The European Commission has issued the final complementary regulation of the Corporate Sustainability Reporting Directive (CSRD), establishing European Sustainability Reporting Standards (ESRS) mandatory for all companies within the scope of CSRD in the European Union. It’s crucial that affected companies start preparing immediately, as some will have to apply ESRS from January 1, 2024, and most from January 1, 2025. Adapting to the new requirements of CSRD and ESRS is not simple, requiring a paradigm shift in sustainability management and the implementation of a Transition Plan to effectively address the changes.
CSRD overview
The Corporate Sustainability Reporting Directive (CSRD) came into effect on January 5, 2023, expanding the disclosure requirements of its predecessor, the Non-Financial Reporting Directive (NFRD) of 2018. CSRD extends its scope to about 50,000 EU entities, compared to approximately 11,000 covered by NFRD. Affected entities must include detailed information on environmental (E), social (S), and governance (G) aspects in their annual management reports, along with their annual accounts and for the same reporting periods.
CSRD aims to strengthen the current requirements of the EU Directive on non-financial reporting (NFRD), in line with the European Green Deal and the United Nations Sustainable Development Goals (SDGs). These standards ensure that investors and stakeholders have access to crucial information to assess investment risks related to climate change and other sustainability issues. They also promote a culture of transparency regarding the environmental and social impact of entities.
Differences between NFRD and CSRD
CSRD expands the scope of sustainability reporting beyond large listed entities, as did NFRD (Directive on non-financial reporting). Under CSRD, entities must meet specific criteria, such as the number of employees, total assets, and turnover, to determine their inclusion. European Sustainability Reporting Standards (ESRS) become mandatory, requiring entities to apply them in their annual management reports. This marks a significant difference in sustainability reporting requirements.
European Sustainability Reporting Standards (ESRS)
The European Sustainability Reporting Standards (ESRS) are the European standards outlined within CSRD for corporate reporting. They aim to provide comprehensive but detailed information on environmental, social, and governance issues. They were just approved at the end of October and are already integrated into the European legal framework. There are twelve standards, aligned with GRI and divided as follows:
- General requirements:
- ESRS 1: General requirements.
- ESRS 2: General disclosures.
- Environment:
- ESRS E1: Climate.
- ESRS E2: Pollution.
- ESRS E3: Water and marine resources.
- ESRS E4: Biodiversity and ecosystems.
- ESRS E5: Resource use and circular economy.
- Social:
- ESRS S1: Own workforce.
- ESRS S2: Workers in the value chain.
- ESRS S3: Affected communities.
- ESRS S4: Consumers and end users.
- Governance:
- ESRS G1: Business conduct.
Here you can find the list of these indicators.
Double materiality principle
Another key point is the double materiality it imposes, financial and impact.
Materiality analysis is the process by which a company identifies and prioritizes sustainability aspects that are most important and/or impactful for the company and its stakeholders.
Double materiality means that when conducting this analysis, companies are obliged to report on how environmental and social issues can affect their operations and results; but they must also analyze and communicate the impact of their activity on people and the environment.
Materiality is specific to each company, each company is different. Although there are issues that are common to all companies and others that are sectoral, ultimately the issues that are material must be decided by each company. Materiality is a mix of regulated aspects, best practices, and others that the company specifically chooses for various reasons.
It is also important that this exercise does not end in a materiality matrix but that it is followed by a process of communication and negotiation with stakeholders that leads to prioritizing the material issues that will be most relevant.
