CSRD and ESRS on the horizon
A new European legislative directive and accompanying reporting standards will obligate 49.000 companies to report in detail on their sustainability. Will you be ready?
On 10 November 2022, the European Parliament adopted the Corporate Sustainability Reporting Directive (CSRD). It is scheduled to be published and come into effect in early 2023. The CSRD is a Directive, a legislative act that sets out a goal that EU members must achieve. The directive will legally obligate companies to report on their ESG matters.
According to the CSRD, affected companies will be legally required to report according to European Sustainability Reporting Standards (ESRS). The CSRD is aimed at bringing sustainability reporting up to the same standard as financial reporting, increasing corporate accountability as Europe strives to meet the central objective of the European Green Deal, becoming the world’s first climate neutral economy by 2050.
ESRS in a nutshell
While the CSRD is a Directive that will require companies to report extensively on their sustainability, the ESRS are a set of standards that supplement the CSRD relating to environmental, social and governance matters that lay out in detail how companies will be required to collect data and issue reports using a double materiality reporting standard, i.e. reporting simultaneously on matters that are financially material in influencing business value and environmentally and socially material; i.e. relating to the environment and people.
The ESRS drafts were developed by EFRAG, the European Financial Reporting Accounting Group which was appointed technical advisor to the European Commission (EC). EFRAG’s drafts were submitted to the EC on 23 November 2022 after public consultation and can be accessed here. The EC will adopt the draft ESRS as Delegated Acts by 30 June, 2023.
Who will be affected?
It is estimated that 49.000 European companies will be subject to the CSRD and directly affected, an increase from 11.700 companies which are already subject to the Non-Financial Reporting Directive (NFRD).
This 49.000 figure includes all listed companies on the EU regulated market, including SMEs but excluding micro-enterprises. The CSRD also applies to large companies regardless of whether they are listed, granted that they meet two of the three following criteria:
- Revenues exceeding 40 million EUR in the financial year
- Assets exceeding 20 million EUR in the financial year
- Over 250 employees
Non-EU companies with substantial activity, i.e. turnover of over 150 million euro in the EU, will also need to comply as well as small and non-complex financial institutions and captive insurance and reinsurance undertakings.
The 49.000 figure does not include the various companies comprising the value-chains of directly affected companies, which can expect to be indirectly affected as their suppliers and customers will undoubtedly require their co-operation in order to meet the expanding requirements of the ESRS reporting on the entire value chain.
What will I need to report?
The first set of twelve draft ESRS consists of two cross-cutting standards out-listing general requirements and general disclosures respectively, and ten topical standards relating to environmental (5 draft standards), social (4 draft standards), and governance (1 draft standard) matters; spanning a wide range of topics from climate change to business conduct. In short, the ESRS will guide companies as to what information they need to disclose in their reports according to the CSRD, and how to report it.
Proportionate standards for listed small and medium enterprises (SMEs), as well as sector-specific standards are currently on the drawing board due to be developed by EFRAG in 2023.
Even companies that are already ambitious and accustomed to reporting under current rules will feel the impact of the CSRD and ESRS and need to prepare. The CSRD is not only aiming to multiply the number of companies that are required to report and introduce the obligation to report according to a double materiality standard, but also expanding the scope of what ESG information needs to be reported. It is evident by the current draft ESRS that they are meant to cover more ESG-related topics than companies are currently accustomed to reporting on. Furthermore, the reporting boundaries will be extended outside of the organizations themselves and into the value chain, both upstream and downstream, to give a better understanding of an organization’s true ESG impact.
When will the rules come into effect?
The CSRD will first apply to large listed companies that are already subject to the NFRD from 1 January 2024 (requiring them to report in 2025 on 2024 data). Next in line, large companies that are not subject to the NFRD will be subject to the Directive starting in 2025. Small and medium enterprises and captive insurance undertakings will then follow suit, reporting in 2027 on 2026 data and finally, third-country undertakings will be obligated to report in 2029.
Don’t panic - Klappir can help you prepare.
It is clear that in the coming years, more companies will need to rein in and understand their ESG obligations and related data. The first step is to familiarize yourself with the draft ESRS and how they will affect your organization.
Klappir is a leading provider of digital sustainability management software solutions that enable companies and other stakeholders to align their sustainability accounting and reporting processes towards various standards, guidelines and regulations, including the ESRS and CSRD.
The Klappir Platform enables you to collect all relevant data from sources within your organization and supply chain including your scope 1, 2 and 3 emissions and other ESG data. We can help you understand your data and report it in a manner that is accurate, transparent and effective so you can take the right steps toward compliance and a sustainable future.