With the CSRD, the European Union requires companies to disclose data on the impact of their activities on people and the planet, and any sustainability risks they are exposed to. The former Non-Financial Reporting Directive (NFRD) was seen as insufficient and only applied to about 11,700 companies, whereas now the CSRD will be mandatory for nearly 50,000 companies in the EU. The CSRD intends to put financial and sustainability reporting on an equal footing, and to ensure that investors will have comparable and reliable data.

With the European Parliament approving the European Commission’s CSRD proposal, applicable companies will need to start preparing for compliance soon. It has now been confirmed that the first group of companies will need to integrate their non-financial disclosures in the annual report for FY2024.

Scope of application of the CSRD

With the adoption by the European Parliament, more clarity has been provided regarding the consequences for companies. The rules will start applying between 2024 and 2028 in the following categories:

• From 1 January 2024 for large public-interest companies (with over 500 employees) already subject to the non-financial reporting directive, with reports due in 2025;
• From 1 January 2025 for large companies that are not presently subject to the non-financial reporting directive (with more than 250 employees and/or €40 million in turnover and/or €20 million in total assets), with reports due in 2026;
• From 1 January 2026 for listed SMEs and other undertakings, with reports due in 2027. SMEs can opt-out until 2028.

The new EU sustainability reporting requirements will apply to all large companies, whether listed on stock markets or not. Non-EU companies with substantial activity in the EU (with a turnover over €150 million euro in the EU) will also have to comply. Listed SMEs will also be covered, but they will have more time to adapt to the new rules.

More information on what companies which are in scope of the CSRD need to report on is given by the new European Sustainability Reporting Standards (ESRS), which is currently being finalized by EFRAG.

Recommendations and methods to prepare for the CSRD

In order to be ready to comply with the public reporting requirements, an active response to the upcoming legislation is recommended:

1. Perform a double materiality assessment

This is the required stepping-stone toward building a sustainability strategy that fully considers all stakeholders. With the double materiality principle, companies will have to assess both the “inside-out” perspective of their business' impact on the environment and society and the “outside-in”, impact of environment and society on their business models.

Increasing transparency by disclosing the company’s impact will help end greenwashing as well as provide opportunities to influence the impact on environment, human rights and social standards. This approach is in line with the requirements from the CSRD, focusing on both the impact of companies’ activities on people and the planet as well as sustainability risks they are exposed to.

2. Link risk management with sustainability & strategy

As the double materiality concept also considers the business impact that sustainability topics could have on the company's reputation and eventually the license to operate, firms should comprehensively address risk factors in sustainability. This will better align efforts with sustainability, their business value, and risk mitigation interventions. Collaborating with the risk department at an early stage will improve engagement and enable a serious treatment of non-financial risks.

3. Integrate reporting

As companies will have to publish sustainability information within the management report, incorporating the guidelines of the Integrated Reporting Framework is highly recommendable. With the focus on intangibles, companies should start preparing to measure these factors to be able to effectively communicate them. To ensure companies are providing reliable information, independent auditing and certification will be mandatory under the CSRD. In addition, companies are required to guarantee digital access to sustainability information.

4. Comply voluntarily & start as soon as possible

Apply requirements on a voluntary basis (even if your company falls out of scope), as it will become a universal tool, beyond listed companies. Although the requirements will only become mandatory in 2024, companies are advised to start as soon as possible to adapt and incorporate changes in advance.

A description of the main implications of the CSRD, especially compared to the former NFRD, as well as an overview of the recommendations to prepare for the CSRD, can be found in the downloadable document at the top of this article.

Finch & Beak provides support to help you comply with the CSRD

At Finch & Beak, we provide support for organizations as they prepare for compliance with the CSRD, for example through materiality assessments, including a double materiality approach. If you are looking for support with your double materiality assessment or want to know more about how to link your risk management with sustainability, reach out to Johana Schlotter, at johana@finchandbeak.com or call +31 6 28 02 18 80.

^{Photo by Ono Kosuki on Pexels}