New EU legislation on sustainability is coming: starting from January 1, 2025, the first companies are obligated to report their impact on the environment and society through the Corporate Sustainability Reporting Directive (CSRD). How does their business operation affect people and the environment? Initially, this reporting obligation applies to large organisations, requiring them to take steps already in 2024 to report by 2025. Subsequently, the CSRD will become mandatory for all companies. Read the article below to learn everything about the CSRD.
What is CSRD?
The CSRD is legislation for sustainability reporting based on a new EU directive arising from the European Union's Green Deal. The Green Deal aims for Europe to become climate-neutral by 2050, aligning with the Paris Agreement formulated during the UN Climate Conference (COP21) in Paris on December 12, 2015, recognized by 194 countries and the European Union.
CSRD builds on the Non-Financial Reporting Directive (NFRD), an obligation for large (>500 employees), listed companies, banks, and insurance companies to report on aspects such as social responsibility, treatment of employees, human rights, and diversity. The lack of uniformity in reporting frameworks resulted in limited comparability between companies. CSRD introduces consistency in sustainability reporting, allowing for meaningful comparisons.
Both the CSRD and NFRD are examples of sustainability reporting, describing how organisations implement strategies and ambitions regarding sustainability. Sustainability is assessed in three dimensions: Environment, Social, and Governance, collectively known as ESG indicators, derived from the European Sustainability Reporting Standards (ESRS).
CSRD reporting provides comprehensive insights for financial stakeholders (e.g., shareholders, banks, creditors) and anyone interested in the company's impact on the environment (employees, customers, neighbors, or organisations focused on environmental and human rights). Standardized reporting allows for comparisons between companies.
Who is obligated to follow the CSRD?
The first companies must comply with the CSRD legislation from the financial year 2025. These include organisations currently subject to NFRD requirements: large listed companies or organisations of public interest, such as banks or insurance companies.
From the financial year 2026, the CSRD applies to organisations meeting at least 2 of the following criteria:
- More than 250 employees
- Revenue exceeding €50 million
- Balance sheet exceeding €25 million
Other companies will gradually comply with reporting obligations: listed small and medium-sized enterprises (SMEs) must report from 2027, and from 2028, all EU-based companies (with more than 10 employees) must adhere to the CSRD. Non-EU companies (revenue > €150 million) must also comply from 2028.
Indirectly, the CSRD will also impact companies with fewer than 10 employees, as they are often stakeholders of larger reporting companies, requiring them to provide insights into their organisation's impact on ESG indicators.
What to report under CSRD?
According to the CSRD, organisations must publish their sustainability strategy, objectives for implementation, policies/measures to achieve these goals, and how they monitor progress and report on it.
Specifically, the CSRD requires reporting on everything from NFRD, along with additional themes. NFRD already mandated reporting on:
- Environmental protection
- Social responsibility and treatment of employees
- Respect for human rights
- Anti-corruption and bribery
- Diversity in corporate boards (age, gender, education, professional background)
The CSRD incorporates these topics and adds the following:
- Business model, strategy, and policy
- Key performance indicators (future-oriented information)
- Corporate governance and sustainability
- Double materiality assessment and due diligence
- Risk and opportunity management
Additionally, mandatory disclosure on specific subjects:
- Environment (including EU taxonomy)
- Sector-specific standards
The CSRD obliges organisations to map all impacts, risks, and opportunities (IRO). Reports must cover all relevant E, S, and G topics: Environment, Social, and Governance. Gathering supporting data and verifications takes time, so it is advisable to start preparing for the CSRD early.
CSRD: explaining double materiality
A crucial aspect of CSRD is the principle of 'double materiality.' Organisations must report on the impact of their business activities on the environment, reflecting how their business affects people and the environment. This encompasses ecological and social material impact, contributing to biodiversity loss or human rights violations in the supply chain.
Simultaneously, organisations must report on the financial risks associated with ESG-related topics. How can their business operations be affected by climate change? Consider financial risks arising from factors such as resource scarcity, extreme weather, and transition risks.
A step-by-step guide for a double materiality analysis could include:
- Determining and identifying relevant stakeholders, both internal and external. Who will be affected by your environmental impact? And vice versa? This could include customers, partners, employees, NGOs, or suppliers.
- Identifying relevant ESG topics. The CSRD is part of the European Sustainability Reporting Standard (ESRS), which includes a list of possible ESG topics. Organisations must decide which are applicable to them.
- Defining how double materiality looks for your organisation. How does your organisation influence the climate? And how will climate change affect your organisation? Answering these questions involves interviews, focus groups, workshops, etc., with the stakeholders identified in step 1.
In the final sustainability report, organisations must elaborate on points derived from their double materiality analysis. What is the impact for these points? What actions will the company take to reduce this impact? What goals and measures will be implemented, and how will the organisation stay on course? Who is responsible, and what procedures will be followed?
CSRD: explaining GAP analysis
Another crucial aspect in complying with the CSRD is conducting a Gap Analysis. This involves comparing how you currently report on ESG indicators with what is required by the CSRD. You might discover missing data, inconsistencies in data collection, inadequate verification methods, or entirely absent reports.
Once you identify the gaps between your current reporting and the CSRD requirements, you can take steps to close these gaps and become fully and correctly compliant.
How to report?
The sustainability report becomes an integral part of your management report. After preparing your sustainability report according to the CSRD, an external accountant must verify it. Companies are obligated to include this sustainability report in their annual reports and publish it in the European Single Electronic Format (ESEF/XHTML).
The frameworks and guidelines for reporting according to the CSRD are established in various chapters of the European Sustainability Reporting Standard (ESRS). Find information about the CSRD from the European Union here.
Saro Campisano, Co-Founder Hedgehog Company:
"We are currently in a transitional phase, and not everything is crystallized yet. Companies have many questions about the implementation of the CSRD. What is clear, is that the CSRD provides guidance for companies in their sustainability ambitions. The CSRD requires transparent communication about sustainability, making sustainability crucial for organisations, stakeholders, and the entire economy."
What happens if I don't comply with the CSRD?
The CSRD will eventually be mandatory for all organisations. Failure to comply with reporting obligations may lead to legal prosecution, fines, sanctions, reputation risks, or negative reactions from investors, customers, and other stakeholders. It is advisable to start identifying relevant sustainability data and information within your organisation now. This involves not only collecting data, but also evaluating existing reporting processes and systems to ensure they meet the new requirements.
How can Hedgehog Company guide me?
To report on all required topics, you need insights and data from your organisation and supply chain to support your sustainability ambitions and strategy. This involves mapping all impacts, risks, and opportunities (IRO) related to all relevant E, S, and G topics: Environment, Social, and Governance. We guide you through this process.
Our experts assist you with a double materiality analysis and gap analyses. Additionally, we can model your organisation's complete environmental impact through our expertise in life cycle assessments (LCAs) and carbon footprint modeling (modeling greenhouse gas emissions at the corporate level).
A life cycle assessment quantifies the environmental impact of your product or organisation over its entire lifespan and all phases, from raw material extraction, transport, production, and use to potential end-of-life processing.
With this, we meet your specific data needs to comply with the CSRD and provide guidance to elevate your sustainability performance.