CSRD Compliance for Both EU and Non-EU Companies

Who Does the CSRD Impact?

The Corporate Sustainability Reporting Directive (CSRD) enacted by the European Union has attracted considerable focus since its introduction in January, due largely to the growing interest in environmental, social, and governance (ESG) matters.

The CSRD will primarily impact companies based within the EU and the European Economic Area, including Norway, Iceland, and Liechtenstein. However, firms outside the EU with significant operations within the EU will also be subject to these regulations. Compliance with the new directive necessitates the integration of double materiality and Scope 3 into reporting, as well as adherence to stricter rules regarding corporate social and environmental disclosure.

What’s New?

The CSRD expands upon preceding regulations such as the EU’s Non-financial Reporting Directive (NFRD) and broadens the range of organisations affected. Key points within the CSRD include:

  • New rules necessitate reports from firms of all sizes: As per official CSRD guidelines, roughly 50,000 large, medium, and small-sized businesses in the EU are expected to implement the CSRD rules starting from 2024 to 2029. Large firms or large groups with consolidated subsidiaries must meet two out of three criteria: €40 million in net turnover, €20 million in assets, or employ 250 or more individuals. Global firms with subsidiaries in the EU will also need to comply with the CSRD if they carry out significant operations within it.
  • Impact on society and climate: A double materiality approach is included in the CSRD, obliging businesses to reveal risks related to climate change and the impact of such risks on society and the climate. This signifies a shift in approach for companies based in the US and internationally who are unaccustomed to such requirements.
  • Supply chain information requirements: Scope 3 reporting is mandated by the CSRD, which involves gathering sustainability information across a company’s supply chain. Many US companies have, until now, only reported their Scope 1 and 2 emissions, if any. However, reporting requirements have varying target dates, and some reporting exemptions do exist.
  • Third-party verification is required: Companies will need to have their data-gathering processes evaluated by an independent assurance service provider, such as a third-party audit. The need to digitise data will also necessitate investments in technology to ensure accurate data collection and data trails. The European Commission intends to transition from limited to reasonable assurance in the future.

Digitalisation Requirements & Costs

Digitalisation Requirements & Costs Adherence to the CSRD will require embracing digitalisation, with companies expected to prepare their reports in XBRL format in accordance with the European Single Electronic Format Regulation. Firms are also required to tag sustainability data within the report following a digital categorisation system to be developed in line with the European Sustainability Reporting Standards (ESRS).

Digitalisation of sustainability reporting streamlines information transfer and makes it easier to locate, thereby enhancing transparency and accountability. It also carries potential for substantial cost savings for companies, while providing investors and key stakeholders with improved data accessibility.

However, the immediate downside is the associated cost. While the CSRD requirements may lead to higher short-term costs, it’s noted by the European Commission that companies will likely face an increase in costs due to the growing demand for sustainability information. Yet, these short-term costs should be offset with the goal to streamline and harmonise reporting requirements over the medium- to long-term.

CSRD vs. SFDR and TCFD

Another issue is the numerous overlapping frameworks and standards currently in place, although attempts are underway to harmonise them. The ESRS must align with the European Green Deal’s ambitions and with the EU’s current legal frameworks, the Sustainable Finance Disclosure Regulation (SFDR), and the EU Taxonomy.

Via the European Financial Reporting Advisory Group, the CSRD has incorporated key components of the ESRS, which draws upon several existing frameworks including the Global Reporting Initiative (GRI) and the International Sustainability Standards Board-driven (ISSB) Taskforce for Climate related Financial Disclosures (TCFD) framework. Indeed, the European Commission is backing the TCFD in the development of a global baseline, and collaboration between the GRI and ISSB is continually progressing.

Recommended Immediate Actions

With the EU and CSRD setting the bar with the most stringent reporting regulations thus far, international companies need to prepare for the future of reporting in their jurisdictions. For industry professionals grappling with the challenge of the sustainability regulatory environment, the following actions are recommended:

  • Familiarise yourself with CSRD regulations: A crucial initial step is to understand and comply with the heightened rigour of ESG reporting brought about by the CSRD. Studying the CSRD and implementing similar reporting standards, such as Scope 3 and double materiality, will provide companies with a head-start in their reporting journey. Indeed, stakeholders and investors are likely to view increased transparency and preparedness for upcoming regulation, such as the Security Exchange Commission’s rules on Scope 3, favourably.
  • Benchmark with peers: It is vital to understand how comparable companies are dealing with Scope 3 emissions and their approach to sustainability reporting to stay current on your organisation’s standing against competitors. US companies that are not directly impacted can use the CSRD regulation as a yardstick to analyse how their EU competitors are reporting, providing valuable insight for when the requirements from the SEC are updated.

In the next five years, new regulations around ESG are set to proliferate, and deadlines for implementing existing regulations will come due. Concurrently, companies in the short term will have to navigate increased costs and the complexity of global frameworks and standards.

However, it is evident that ESG reporting requirements are becoming increasingly stringent, and it’s crucial for companies to ready themselves to meet these new demands.

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Matt Whiteman

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