What is the essence of the Corporate Sustainability Reporting Directive, published on December 16 2022 by the European Union?
Highlights
- The CSRD introduces double materiality. Materiality refers to aspects with impact. Single materiality is understood as the impact of the social and environmental ecosystem on the organisation. This refers to ecosystem as an opportunity for the organisation to operate (e.g. access to water to cool operations, public institutions to protect patents) as well as ecosystem as a thread to the organisation (e.g. earthquakes, biodiversity loss). Double materiality adds the reverse direction: the impact of the organisation on the ecosystem.
- The CSRD has financial investors as target audience in mind. Reporting should be done to make investment decisions on a more transparent basis. Nevertheless worker‘s representatives and external stakeholders are considered as well.
- The CSRD requires large organisations to report also on adverse impact of their value chain. This is not required for SMEs. Nevertheless, if small organisations are part of the value chain of large organisation, they need to reflect upon the environmental impact of their operations and how to mitigate that. So SME will be more and more confronted by reporting needs of their downstream big customers.
What
(1) Reporting: More organisation must report on more sustainability topics
The main areas to report on are:
- the business model and strategy including
- (i) risks & opportunities related to sustainability,
- (ii) plans & actions to limit global warming to 1,5° C,
- (iii) interest of stakeholders, and (iv) the implementation status of the sustainability strategy
- the status of the measures to reduce absolute greenhouse gas emission by 2030 and 2030
- role, skills, incentives and experience of administration, management and supervisory bodies with regard to sustainability matters
- the sustainability due diligence process
- actual or potential adverse impacts from own operations and value chain, including actions and results to prevent or mitigate such adverse impacts
- the main risks related to sustainability and how these are managed
- metrics relevant to the points above
There is a light version for small- and medium-sized organisations as well as small and non-complex institutions, that only includes:
- the business model and strategy
- the sustainability policy
- actual or potential adverse impacts from own operations, including actions and results to prevent or mitigate such adverse impacts
- the main risks related to sustainability and how these are managed
- metrics relevant to the points above
(2) Format: The reporting must be done in a machine-readable format
CSRD reports must be published according to the European Single Electronic Reporting format. It is the “electronic reporting format in which issuers whose securities are admitted to trading on EU regulated markets must prepare their annual financial reports to facilitate accessibility, analysis and comparability of annual financial reports.” See link https://www.esma.europa.eu/issuer-disclosure/electronic-reporting Obviously, this should and will lower transaction costs for investors and stakeholders to process CSRD information.
(3) Assurance: The reporting must be audited
CSRD reports must be audited by an eligible auditor. Initially, the level of assurance will be limited.
For limited assurance processes, data and conclusions will be reviewed selectively: “The conclusion of a limited assurance engagement is usually provided in a negative form of expression by stating that no matter has been identified by the practitioner to conclude that the subject matter is materially misstated.”
A reasonable assurance – as currently required for financial reporting – asks for a more in-depth review of the sustainability reporting resulting in a positive statement that the reporting is correct: “The amount of work in a reasonable assurance engagement entails extensive procedures including consideration of internal controls of the reporting undertaking and substantive testing” (both quotes from the CSRD directly).
Given the lack of established standards and practices in sustainability reporting, the EU starts with reasonable assurance level. It tasked itself to review before October 2028 whether an upgrade to a reasonable assurance level is feasible already.
For Whom and When
The implementation of the CSRD depends on the company size and its listing. As of October 2023, the European Commission considers to increase monetary thresholds by 25% due to inflation. This has not been decided yet. The potentially new thresholds can be found in brackets.
2024
Listed companies with more than 500 employees have to report according to CSRD. This report is due in 2025 and has to cover the financial year 2024.
2025
Large companies that meet at least two of the three criteria have to report according to CSRD:
- more than 20 (25) Mio. € in balance sheet
- more than 40 (50) Mio. € in net revenue
- more than 250 employees
This report is due in 2026 and has to cover the financial year 2025.
2026
SME that are listed on a European-regulated stock exchange have to report according to CSRD. This report is due in 2027 and has to cover the financial year 2026. There is an option to opt-out until January 2028. A SME is an organisation that meets at least two of the following three criteria
- more than 4 (5) Mio. € in balance sheet
- more than 8 (10) Mio. € in net revenue
- more than 50 employees
This will affect roughly 700 organisations, as this duty is limited to listed SME only.
2028
Companies outside the EU that exceed € 150 Mio in net revenue in the EU market and have at least one subsidiary or branch inside the EU need to report according to CSRD.
Large companies that do not meet the respective size criteria do not need to report according to CSRD. The same is true for non-listed SME and listed SME that do not meet the size criteria.
However, companies might be affected indirectly as soon as they are part of the value chain of a company that is covered by CSRD. This is relevant only for value chains essential to the sustainability matter of the reporting company. In that case, value chain relevant information has to provided to that company so it can fulfil its obligations.