May 23, 2023
The ultimate guide to understanding CSRD reporting requirements and how to harness ESRS for your organization
Business leaders are becoming increasingly aware of the need to comply with complex mandatory regulations and audits on a wide range of environmental, social and corporate governance issues (ESG).
The seemingly endless list of acronyms and regulations can make it feel like an impossible task! So, we’ve put together a practical guide to help you prepare for the European Union’s Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS) that apply to it.
Covered in this post:
Why are so many organizations concerned about CSRD?
CSRD timeline of who’s affected
What do I report and which parts are compulsory?
ESRS
Which parts of ESRS are compulsory?
Mandatory double materiality assessment
Submitting reports for CSRD using ESEF
How CSRD compares to other frameworks
Can data from other frameworks be used for CSRD?
Gap Analysis and how it helps
The CSRD ecosystem
Business benefits of CSRD
7 Steps to take right now!
Why are so many companies concerned about CSRD?
The Corporate Sustainability Reporting Directive became European law in January 2023. It aims to improve the quality and transparency of sustainability reporting for businesses. That’s a positive step for the planet and society, and will better reflect the corporate and social landscape.
However, many of our customers and partners tell us it’s unclear which requirements apply to them, how to get good data, and where to submit it. It doesn’t help that parts of CSRD are mandatory, come into force in January 2024, and some details have yet to be finalized! This blog aims to set out all the information business leaders and sustainability managers need to prepare, and even capitalize on CSRD.
CSRD timeline and who’s affected
All enterprises present in the EU will have to report ESG data eventually, but for now, large public-interest entities (PIEs) established in the EU, with 500+ employees, will be the first affected by CSRD. This includes listed companies, banks, insurance companies, and other entities that are required to prepare consolidated financial statements under the Accounting Directive.
The CSRD will come into effect for financial years starting on or after January 1, 2024, for reports published in 2025. In reality, this means you will need to start aligning processes and creating the policies your company is missing right now! It’s worth noting that companies are also required to report on the activities of suppliers, 3rd parties and others in their value chain, so they’ll need your support as well.
Large Companies with 250+ employees, at least 40 million Euros in net turnover, or at least 20 million Euros in assets must start recording data from January 2025 for reports published in 2026.
Listed SMEs are obliged to start in January 2026 for reports published in 2027. They have a further possibility of voluntary opt-out until 2028, and will be able to report according to separate, proportionate standards being developed. We don’t yet know exactly when non-listed European SMEs and micro-enterprises will have to comply, but it won’t be before January 2028.
ESRS
The European Sustainability Reporting Standards (ESRS) set out details on how companies should comply with CSRD. A private association called EFRAG submitted the first set of drafts to the European Commission in November 2022, and, at the time of writing, the drafts were being considered and amended. The final and approved standards are expected this summer.
Despite the lack of a finalized document, a lot of detail is available and unlikely to change radically. If the approved version is more or less as expected, there’s a great deal you can do now. This involves automating the data you already have, working out what data you need to improve, and what data is lacking. Then, by the time you have to generate reports, much of the hard work has already been done!
Which parts of ESRS are compulsory?
If CSRD states who must report on what, ESRS gives the framework and method for actually reporting. This will cover a wide range of topics, including climate change, water and marine, biodiversity and ecosystems, the circular economy, your own workers, workers in your value chain, affected communities, consumers, and business conduct.
We’re all familiar with carbon emissions, but the scope of ESRS is so much more, including human rights, anti-corruption and diversity. It may seem daunting, but the legislation is being introduced in stages, and only 3 elements are compulsory at present: general disclosures, climate change, and own workers.
Pro Tip!
Collect and store raw data using dynamic software. This automates much of the process, making it more efficient, and reducing the likelihood of errors. It also means you can adapt your reports to whatever the latest regulations demand, and make future reporting less time-consuming. At SustainLab, our AI maps data across legislations including SFRD, GRI, SBTs and more.
