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Game Changer: CSRD. How to transform your business and value creation.
Big things are happening in the Climate and Sustainability Reporting Field
Make sure you are prepared! In the following you find the most important key takeaways about the upcoming Corporate Sustainability Reporting Directive (CSRD) and how it changes the way you do business today.
Summary: The new sustainability reporting standard is leading a future-oriented change of business relations. Investors, customers and business partners will be able to discover the impact of companies and their actual measures to improve it. Companies will therefore report annually on how they manage their social and environmental dimensions as well as governance. Reported information will need to be robust, transparent, and verifiable. Therefore, an internal management system as well as external audits will be mandatory for companies, in order to continuously measure and monitor their impact along the supply chain.
What is the CSRD?
Let’s start at the beginning. The Corporate Sustainability Reporting Directive (CSRD) is today still a proposal from the EU Parlament, but will soon replace the Non-Financial Reporting Directive (NFRD) in the EU. Until then, certain details and requirements can still change. However, the objectives of the directive are clear. The policy objective of the new Directive is to ensure that stakeholders can assess the climate and sustainability risks of companies. The practical objective is to bring climate and sustainability reporting to the highest level of maturity, in order to make it transparent and comparable. The process involves the challenge of creating sustainability reporting standards, digitize impact reports and overview them – such as financial reporting.
Who is affected?
The CSRD proposal is suggesting that all “large” companies need to report. Large is defined by 2 out of these 3 criterias:
- €40 million in net turnover;
- €20 million on the balance sheet;
- 250 or more employees.
It is estimated today that in the EU 50.000 companies and more will be affected by the CSRD – compared to about 11.000 that are currently falling under the non-financial reporting requirements.
When will the CSRD come into effect?
In 2024 large companies will need to fulfil the CSRD requirements, reporting on the business year of 2023. SMEs will have a little more time to adapt. But large companies are likely to request the respective information from their suppliers – and they might need to ask their suppliers to report, too. This way, the CSRD will have an indirect effect on more or less all companies. Over time, until 2026 it is also addressing listed SMEs directly.
Large companies are addressed first, but SMEs will most likely be indirect affected.
Which information needs to be reported?
The CSRD refers to existing ESG-guidelines, therefore it requires information about environmental, social and governance aspects of companies. Right now the EU Financial Reporting Advisory Group (EFRAG) works on concrete proposals for binding criterias. However, it is already clear that the directive will be aligned to international ESG-standards such as the work of the Global Reporting Initiative (GRI).
What comes next?
Scheduled for summer 2022, a first set of requirements and final standards will be published. Those will be required for the reporting year 2023. The new update will include guidelines for two main concepts:
- The double materiality concept: This concept requires companies to report both on how sustainability issues affect their own performance, position and development (the ‘outside-in’ perspective), and on their impact on people, stakeholder and the environment (the ‘inside-out’ perspective). It will further demand the disclosure of:
- Climate and environmental impact of a company and its supply chain.
- Social impact and responsibilities across the value chain.
- Climate related risks and financial uncertainties.
- Quality of information: Guidelines on how comprehensive data needs to be collected, managed and reported.
Double Materiality and Data Quality along the entire value chain
A year later, in summer 2023, a set of additional guidelines regarding the reporting standards and its quality will be published. These will focus on the integration of non-financial and financial reporting, the depth of collected and managed data from companies and their supply chains as well as future-oriented metrics to improve companies‘ sustainability performance.
How to prepare?
Start preparing now! Ask how your company collects already climate related data and ESG information, use systems to standardise and prepare to be able to share them. This is not only a matter of digitalisation and software-tools, but it requires a transformation for status quo management. CSRD and its implications will be central to a company’s whole strategy as well as to its internal and external stakeholders. Each company needs to start now with mapping out which resources need to be activated in order to be able to meet the necessary criteria. As mentioned, the EU Parlament is still in the process of defining and discussing the proposal. Nevertheless, decision makers, sustainability officers and supply chain managers are now preparing best by focusing on the strategic means to be able to report on past and future-oriented criteria of the CSRD.
The sooner the better! Focus on climate impact and ESG information.
Conclusion: Which next steps to take?
The CSRD will follow the suggestions of the TCFD*, especially for climate relevant ESG-information. Moreover, it will be in line with the EU Taxonomy as well as the existing NFRD. This means that companies will very likely have to report against:
- The Greenhouse Gas Protocol – disclosing their Scope 1, 2, and 3 emissions.
- The 6 environment impact criteria – disclosing how they substantially contribute to the environmental goals of the EU Taxonomy while not damaging one of them:
- Climate change mitigation
- Climate change adaptation
- Water and marine resources
- Circular economy
- Biodiversity & ecosystems
- Existing ESG-Standards such as the GRI – disclosing their social and environmental impact as well as governance
- Responsible Business Guidelines (OECD) – disclosing the entire impact along the value chain
Get your data managed: From information collection to actions.
Lead the transformation!
The new CSRD is meant to make impact transparent and to simplify investment decisions. For companies this will bring opportunities to position themselves as pioneers and to empower business partners along the way. Meanwhile, the whole process demands attention and needs to be implemented as collaborative transformation within companies and together with stakeholders. Do not hesitate if you want to learn how our software service is enabling you to take the next steps forward. Contact us for more information.