What should you know about the new European reporting standards?
#CSRD • 30/05/2022 • Inès AounThe Corporate Sustainability Reporting Directive (CSRD) requires the 50,000 largest companies in Europe to publish an annual sustainability report starting in fiscal year 2025. The directive goes hand in hand with new European standards that stipulate the conditions the reporting must meet. A first draft of these has been online since the beginning of May as part of a public consultation.
A uniform European standard for sustainability reporting: it will soon become a reality. The European Financial Reporting Advisory Group (EFRAG), charged by the European Commission with the task of developing such a standard, recently came out with a first draft.
It concerns a set of standards that determine how organisations must report on three sustainability topics: environment, social risks and governance - the so-called ESG criteria. In addition, the draft also contains general or cross-cutting standards, overarching the topics.
The draft standards can be consulted online until 8 August of this year. They are linked to a survey in which companies and other organisations - but also European citizens - can give their opinion on both the general content and implementation of the standards and on the publicity of the reported information. With the input of the public survey, EFRAG will fine-tune its draft before it goes to the European Commission in November.
The framework
In 2024, the European Commission will launch a new directive on sustainability reporting: the Corporate Sustainability Reporting Directive (CSRD). It will replace the existing reporting directive, the Non Financial Reporting Directive (NFRD), making it mandatory for more companies to publish a sustainability report. Currently there are about 11,700 reports, under the CSRD there will be 50,000.
The new directive is all about the Green Deal: the CSRD wants to ensure that government, banks and investors have relevant, reliable and comparable information about the sustainable performance of companies. This will automatically lead to more investments flowing into sustainable activities - a key condition for making Europe climate neutral by 2050.
The uniform standard will ensure that all large companies in the EU report in the same way. The European Commission sees transparency as an important lever to truly realize the sustainable transition and to fight greenwashing.
What are the standards about?
As a large company, you will soon not only be required to publish an annual sustainability report, your report must also meet standards. In other words, the standards determine what information future sustainability reports must contain. A total of 11 standards has been published, corresponding to the various subjects on which companies must report:
- 5 standards on environment: climate change, environmental pollution, water and marine resources, biodiversity and ecosystems, and the use of raw materials and circular economy
- 4 standards on social topics: human resources, employees in the value chain, affected communities, and consumers and end users
- 2 standards on governance: risk management and internal inspections, and business conduct
Climate targets, carbon footprints and strategies are already on the agenda in many companies today. But also a domain like biodiversity, for which only few companies have a policy, will therefore have to receive more attention. In addition to the thematic standards, there are two general standards that deal with the general principles of reporting and examine topics such as good governance and the materiality analysis.
Crucial to the new working method is that a sustainability report is no longer merely a snapshot of the current status, but also looks to the future. Companies must include in their new reports not only a measurement of the various areas, KPIs and actions taken. They are also required to set targets and outline the strategies for achieving them.
Risks and financial impact
The new standards also create an important link between the sustainability report and corporate financial reporting. Indeed, the CSRD introduces the principle of dual materiality: both the company's impact on people and planet and the financial impact on the company as a result of sustainability risks and opportunities must be identified. For example, companies must provide an estimate of the potential financial impact of climate risks on their business. These include both physical risks, such as extreme weather conditions (drought, forest fires, floods) or changing seasons (e.g. in the tourism sector) and transition risks, such as the impact of stricter legislation or new taxes (e.g. the carbon tax), the development of new technologies, consumer trends and so on.
To allow investors to judge whether a company is future-proof, companies also need to identify the financial opportunities of the green transition, such as reduced costs through energy savings. They also need to map out the market size of low-carbon products and services and compare it with the turnover that already complies with the EU Taxonomy, the new European classification system for sustainable activities.
The whole chain
The CSRD also requires companies to look beyond the walls of their own operations. Impacts from the supply chain and up to the consumer must also be tracked and reported. This includes scope 3 emissions, which include CO2 emissions throughout the product life cycle, but also human rights violations at subcontractors or health effects of products on end users and consumers.
Europe wants to banish bad governance, corruption and bribery from business life. Therefore, companies must demonstrate what systems they have in place to prevent, detect, investigate and address these practices.
The timing
The CSRD itself is currently still making its way through the European Parliament and the European Council. Once the directive has been approved, it will be transposed into national legislation.
When the first report is due depends on the type of organization. For public interest entities this is 2025 (reporting year 2024), for large companies 2026 (reporting year 2025) and for listed SMEs 2027 (reporting year 2026).
The CSRD and the new reporting standards will have a major impact on your business. Before you can issue a report, there are still quite a few steps to take. For example, your company must have a sustainable strategy and roadmap, which outlines how and by when you will make progress in the various ESG areas. It is also advisable to start testing the KPIs and data collection a few years in advance. In a subsequent blog article we will provide you with a complete step-by-step plan!
We can help you with the new reporting requirements. Want to know how? Contact us at mail@pantarein.be.
Is my company among the 50,000 largest?
The EU requirement to publish a sustainability report will apply to all:
- companies registered on a regulated market in the EU, excluding micro companies
- large European companies or subsidiaries of a non-European company. To be 'large', you must have two of the following:
- a net turnover of more than 40 million euros
- a balance sheet total of more than 20 million euros
- more than 250 employees
- insurance companies and credit institutions
- public interest entities
- listed companies, including SMEs that are listed on the stock exchange
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