Double materiality and more: what companies need to know about CSRD
“ CSRD introduces a series of firsts in sustainability reporting and that makes both compiling the submission and analysing the results, very impactful. ”
Senior Consultant, ESG & Corporate Sustainability Services
For an estimated 50,000 businesses, 2024 marks a step-change in the way they must report their climate impacts. This is due to the phased introduction of the Corporate Sustainability Reporting Directive (CSRD) - arguably the most detailed and progressive measure yet of a company's impact on society.
CSRD is an EU-led reporting measure. It demands detailed reporting from large organisations on sustainability issues to further drive and support sustainable investment decisions.
For UK-based organisations, they'll need to report if they have a subsidiary or significant presence in the EU.
Analysis reported in June 2023 by the London Stock Exchange Group suggests that CSRD will impact just over 10,000 non-EU companies, in addition to the EU's own estimate of 50,000 companies that will be in scope. Whilst a significant number of these non-EU businesses are American, estimates suggest over 1,000 of them will be based in the UK.
So, with a series of 'firsts' in terms of the level of detail required to report, what do you need to know about CSRD?
Is your company affected by the new Corporate Sustainability Reporting Directive (CSRD)?
In summary, CSRD will apply to the following:
- Large companies meeting two out of three criteria:
- More than 250 employees
- Turnover over €40 million
- Excess of €20 million total assets
- Companies listed on regulated markets in the EU, and listed SMEs - although the latter can opt out until 2028.
- Non-EU companies with a net turnover of €150 million in the EU, and with at least one subsidiary, or branch in the EU.
When do companies need to start reporting to comply with CSRD?
CSRD came into effect from 1 January 2024 but the initial reporting is phased.
The first 12-month period on which organisations must report will begin from the start of their next financial year after 1 January 2024.
So, for example, if your financial year begins on 1 April 2024, you report on the period to 31 March 2025, and submit a response after that financial year ends.
The first CSRD reports will be published in 2025.
What you need to know about CSRD reporting
Sharing some common ground with the Task Force on Climate-Related Financial Disclosures (TCFD), which itself is being subsumed within the new International Financial Reporting Standards, CSRD demands a lot more data, going much deeper into your company's impacts.
The CSRD is a major step forward for sustainability reporting. It introduces a number of new requirements, including:
- Double materiality: Companies will need to report on both the impact of their business on the environment and society, as well as the impact of climate change on the financial standing and value of their organisation. Most organisations can work out how to report on 'single materiality' ESG, but assessing double materiality and putting a quantitative figure on the impacts they have on people and planet, demands specialist help.
- Scope 3 emissions: Companies will need to report on their Scope 3 emissions, which are the greenhouse gas emissions that occur up and down their value chain. This is a 'first' in the field of sustainability reporting directives. Acknowledged as often being the largest percentage of emissions across Scope 1, 2 and 3, it's also the hardest to track and measure as it relies on so many third-party stakeholders. Specialist help will once again be required.
- Forward-looking and retrospective reporting: Companies will need to report on both qualitative and quantitative information on their environmental and social impacts both in the past, and in the future. This requires both an excellent process for collecting and analysing key metrics, but also an acute awareness and understanding of risk in the short, medium and long-term.
- Mandatory verification: In another 'first', all CSRD reports will need to be independently audited and verified by an external expert auditor to ensure the information is accurate and reliable before it is published.
Where and how to publish your CSRD report under the new EU directive?
Companies must publish their CSRD reports in a dedicated section of their annual report.
The report will cover a broad spread of ESG-related factors, including:
- Environmental issues, notably performance against carbon reduction targets and climate-risk issues
- Social value, community interaction and employee well-being
- Human rights performance
- Adherence to anti-corruption and bribery
- Diversity on company boards
CSRD non-compliance: risks and benefits of transparent sustainability reporting?
At present, there are no financial repercussions for non-reporting. This situation might change in time.
However, the focus of the EU on this significantly more detailed sustainability-oriented reporting directive, is in aiding long-term sustainable investment decisions.
Reporting accurately and in a timely manner is completely in the interests of all qualifying organisations from a reputational perspective with all their stakeholders - investors, employees, consumers, media, suppliers and communities.
UK Sustainability Disclosure Standards: what you need to know about upcoming regulations?
A brief, and final word, on the proposed UK Sustainability Disclosure Standards (UK SDS).
These are set to come into play in July 2024. They will take the essence of the International Sustainability Standards Board (ISSB) regulations - IFRS S1 and IFRS S2 - into a UK regulatory environment.
Critically, like the new CSRD, they will also require double materiality reporting to be part of the disclosure, which is where the UK's standards will differ from the ISSB standards.
We await news of what type of organisation qualifies, but it is likely to listed companies. Many of these organisations will have EU operations and so will be subject to CSRD and IFRS S1 and S2. This means the level of reporting requirement for the specific UK version of these directives will be almost identical.
The CSRD is a major new regulation that will have a significant impact on businesses across the EU. Those that are subject to the CSRD will need to start preparing for the new reporting requirements now.