For companies in Europe, sustainability is quickly transitioning from being optional to becoming obligatory. The Corporate Sustainability Reporting Directive (CSRD) is an EU regulation that forces companies to be transparent about their social and environmental impact. 

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What does the CSRD mean for you?

• If you are a company in the EU/EEA, you are required to disclose the impact of corporate activities on the environment and society. The reported information must be audited. Companies failing to disclose this information could face fines and risk reputational damage.
  
• You have an opportunity to be proactive and use metrics related to the legislation as steering KPIs, even if not yet required, to stay competitive and show actual results from your sustainability efforts.
  
• If done well, you will win customers, meet investor expectations, and secure more affordable financing from banks.
  
  

This extended summary of the CSRD covers:

• What is the CSRD?
• What is the background for the CSRD?
• How does the CSRD work?
• What is required to comply?
• How does it impact your business?
• How do you report in alignment with the CSRD?

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What is the CSRD?

To put it simply, the CSRD is EU legislation that requires companies to disclose environmental, social, and governance (ESG) information. The regulation incorporates for the first time financial data together with ESG information and assurance. Companies must report their sustainability performances against the EU taxonomy, a classification system for sustainable economic activities. 
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The CSRD ushers in new reporting requirements and obligations. This shift towards greater transparency marks a significant step forward in sustainability reporting. Previously, investors, lenders, and journalists faced challenges in understanding the full impact of a company's actions on its workforce, the local environment, and the climate. Companies had the freedom to selectively share positive information, leading to incomplete pictures of their sustainability efforts. The CSRD addresses this issue by requiring companies to disclose their action plans and progress towards sustainability goals. 
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The directive revolutionizes sustainability reporting by providing external parties with the transparency needed to make informed decisions about investments and engagements with companies. The CSRD also ensures comparable ESG data between companies. The idea is that if investors know more about how companies perform in terms of sustainability, they will channel money to the more sustainable companies. In that way, greater transparency moves us in the direction of greater sustainability.

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Summary of the CSRD background

Many large companies have previously reported according to the Non-Financial Reporting Directive (NFRD) which was introduced in 2014. The NFRD could be considered the forerunner of the CSRD. Due to flaws of standardization, a limited scope of affected enterprises, and a lack of mandatory auditing, the EU has improved the regulatory framework. The term “Non-Financial” was also considered misleading because it suggests that ESG issues lack financial relevance, which is not the case. Transitioning from the NFRD to the CSRD signifies an alignment of ESG processes with financial processes. 
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It is not just the name that has changed. Here are some major differences:

• Broadening the scope of affected companies: The CSRD applies to a broader range of companies, including small and medium-sized enterprises (SMEs) and non-European companies with significant activities in the EU.
  
  
• Increased data requirements: Companies are required to provide more comprehensive and detailed sustainability disclosures.
  
  
• Requirements are becoming far more standardized: The CSRD introduces stricter standards for data quality, ensuring that reported information is comparable and consistent across companies.
  
  
• Audits will be required: Reported information must undergo mandatory auditing to ensure accuracy and reliability.
  
  
• Double materiality perspective: The directive emphasizes the concept of double materiality, requiring companies to report on how sustainability issues affect their financial performance and how their activities impact society and the environment.
  
  
• Integration with financial reporting: The CSRD aligns sustainability reporting more closely with financial reporting processes, enhancing the overall transparency and accountability of corporate practices. It will be mandatory for companies to include a sustainability report in their annual financial report.

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How does the CSRD work?

The Corporate Sustainability Reporting Directive mandates that companies report on the environmental and social impact of their activities and ensures the audit of this information. It requires a thorough analysis of both upstream and downstream value chain activities, including products, services, and business relationships. Consequently, the volume of data to be collected and the number of people involved in the integrated reporting process will significantly increase.

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What is required to comply with the CSRD?

To comply with the CSRD, companies need to disclose a report in accordance with the European Sustainability Reporting Standards (ESRS) and submit a sustainability statement in the annual report. The CSRD outlines who needs to report, why they need to report, and when they need to report. The ESRS defines the criteria of what and how to report. By providing a framework and methodology for reporting under the CSRD, the ESRS will ensure that the requirements are met, as well as promoting comparability across companies and sectors.

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How will the CSRD impact my business?

The CSRD will require extensive data collection and collaboration with colleagues across various departments, as every aspect of a company’s operations, including finance, HR, environment, and ethics, is affected by the CSRD. Businesses will be held accountable for their actions to improve sustainability metrics, which means they must collect a vast range of data points from numerous sources. Efficient governance and continuous data management, including progress tracking, will be essential to meet these requirements.
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The EU estimates the annual cost will be approximately €320,000 on average for large listed companies to report in compliance with the CSRD. Aligning ESG processes with financial processes offers companies an opportunity to leverage their expertise in the financial domain. While compliance comes with a cost, the goal is to achieve the most advantageous outcome in relation to both objectives and related expenses.
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The CSRD will impact all EU-listed companies, including small- and medium-sized enterprises (SMEs), with the exception of micro-enterprises. The CSRD will be rolled out in multiple waves, based on the size of companies and whether they are listed. The timeline below indicates when your company will be subject to the new standards.
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It is important to note that the CSRD will also impact non-EU companies. All non-EU parent companies that have securities admitted to trading in EU-regulated markets or have a subsidiary in the EU will follow the timeline below. Their obligations to report will depend on various conditions such as size, turnover and balance sheet, as shown in the timeline.

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 CSRD Regulatory Timeline

How will the CSRD impact small companies?

There will be a modified version of the ESRS for SMEs, which is currently being drafted. SMEs will be obliged to report by 2027, for the financial year 2026, with the possibility of opting out for two years. However, SMEs may face expectations to enhance their sustainability reporting before then. Many investors in SMEs are facing reporting requirements of their own, or have started collecting ESRS-introduced indicators to stay ahead of the new legislation. By making an early start, you will be better prepared to fulfill the reporting obligations when they come into force for your company. You will also be ahead of the curve in terms of meeting the expectations of investors and customers, who will rely on these reports to evaluate your company's sustainability performance.

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How do I report in alignment with the CSRD?

1. Do a Double Materiality Assessment
   Identify how you affect the environment and external stakeholders, and also how the environment affects your company.
   
   
2. Description of action plan and policies
   Make a concrete plan for how to become more sustainable on the topics identified in the Double Materiality Assessment.
   
   
3. Track your progress
   Track your metrics over time to ensure that actions are followed up and that you’re progressing towards the targets you set.

To create your ESRS-aligned report, you must first conduct the Double Materiality Assessment, develop improvement plans, and monitor the progress. The final report is then a description of your analyses, plans and progress.

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How can Celsia help?

Reporting is important, but the primary goal is to enhance the company's sustainability. Recognizing the challenges of staying up-to-date of the evolving ESG legislation, we've decoded the requirements of the EU sustainable finance standard to save you the headache. Instead of engaging external parties to comply with the CSRD, we give you the tool to establish CSRD-compliant goals, policies, and actions yourself.
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Follow straightforward steps and track the progress within user-friendly software. Integrate with existing systems and import data from any source, and engage your colleagues within the software to verify all required data points under the CSRD are addressed. Plus, our expert team will be ready to support you throughout the process.
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We hope this CSRD regulation summary was clear and that the key takeaways will be useful. Good luck!