Mandatory Double Materiality Assessment
The draft ESRS 1 document on General Requirements by EFRAG, has made Double Materiality a mandatory part of sustainability reporting. Let’s get to grips with what that really means.
Materiality has been used in the financial accounting world for a while, originally referring to physical assets that were material to financial decisions. Now materiality is used more widely in sustainability to include a whole range of environmental, social, and company governance information that’s relevant to stakeholder decisions.
Double materiality recognizes that a company's financial performance is inextricably linked to its environmental and social performance. It covers two categories: impact materiality and financial materiality. Impact materiality is often called the inside-out perspective because it takes into consideration the various effects a company has on people or the environment.
Financial materiality is called the outside-in perspective because it looks at the financial effects a company might experience due to various sustainability issues. In other words, the company’s financial wellbeing, including access to finance, cash flow, risks, and opportunities. It’s important to note that the effects in both categories can be actual or potential, positive and negative, now and in the long-term.
Completing a double materiality assessment helps:
Identify risks and opportunities that could impact the company's financial performance and reputation
Prioritize issues based on their material impact, and importance to the company's stakeholders
Align sustainability reporting with the company's strategic priorities and goals
Enhance stakeholder engagement and communication on sustainability issues
Submitting reports for CSRD using ESEF
You’ve done your assessments, set up your processes, and gathered your dynamic data. Now it’s time to submit everything. The European Single Electronic Format (ESEF) is an electronic format designed to make it easier to compare financial and sustainable data. It’s already in use for other types of financial reporting and uses an inline XBRL format (iXBRL).
Companies will be required to tag data in a specific way using a taxonomy prepared by EFRAG. This means you’ll need to get set up with XBRL compliant software, such as SustainLab’s, to help you well in advance of the CSRD deadline.
How CSRD compares to other frameworks
SFDR (Sustainable Finance Disclosure Regulation) While both SFDR and CSRD aim to promote sustainability reporting, their scope and audiences differ. SFDR targets financial market participants, focusing on the disclosure of sustainability-related information in financial products. CSRD covers a broader range of companies' non-financial and sustainability reporting.
SBTs (Science Based Targets) are a voluntary framework developed by the Science Based Targets Initiative (SBTi), to help companies set targets for reducing their greenhouse gas emissions. SBTs aren’t mandatory and focus on greenhouse gas emissions.
NFRD (Non-Financial Reporting Directive) is an existing EU regulation that requires large companies to disclose certain non-financial information, including environmental, social, and governance (ESG) factors. CSRD is meant to replace NFRD and introduce a more comprehensive sustainability reporting standard.
IFRS (International Financial Reporting Standards) are a set of accounting standards used by companies worldwide. Unlike CSRD, IFRS doesn’t focus on sustainability but instead covers financial reporting.
GRI (Global Reporting Initiative) and ISSB (International Sustainability Standards Board) are non-profit organizations that have developed sustainability reporting frameworks for companies. Unlike CSRD, these frameworks aren’t mandatory.
GHG (Greenhouse Gas) and TCFD (Task Force on Climate-related Financial Disclosures) are frameworks specifically focused on climate change-related disclosures. While CSRD includes climate-related disclosures, it covers a broader range of sustainability issues.
CDP (formerly known as the Carbon Disclosure Project) is a non-profit organization that requests companies to report on their environmental impact, including carbon emissions. Unlike CSRD, CDP's framework isn’t mandatory, and only focuses on environmental disclosure.
Can data from other frameworks be used for CSRD?
Broadly speaking, yes! The CSRD and ESRS are designed to be complementary to each other and, as far as possible, other reporting frameworks. So any core data that sustainability managers have collected for other frameworks can often be used for CSRD as well.
SustainLab’s Platform can migrate information from other reporting systems to CSRD, saving you time and hassle. CSRD requires Limited Assurance, so it’s worth aligning with auditors as well, not least because this form of financial protection is expected to become Reasonable Assurance later on.
