The Corporate Social Responsibility Directive

Exec summary

This month, the European Commission is set to present the first set of detailed instructions under the Corporate Sustainability Reporting Directive. The EU expects the new rule will affect about 50,000 companies, including those outside the bloc with dual listings or subsidiaries in Europe. 

Corporations in the US are unprepared for the paradigm shift that’s about to hit their reporting requirements as EU rules kick in.  According to Bloomberg (May 2023), not many outside the EU have a clear understanding of CSRD. US companies “are either largely ignorant of what’s happening, or they just have their head in the sand,” said John Wheeler at risk-management firm AuditBoard. Datamaran says 95% of its clients may be affected.

Head in the sand?  The detailed CSRD reporting standards will be finalised in June 2023, and specific requirements for some sectors will come out in 2024, but companies need to be aware of what’s coming and who qualifies, and act now.   

Here is an inside track on this.

What is CSRD?

The Corporate Social Responsibility Directive (CSRD) is a significant European Union (EU) regulation aimed at driving sustainable and responsible business practices.

It replaces the existing Non-Financial Reporting Directive (NFRD) and expands the scope of reporting obligations for companies across the EU, and beyond (see ‘key implications for US companies’, below).

Why is it being brought in?

To bring sustainability reporting up to the level of rigour required for financial reporting, the CSRD will introduce a greater depth of detail in reporting and an audit assurance requirement. 

The assurance requirement will be new for many companies who will need high levels of data accuracy, completeness, transparency, and controls. The overall aim of course is to reduce or even eliminate greenwashing and help corporates accelerate their achievement of net zero.

Key Implications

1. Extended applicability: CSRD applies to large companies, both listed and non-listed, with more than 250 employees and annual revenues exceeding €40 million. It also includes certain small and medium-sized enterprises (SMEs) with high public interest, such as credit institutions, insurance companies, and listed SMEs.  The EU estimates that about 50k companies will be impacted.
2. Enhanced Reporting Requirements: CSRD introduces more comprehensive and standardized reporting obligations, making it necessary for companies to disclose a broader range of environmental, social, and governance (ESG) information. This includes climate-related risks, including the supply chain (GHG Protocol Scope 3), diversity policies, and due diligence measures.
3. Climate reporting is mandatory for all firms in scope.  CSRD establishes a reporting baseline for all companies. This includes full climate disclosure based on the TCFD framework as a starting point, but CSRD goes further. 
4. Qualifying organisations must disclose their full scope 1-3 emissions, alongside their climate risk assessment and any policies related to climate change mitigation and adaptation.  Beyond climate, the CSRD also includes some mandatory disclosures across other standards, such as water, pollution, and biodiversity.
   Above and beyond that baseline, reporting will depend on the outcome of a materiality assessment which will be carried out as stage 1 of CSRD.
5. Increased transparency: The depth and scope of the CSRD climate reporting – which covers not just companies own operations but their value chains – is complex to produce in a repeatable fashion.  CSRD requires a detailed audit trail of how climate emissions were calculated.
6. Assurance of Information: CSRD introduces mandatory 3rd party verification for specific sustainability information disclosed by companies, including Climate disclosures. This aims to enhance the credibility and reliability of reported ESG data, reassuring stakeholders and investors.
7. Digital Reporting: CSRD promotes digitalisation by requiring companies to prepare their sustainability reports in a digital, machine-readable format which in turn  facilitates accessibility, comparability, and analysis of ESG information.
8. Phased Timing:  CSRD reporting requirements will be phased in over time between now and 2027 depending on the company type, but the advice is that data gathering should start soon in preparation.