What is the EU Corporate Sustainability Reporting Directive (CSRD)?
In today’s world, businesses are expected to operate in a manner that is mindful of social and environmental issues, taking into account the impacts of their operations and making efforts to minimize negative effects. With the goal of helping companies make progress toward sustainability, the European Union has introduced the Corporate Sustainability Reporting Directive (CSRD). This directive requires large companies operating in the EU to disclose information on their environmental, social, and governance (ESG) performance in their annual financial reports, encouraging them to take steps toward reducing carbon emissions and adopting greener practices.
CSRD reporting will go into effect for the 2024 fiscal year, which means it is essential for reporting organizations to prepare in 2023. CFOs and Heads of Sustainability must understand CSRD requirements, carbon emission reporting, and how the CSRD can help companies meet their sustainability goals.
History of the CSRD
To understand the purpose of the CSRD, it can be helpful to start with its history as well as the history of the NFRD. The NFRD, or Non-Financial Reporting Directive, is an EU directive announced in 2014 and put into effect in 2018 to help companies and investors understand a business’s potential risks and opportunities due to non-financial factors while promoting sustainable and responsible business practices. The NFRD applies to certain entities, including publicly listed companies, banks and insurance companies, and companies with more than 500 employees. They are required to report on their business policies and approaches to environmental and social issues and disclose their performance and risks in the previous year.
The NFRD is not without shortcomings, evidenced by the fact that it is possible for companies to report but not take action. In January 2021, the European Commission (EC) reviewed the NFRD and determined the following opportunities.
- Reported information was not easily comparable and reliable, lacked a common reporting standard, and often overlapped with requirements from other legislation.
- Stakeholders indicated they would support stricter audit requirements, digitalization of the reported information, and new requirements for disclosing it.
- Stakeholders wanted the scope of the NFRD expanded to apply to more companies.
In April 2021, the EC announced the creation of the CSRD to address the challenges of the NFRD and replace it. In Nov. 2022, the EC approved reporting and disclosure standards, while the same month, the EU Council and the EU Parliament each formally approved the CSRD.
The CSRD requires more companies to report—expanding the company size criterion from 500 employees to 250, among other criteria—resulting in over four times the number of businesses included in the CSRD requirements compared to the NFRD. The CSRD also has more requirements for reporting companies, including more details on the subject of sustainability risk and environmental and social impacts, plus third-party limited assurance and digitally tagging the reported data.
Both the NFRD and the CSRD use the concept of double materiality, which covers both the perspective of how environmental and social issues affect the reporting companies and, in the inverse, how each company affects environmental and social issues. The former was the main motivator behind this annual reporting that investors and stakeholders are interested in. The latter is how these directives are furthering the push toward sustainability.
Requirements of the CSRD
The CSRD requires that organizations track the following data and/or management commentary to include in their report. Note that the first five are requirements carried over from the NFRD.
Requirements include information regarding:
- Environmental policies
- Social policies and the treatment of employees
- Respect for human rights
- Anti-corruption and anti-bribery policies
- Diversity on company boards (such as age, gender, and career background)
- Goals and progress for sustainability and ESG performance
- Impacts on the environment and society caused by company operations
- Risks to the company regarding sustainability
- Effects on company operations and performance caused by environmental and social risks
- Materiality process used for choosing areas of focus
Each year, there are four main steps that reporting companies must complete to comply with CSRD requirements.
- Track all required information.
- Prepare statements in the correct format and in line with the EU sustainability taxonomy, and digitally tag the data according to specifications.
- Work with a third-party reporting partner or auditor to review the information.
- Submit the report by the required date.
CSRD Reporting Timeline
The European Council and the European Parliament have set a rough timeline for CSRD reporting. Starting in 2023, organizations must prepare to meet the requirements by implementing the structures and capabilities needed for ESG reporting. 2024 will be the first fiscal year of collecting the required information, and sometime in 2025, this first report will be expected. This is for companies that met the criteria for the NFRD, but large companies not subject to the NFRD have another year to prepare, reporting for 2025. Small and medium-sized enterprises (SMEs) will begin reporting for 2026, and finally, certain international companies will start with the 2028 fiscal year.
Benefits of the CSRD
Generally, companies that focus on sustainability and carbon emission reduction experience many benefits. In the past, this focus has been considered a necessary investment for conscientious companies aware of the growing push for cleaner businesses, one without many additional benefits. However, we know now this is not the case. Today, it’s clear that sustainability brings the opportunity for better returns from both increasing revenue and decreasing operating costs.
Improved Corporate Transparency
With better reporting practices comes greater transparency. This enables better understanding and alignment internally on policies and approaches, thereby compounding the effect of sustainability efforts.
When transparency leads to better decisions, it lends itself to more efficient operations. Take the example of freight procurement. Reducing emissions by consolidating freight or optimizing routes supports more efficient transportation that saves time and money. Sustainable procurement equates to utilizing resources more effectively, benefitting both the environment and the company. This can reduce costs and add value back to the company while driving substantial progress toward ESG goals.
Enhanced Corporate Reputation
Stakeholders can see the company’s stance on environmental and social issues, which helps the company foster a favorable image and leads to more opportunities, including business growth.
These are just the beginning of the benefits to the business. It should also be apparent that carbon emission reporting and sustainability practices are best for the environment. The Intergovernmental Panel on Climate Change (IPPC) has warned of a point of irreversibility for worsening climate change. The CSRD is one effort to better awareness of environmental and social issues leading to change.
As for the benefits of the CSRD specifically, compared to the NFRD, the CSRD will promote better accountability and reliability, and more companies will be subject to the CSRD. The assurance portion of the requirements will help to avoid companies greenwashing. But one of the biggest differences between the NFRD and the CSRD is the amount of detail the latter requires, using specified standards, which means it will better represent how companies are doing in sustainability while encouraging progress.
Challenges of the CSRD
Like anything new, the details of the CSRD may take time to work through—the framework, language, methodologies, and requirements—which will be addressed in the next few years. For example, some terms have clear definitions, but for others, like the “diversity” required on company boards, it is not obvious what this means unless it is defined. This type of challenge is simply a growing pain to get to a better place of standardization across the industry.
All this brings complexity to reporting that companies will need to navigate. This is why companies not previously reporting under the NFRD will have a year longer to begin reporting under the CSRD. There are challenges related to reporting strategy and consistency with financial reporting, available data, and quality of data, plus time and cost implications of figuring out these challenges.
How Searoutes Helps Logistics Companies with CSRD Compliance
The CSRD is moving companies in the right direction toward better transparency for sustainable practices that leads to action taken to reduce greenhouse gas emissions. Companies working through the CSRD and what it means for their reporting need a solution for carbon emissions transparency in logistics.
Searoutes provides detailed emissions data and analytics on the shipping of goods across all modes of transportation. Our solution prioritizes accuracy and precision, so companies have the data they need to make informed decisions and monitor and report their progress toward sustainability goals. With complete data on their logistics operations emissions, companies are better prepared for upcoming compliance with the CSRD.
For more information on Searoutes and our approach to achieving reliable reporting, contact us today to book a demo.