ESRS E1 is a good example of a requirement that’s highly integrated with other standards. These include EBA Pillar 3 Disclosures on ESG Risk, IFRS and ISSB, EU Taxonomy Regulation, and SFDR.
Gap Analysis and how it helps
A gap analysis is a process that helps companies identify the gaps between their current practices and where they need their sustainability reporting to be in the future. It involves a review of the company's existing processes and systems, and an assessment of how well they align with the CSRD. SustainLab has created a market-leading Gap Analysis Tool companies can use to do this and come up with a detailed plan of action.
A gap analysis can help companies meet CSRD goals by:
Addressing data collection and reporting gaps that have been found in the value chain
Areas where the organization is not complying with CSRD are identified and guidance provided on how to improve
Aligning on processes and priorities
Assigning and automating tasks
A clear roadmap is created, including specific actions that need to be taken and timelines for completion
Want to hear more about our Gap Analysis Tool and why it’s so important for you to start your Gap Analysis ASAP in order to get CSRD-ready? Sign-up for our webinar today: Ready, Set, Report: Mastering CSRD Readiness with Confidence
The CSRD ecosystem
It takes more than one sustainability manager to gather information from up and down your company’s whole value chain. Different people and types of expertise are required, so nurture and support your supply chain, procurement, and HR departments. That way, you’re more likely to get good data, more quickly.
“Sustainability reporting goes far beyond simply feeding numbers into a spreadsheet to meet legislation. It involves a network of suppliers, stakeholders, and colleagues collaborating effectively. It takes an ecosystem of people and data to find the right information and know what to do with it.” – Maria Svantemark, CEO and Co-Founder of SustainLab
Business benefits of CSRD
Complying with CSRD may seem daunting and time-consuming, but it will steer and influence how business will be done in the future in Europe. Compliance will lead to action and long-term impacts. The effects include:
Improved sustainability performance: helps identify areas for improvement and drive progress towards company KPIs
Increased transparency: CSRD compliance requires organizations to disclose sustainability information to the public, which helps build trust and credibility with stakeholders
Competitive advantage: organizations that are at the forefront of sustainability performance will gain a competitive advantage in the market
Risk management: CSRD compliance helps organizations identify and manage sustainability-related risks, such as reputational, regulatory, and operational risks
7 steps to take now
It will take time to get ready for CSRD but there are things sustainability managers and others can do right now to avoid stress or penalties later on:
Understand the requirements: Get familiar with CSRD and ESRS regulations. This includes understanding the scope of reporting, the metrics that need to be reported, and the timeline for compliance
Assess data availability and quality: Carry out a gap analysis to identify gaps in data collection processes and develop plans to address them. SustainLab has a tool and a process that helps you do this!
Build internal awareness: Work with other departments within the company to build awareness of CSRD and the importance of compliance. This will ensure that all relevant stakeholders are aware of their roles and responsibilities
Establish a reporting framework: It should define the reporting processes, roles, and responsibilities, as well as the tools and technologies needed to support reporting
Develop reporting templates: This will help ensure consistency in reporting across the organization and make it easier to collect and analyze data
Engage with external stakeholders: Talk to auditors and regulators, to ensure that their reporting processes and frameworks align with yours
Monitor progress: Finally, keeping track makes it easier to make adjustments when needed. This will help ensure that the organization is on track to meet its goals and that reporting processes are continually evolving as data quality improves
So, there you have it! A deep dive into CSRD, the ESRS rules that apply to it, ways to prepare, and why to bother!
If you’d like support on your journey towards CSRD compliance, SustainLab can help with all things ESG! That includes Gap Analysis Tool, and dynamic data management software. Book a demo with us so you can see the tool firsthand!
And sign up for our upcoming webinar, Ready, Set, Report: Mastering CSRD Readiness with Confidence, happening on May 31st, 11.00 CET. The webinar will be led by internal experts Maria Svantemark, our CEO and Co-Founder, and myself, Micaela Quesada, Chief Sustainability Officer at SustainLab.
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