The EU institutions reached an agreement on the Corporate Social Responsibility Directive (CSRD) this year. It’s a new law that aims to bring financial and sustainability reporting up to the same level (for large and listed entities).
This blog looks at:
- Why we need standards for sustainability reporting
- How these EU standards relate to other sustainability reporting standards
- What information is obligatory and what is optional
- What are the timelines for reporting
Creating a common recipe for sustainability reporting
Sustainability reports often lack detail or are difficult to compare. EU policymakers noticed that financial reporters solved this problem by developing detailed reporting standards. The EU decided, therefore, to introduce mandatory standards for sustainability reporting for large and listed entities. These standards are called the European Sustainability Reporting Standards (ESRS).
Since the European institutions are political in nature, they asked a club of technical experts (EFRAG) to come up with a draft ESRS. In November, they submitted a collection of 12 standards and 6 appendixes. The European Commission will adopt the final standards by June 2023.
Mixing ingredients from other standards
There are several existing non-mandatory sustainability reporting standards. The technical experts at EFRAG wanted to avoid that companies already reporting under another authoritative standard, would need to do unnecessary multiple reporting.
Therefore, they sought to align the draft ESRS with other frameworks and standards. This includes the proposed standards by the International Sustainability Reporting Standards Board (ISSB), the standards from the Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial Disclosures (TCFD). It also includes international instruments such as the OECD Guidelines for Multinational Enterprises.
As a result, the draft ESRS follows the same structure as ISSB/TCFD. Moreover, requirements are often literally the same as those proposed by ISSB. According to EFRAG, companies that comply with ESRS can, therefore, also be considered as complying with the ISSB standards (not the other way around).
A layer cake with your favorite toppings
There are 2 layers of reporting. If ESRS were a layer cake, it would consist of a basic cake that is common for everyone. On top of that, there are different layers of filling and frosting tailored to the reporting entity.
The basic cake includes essential information to contextualize the overall reporting to users. It also includes reporting requirements that flow from other existing EU legislation.
The toppings are your material sustainability topics. The sustainability topics are related to dedicated environment, social and governance standards e.g. climate change, biodiversity, or workers in the value chain. You ‘choose’ these based on a double materiality assessment (see this blog for how this works). This means that companies don’t need to report on all topics covered by the standards. Depending on their sector and context, they will report on a (different) subset of the ESRS.
The reporting requirements can be grouped into 4 reporting areas:
- Governance: What are your processes & procedures to manage your sustainability topics?
- Strategy: What is the link between your company strategy and your sustainability topics?
- Sustainability impacts, risks and opportunities: how do you identify, assess, and manage these?
- Metrics & targets: how do you track performance?
One spoon at a time
Not all information is so easy to obtain. The reporting requirements will, therefore, be phased in to give companies the time to put in place the necessary reporting structure.
The phase-in depends on the following:
- The company type: Large listed entities, large non-listed entities, and listed SMEs will have to respectively apply the standards for their report for the fiscal year of 2024, 2025, and 2026.
- The type of information: Several reporting requirements only have to be reported 1, 2 or 3 years after a particular contingent of companies needs to start to apply the ESRS (see the previous point)
- The value chain: For the first 3 years, getting data from your value chain (e.g., clients or suppliers) is not obligatory. During this time, you can use in-house data to provide insights into your value chain. This does not apply to the data needed for the readers of your reporting to comply with the requirements of other EU legislation (e.g., banks and the Taxonomy Regulation).
The first step to prepare for CSRD is doing a gap analysis. It gives insight into where you stand and what ingredients are missing in your sustainability report. From this, you can plan your way to the big CSRD day.
Need some help figuring out the requirements of CSRD? TheRockGroup developed a gap analysis that provides an overview of where you stand regarding CSRD. We also include practical recommendations to set you on your way toward compliance.
Get in touch with our experts: firstname.lastname@example.org