The Corporate Sustainability Reporting Directive (“CSRD”) is the European Union’s latest effort to stretch the European Green Deal across all economic activity occurring within the EU. The directive is part of the EU’s broader Sustainable Finance package which pushes private investment toward supporting the transition to a carbon-neutral economy by 2050. The CSRD aims to improve transparency and standardize sustainability reporting across all companies operating in the EU.
The EU maintains that improved sustainability reporting is an effective way for companies to identify and manage sustainability-related risks and opportunities across the value chain. The CSRD is a response to widespread criticism that sustainability reporting is merely a vehicle for greenwashing. Specific regulations are underscored by the following guiding principles:
The CSRD amends the Non-Financial Reporting Directive (NFRD) and extends compliance requirements beyond listed EU companies to include private entities and non-EU companies with significant operations in the EU. The reporting requirements for large EU corporations also apply to subsidiaries of non-EU parent corporations. Compliance is required for companies that have at least two of a) 250 employees or more, b) €40 million in annual revenue, or c) total assets of €20 million or greater. Reporting requirements also apply to non-EU companies with EU-generated revenues in excess of €150 million and either a) a large or listed EU subsidiary, or b) a significant EU branch generating over €40 million in annual revenue. Companies not already subject to the NFRD, and non-EU firms can opt out until the 2026 and 2028 reporting cycles, respectively.
As standards are released, companies must stay up to date to ensure they are prepared to produce CSRD-compliant reports. Special attention should be paid to coherence across various areas of disclosure, particularly for North American corporations who are subject to SEC mandates. Adopting comprehensive ESG reporting practices now will ease the reporting burden when compliance is required. Information gathering can also help with risk management under changing environmental demands. To prepare for reporting, companies may want to focus on areas such as:
The CSRD aims to provide companies with a reporting framework designed to enhance comparability and reduce information collection costs. The first set of standards will be released on June 30, 2023, with the first set of reports to be released by fiscal 2024 for EU firms, and by fiscal 2028 for non-EU firms.
Annual reports must be externally assured. Two main conceptual guidelines underscore the CSRD: quality of information and double materiality.
Quality of information standards ensure corporate sustainability disclosures are truthfully represented, comparable, and verifiable.
Double materiality defines information as materially relevant if it explains how the company is impacted by external factors which affect its economic position, as well as if it reflects how the company impacts the environment and society in which it operates.
For North American companies adopting the EU’s definition of ‘double materiality’ significantly expands the scope of traditional reporting. In addition to reporting on financially material aspects of sustainability disclosures, companies must assess the relevance of information based on how its operations affect people and the environment throughout its entire value chain. Information may be qualitative or quantitative in nature and cover areas such as:
The CSRD represents a political commitment to a greener future. The directive improves transparency while also creating new points of comparison. Companies should be attentive to changing competitive demands. Implementing a comprehensive ESG management platform can help to harmonize financial and sustainability data, model ESG scores, identify areas for improvement, benchmark against industry peers, and stay up to date on changing regulatory demands.
Contact True North to learn more about what our ESG management platform True Alpha is doing to prepare asset managers and investors for the future.
Kai Chen, True Alpha
+1-647-922-5228
kai@truenorthimpact.com
https://truenorthimpact.com/
Ainsley Gonder, Ivey Business School
agonder.phd@ivey.ca
https://www.ivey.uwo.ca/sustainability/
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