As climate regulations tighten and global awareness of sustainability deepens, the Corporate Sustainability Reporting Directive (CSRD) has emerged as a key directive for businesses operating in Europe and beyond. The CSRD is designed to enhance and standardise sustainability reporting across the EU, ensuring that companies are transparent about their environmental, social, and governance (ESG) practices.
In this article, we’ll break down who the CSRD effects, what it takes to comply, its impact on non-EU parent companies with EU subsidiaries, and the concept of double materiality.
Who Does the CSRD Effect?
The CSRD applies to a much broader range of companies than its predecessor, the Non-Financial Reporting Directive (NFRD). It impacts:
Large companies: All large EU companies are required to comply. A company is considered large if it meets at least two of the following criteria:
More than 250 employees
More than €40 million in annual turnover
More than €20 million in total assets.
Non-EU companies: One of the most significant expansions of the CSRD is its application to non-EU companies with substantial operations in the EU. If a non-EU company has EU subsidiaries or generates more than €150 million in annual turnover within the EU, it will need to comply with the CSRD.
What Do Companies Need to Do to Comply?
Compliance with the CSRD goes beyond previous reporting frameworks. Companies must now report detailed sustainability information with the same rigour and reliability as financial data. This includes:
Scope 1, 2 & 3 Reporting: Companies are expected to disclose information on how their operations affect environmental, social, and governance factors. Previously, companies solely had to report on scope 1 & 2 emissions, however with scope 3 emissions accounting for over 70% of a companies GHG emissions, it will now have to be reported on.
Assurance Requirements: Reported sustainability information must be externally audited and assured, providing more credibility and transparency to stakeholders.
Digital Tagging: Companies will also need to “tag” their sustainability information in digital formats to align with the European Single Electronic Format (ESEF), ensuring standardised and accessible data.
Double Materiality Assessment: Companies will have to undergo an assessment of how sustainability issues affect their own financial performance as well as an impact assessment on how the companies activities affect the environment.
Alignment with European Sustainability Reporting Standards (ESRS): Companies will need to adopt the European Sustainability Reporting Standards, which outline what needs to be reported in line with the EU’s sustainable finance goals.
Impact on Non-EU Parent Companies with EU Subsidiaries
The CSRD’s reach extends to non-EU companies with significant operations in the EU. If a non-EU parent company has subsidiaries or branches in the EU, those subsidiaries must comply with the CSRD’s reporting requirements. This includes subsidiaries that meet the criteria for large companies or exceed the €150 million turnover threshold.
For non-EU parent companies, this creates an additional layer of complexity in aligning global sustainability reporting standards with those required in the EU. Parent companies must ensure that their EU subsidiaries are collecting the required data, conducting audits, and meeting the necessary reporting timelines.
Additionally, group reporting might become mandatory, meaning that non-EU parent companies will need to disclose consolidated sustainability data for the entire group, including their EU operations.
Double Materiality: A Critical Concept in the CSRD
One of the most notable aspects of the CSRD is its emphasis on double materiality. Unlike traditional materiality, which focuses solely on how sustainability factors impact a company’s financial performance, double materiality considers:
Financial Materiality: How sustainability issues (such as climate change, resource scarcity, or social risks) affect the financial performance and value of the company.
Impact Materiality: How the company’s activities impact the environment and society at large. This includes the company’s contributions to environmental degradation, social inequality, and governance challenges.
Double materiality requires businesses to take a holistic view of their sustainability impacts, both internally and externally. It broadens the scope of what needs to be reported, making it essential for companies to understand not just how sustainability affects them, but also how they affect the world around them.
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