucial to ensuring the credibility of reports, as concerns about “greenwashing” have grown in recent years.

The CSRD reporting framework comprises up to 1,178 data points, which may seem insurmountable to many professionals. However, the double materiality assessment helps to simplify this process. By assessing the financial and societal impacts of ESG factors, this matrix helps organizations prioritize the most relevant actions, significantly reducing the number of data points to be considered. As a result, most large companies only have to deal with between 400 and 600 data points, focusing on those that are most important in terms of their specific situation and impact, making the task more manageable.

Impact on global supply chain

The CSRD's influence extends beyond Europe's borders. Non-European companies that generate significant revenues in the EU or have significant subsidiaries in the region will also be required to comply. This development has prompted worldwide discussion of the knock-on effects on international supply chains, with many multinationals now required to disclose and audit their sustainability practices.

For example, a US company with significant operations in the EU may be required to provide detailed data on its carbon emissions, labor rights and supply chain transparency. In fact, CSRD raises the bar for corporate sustainability efforts on a global scale.

Challenges and opportunities

The ambitious scope of CSRD presents both challenges and opportunities for companies. For many , particularly smaller ones, the need to collect, verify and disclose complex sustainability data represents a challenging task but also a great opportunity to engage stakeholders in the process. The cost of compliance, including investment in data management systems and external audits, is likely to be substantial.

The transparency is the main aspect of the CSRD, it does not impose a particular way of doing business; companies remain free to act. It is simply a transparency directive that enables stakeholders to obtain the information they desperately need. Putting sustainability data on the same footing as financial data.

However, the directive also opens up significant opportunities. Companies that can effectively demonstrate their commitment to sustainability can gain a competitive advantage, attracting ESG conscious consumers, investors and talent. In addition, improved transparency and accountability are likely to boost stakeholder confidence and contribute to long-term financial stability.

The road ahead

When the CSRD takes full effect over the next few years, it will fundamentally change the way companies approach sustainability. The directive's broad scope, mandatory audits and stringent requirements ensure that companies are held accountable not just for their financial performance, but also for their environmental and social impact. This is an important step towards a more sustainable and transparent future for business, with Europe once again becoming the global benchmark for corporate responsibility.

As companies embark on this transition, the CSRD will undoubtedly serve as a decisive test for the evolving role of business in solving the planet's most pressing problems.

FAQ’s ❓

Is CSRD reporting mandatory?

-Yes, CSRD reporting is mandatory for large companies (over 500 employees) in the European Union.

-It applies to all sectors, ensuring consistent sustainability reporting across the board.

- Non-compliance can result in penalties, reinforcing the importance of adhering to the directive.

What is the purpose of CSRD?

-CSRD ensures that companies provide transparent, standardized reporting on their sustainability efforts, covering environmental, social, and governance (ESG) issues.

-This enables stakeholders and investors to assess a company's non-financial performance and risks effectively allowing easy comparisons.

Do companies need to report separately on CSR and ESG under CSRD?

-No, under CSRD, companies can produce a single comprehensive report that covers both CSR and ESG aspects.

-This report fulfils all regulatory requirements as long as it includes all necessary non-financial information.

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