The Corporate Sustainability Reporting Directive (CSRD) represents a pivotal moment in the evolution of sustainability reporting within the European Union (EU). With its ambitious mandate to enforce comprehensive reporting standards, the CSRD aims to drive meaningful change in corporate behavior, foster transparency, and bolster investor confidence in sustainable businesses.

Understanding the CSRD’s Impact

At its core, the CSRD seeks to address the shortcomings of previous reporting frameworks by expanding the scope of reporting requirements and introducing stringent standards to combat greenwashing.With the CSRD,Companies are now required to report on indicators such as greenhouse gas emissions, energy consumption, water usage, waste management, employee diversity, labor practices, human rights, supply chain management, ethics, anti-corruption measures, and board diversity. By mandating sustainability disclosures for a broader range of entities, the directive aims to provide stakeholders with a more accurate and holistic view of a company’s environmental, social, and governance (ESG) performance.

Companies are also encouraged or mandated to obtain independent verification or auditing of sustainability data and processes to enhance credibility and reliability. Moreover, the integration of sustainability reporting with financial reporting allows stakeholders to assess the financial implications of ESG factors, facilitating informed decision-making on resource allocation, risk management, and investment strategies.

Who Needs to Comply?

The Corporate Sustainability Reporting Directive (CSRD) mandates sustainability reporting for a broad spectrum of organizations within the European Union. To provide a more granular understanding of the compliance criteria, let’s delve into the specifics:

  • Large Undertakings: Companies exceeding at least two out of the following three thresholds are classified as large undertakings and must comply with the CSRD:
    1. €40 million in net turnover.
    2. €20 million total on the balance sheet.
    3. An average of 250 or more employees on the payroll throughout the year.

This encompasses both entities previously subject to the NFRD and those not previously required to report on sustainability.

  • Listed Small and Medium-Sized Enterprises (SMEs):  Any SME whose securities are listed on a regulated market within the EU is obligated to comply with the CSRD.
  • Non-EU Companies with a Significant EU Presence:  The CSRD’s reach extends to certain non-EU companies with a substantial economic footprint in the European market.  If a non-EU company generates a turnover exceeding €150 million within the EU, they may also be required to comply.

By establishing clear size and economic impact thresholds, the CSRD ensures that organizations with the resources and market influence to significantly impact sustainability outcomes are held accountable for their environmental and social practices.

Key Reporting Obligations

Under the CSRD, companies are mandated to disclose comprehensive sustainability-related information, encompassing a wide range of environmental, social, and governance (ESG) aspects. The following are some specific elements of the reporting obligations:

  • Environmental Impact: Companies must report on their environmental performance, including scope 3 emissions, energy consumption, water usage, waste management practices, and efforts to mitigate environmental impacts. This may involve disclosing emissions reduction targets, energy efficiency measures, renewable energy usage, and initiatives to minimize resource consumption and pollution.
  • Social Initiatives: Reporting obligations extend to social initiatives aimed at promoting employee well-being, diversity and inclusion, labor rights, and community engagement. Companies are required to disclose information on workforce demographics, employee health and safety measures, training and development programs, labor practices, stakeholder engagement activities, and philanthropic efforts.
  • Human Rights Policies: The CSRD mandates disclosure of human rights policies and practices, emphasizing respect for fundamental human rights within the company’s operations and supply chain. This includes efforts to identify and address human rights risks, ensure fair and safe working conditions, prevent discrimination and harassment, and uphold labor standards in accordance with international conventions and standards.
  • Anti-corruption Measures: Companies are required to disclose information on anti-corruption policies, procedures, and practices implemented to prevent bribery, fraud, and unethical behavior. This may involve detailing compliance programs, whistleblower mechanisms, due diligence processes, and transparency initiatives aimed at combating corruption and fostering ethical business conduct.
  • Double Materiality: The directive introduces the concept of double materiality, compelling companies to assess the financial materiality of sustainability issues on the company’s performance and financial condition. Companies must also evaluate the societal materiality of these issues on stakeholders, communities, and the environment.

By disclosing this comprehensive set of sustainability-related information, companies can provide stakeholders with a transparent and holistic view of their ESG performance, contributing to greater accountability, transparency, and trust in corporate reporting.

Preparing for Compliance

The CSRD implementation requires proactive steps. Companies should establish reporting frameworks, integrate sustainability into strategy, and leverage technology to streamline data collection and reporting.

CSRD Compliance Timeline:

  • Large companies (from Jan 1, 2024): Those already subject to NFRD (typically over 500 employees) must report for 2024 (published in 2025).
  • Other large companies (from Jan 1, 2025): Meeting 2 out of 3 thresholds (employees, turnover, balance sheet) but not under NFRD, must report for 2025 (published in 2026).
  • Listed SMEs & Non-EU companies (from Jan 1, 2026): Listed SMEs report for 2026 (published in 2027, with a possible opt-out until 2028). Non-EU companies with a €150 million+ EU turnover may need to report for 2029 (published in 2030, with exact requirements under development).

Understanding the timeline is crucial for a smooth transition and effective communication of sustainability efforts. Furthermore, companies must embrace transparency and accountability by engaging with stakeholders, seeking third-party assurance for their sustainability reports, and actively participating in industry-wide initiatives aimed at advancing sustainability practices.

The Role of European Sustainability Reporting Standards (ESRS)

Central to the CSRD’s implementation is the adoption of European Sustainability Reporting Standards (ESRS), a comprehensive framework designed to standardize reporting practices and facilitate comparability across companies. By adhering to ESRS guidelines, companies can enhance the credibility and reliability of their sustainability disclosures, thereby fostering trust among investors, customers, and other stakeholders.

Conclusion

The CSRD marks the dawn of a new era in sustainability reporting within the EU, presenting companies with an opportunity to set a precedent for responsible business practices. Embracing transparency, accountability, and ongoing improvement is not just a regulatory requirement but a pathway to fostering positive environmental and social change.

CPG companies will be significantly affected by the CSRD due to its comprehensive reporting requirements. They’ll need to disclose information on environmental impact, social initiatives, human rights policies, and anti-corruption measures. For CPG companies in particular, the inclusion of mandatory Scope 3 emission reporting within the CSRD presents a significant yet manageable challenge.  Scope 3 emissions, encompassing a company’s entire supply chain, can represent a substantial portion of a CPG’s environmental footprint.  CarbonBright’s science-based approach and software can equip CPG companies with the tools and expertise needed to accurately calculate and report Scope 3 emissions, ensuring compliance and transparency.