CSRD – new obligations for entrepreneurs are coming
Sustainable development. It is a slogan that is being changed by the various bodies of the European Union in all cases. An important element of sustainable development promoted at all EU levels is CSR, i.e. corporate social responsibility. Through a number of initiatives, EU bodies aim to ‘inoculate’ and disseminate these good practices as much as possible among as many companies as possible.
An example of such efforts was the NFRD (Non-Financial Reporting Directive), which has been in force since 2017 and regulated the obligations to provide information on CSR activities in companies. Nevertheless, it was considered not to fully fulfil its role and work began on a more effective instrument allowing economic entities to take the type of action that would allow them to maximise profit, but at the same time allow them to maintain CSR standards.
The result of such activities is the CSRD (Corporate Sustainability Reporting Directive), which in a much broader way, compared to its predecessor, introduces the requirement of standardized ESG (Environmental, Social, Governance) reporting for a much larger number of entities than before.
Origins of the CSRD
The origins of the CSRD Directive, published in the Official Journal of the EU on 16 December 2022, and specifically the Directive of the European Parliament and of the Council amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014 as regards corporate sustainability reporting, should be sought in the European Green Deal, a package of policy initiatives aimed at putting the community of European countries on the path ecological transition, and ultimately achieving climate neutrality by 2050. One of these initiatives was to propose a new type of guidance on company reporting on its sustainability activities in CSR.
What does the CSRD include?
In short, the Directive obliges the economic operators identified therein to report annually on their impact on:
- human rights and
- in terms of their corporate governance.
What is very important, this Directive replaces the previously applicable NFRD Directive and sets out much more detailed ESG reporting rules, which are to allow EU authorities to conduct ongoing verification and assessment of CSR policies conducted by enterprises.
CSRD directive – what will you have to report?
The scope of reporting is indicated in Article 19a(2) of the CSRD Directive. Under this regulation, certain economic operators include in their management report information necessary to understand the entity’s impact on sustainability issues and information necessary to understand how sustainability issues affect the development, performance and position of the entity.
The directive obviously specifies what information is meant. The enumerative list includes:
- A brief description of the entity’s business model and strategy, including:
- the resilience of the entity’s business model and business strategy to sustainability risks;
- the opportunities that the entity has in relation to sustainability issues;
- the entity’s plans, including implementation activities and related financial and investment plans, to ensure that the entity’s business model and business strategy take into account the transition to a sustainable economy and the limitation of global warming (…) and, where appropriate, the entity’s exposure to coal, oil and gas activities;
- information about how the entity’s business model and business strategy take into account the interests of the entity’s stakeholders and the entity’s sustainability impact;
- information on how the entity’s strategy has been implemented in relation to sustainability issues.
- a description of the entity’s time-bound and established sustainability objectives (…) and a description of the progress made by the entity towards those objectives and a statement of whether the undertaking’s objectives related to environmental factors are based on conclusive scientific evidence;
- a description of the role of administrative, management and supervisory bodies in relation to sustainability issues and their expertise and skills necessary to fulfil that role or their access to such expertise and skills;
- a description of the undertaking’s policies in relation to sustainability issues;
- information on the existence of incentive schemes for sustainability issues offered to members of administrative, management and supervisory bodies;
- the due diligence process implemented by the entity in relation to sustainability issues and, where applicable, in accordance with Union requirements for the conduct of the due diligence process by the entity;
- the most important actual or potential adverse effects associated with the entity’s own operations and value chain, including its products and services, business relations and supply chain, the actions taken to identify and monitor those effects, and other adverse effects that the entity is required to identify in accordance with other Union requirements in order to carry out the entity’s due diligence;
- any action taken by an entity to prevent, mitigate, remedy or mitigate actual or potential adverse effects and the outcome of those actions;
- a description of the principal risks to the entity with respect to sustainability issues, including a description of the entity’s main dependencies on those issues and how the entity manages those risks;
- indicators relevant to the disclosures.
It is also indicated that, where applicable, the information referred to above includes information about the entity’s own operations and value chain, including its products and services, business relationships and supply chains. As explained, the value chain is a list of initiatives that a given economic entity carries out in order to market a given good or service at all stages of such implementation.
ESG reporting will be audited and validated
A kind of novelty increasing the rank and importance of reporting in the field of sustainable development is also the requirement introduced by this Directive to subject reports to expert analysis.
As indicated in Article 34 of the Directive, a statutory auditor or audit firm shall issue an opinion on whether:
- the management report is consistent with the financial statements for the same financial year, and
- the activity report has been prepared in accordance with the applicable legal requirements, excluding the sustainability reporting requirements set out in Article 19a of the Directive;
- where appropriate, issue an opinion on the basis of an assurance service providing limited assurance on the compliance of sustainability reporting with the requirements of this Directive; including compliance of sustainability reporting with sustainability reporting standards, the process carried out by the entity to identify information submitted under those sustainability reporting standards and compliance with the sustainability reporting labeling requirement.
CSRD introduces reporting standards
Article 29b of the Directive sets out reporting standards. This is one of its most important elements and the main advantage over its predecessor. The introduction of such standards, from the perspective of EU bodies, is to significantly facilitate the assessment and enable comparison of entrepreneurs in terms of their activities in the field of sustainable development.
More specifically, the following reporting standards have been introduced in individual areas, taking into account the impact of the entity on:
environmental factors, i.e.:
- mitigation of climate change and, where relevant, greenhouse gas emissions;
- adaptation to climate change;
- marine waters and resources;
- resource use and the circular economy;
- biodiversity and ecosystems.
social and human rights factors, i.e.:
- equal treatment and equal opportunities for all, including gender equality and equal pay for work of equal value, training and skills development, employment and inclusion of persons with disabilities, measures to prevent violence and harassment in the workplace and diversity;
- working conditions, including secure employment, working time, adequate remuneration, social dialogue, freedom of association, the existence of works councils, collective bargaining, including the percentage of workers covered by collective agreements, workers’ right to information, consultation and participation, work-life balance and health and safety at work;
- respect for human rights, fundamental freedoms, democratic principles and norms as laid down in the International Charter on Human Rights and other fundamental UN human rights conventions, including the UN Convention on the Rights of Persons with Disabilities, the UN Declaration on the Rights of Indigenous Peoples, the International Labour Organisation Declaration on Fundamental Principles and Rights at Work and the fundamental conventions of the International Labour Organisation, the European Convention on the Protection of Rights the European Social Charter and the Charter of Fundamental Rights of the European Union;
factors related to the ordinance, i.e.:
- the role of the administrative, management and supervisory bodies of undertakings in relation to sustainability issues and their composition, as well as their expertise and skills necessary to perform their role or for such bodies to have access to such expertise and skills;
- internal control system;
- business ethics and corporate culture, including anti-corruption and bribery, whistleblower protection and animal welfare;
- the activities and liabilities of the undertaking relating to the exercise of political influence, including lobbying activities;
- the management and quality of relationships with customers, suppliers and affected communities, including payment practices, in particular in relation to late payments to small and medium-sized undertakings.
Importantly, the Directive also stresses that sustainability reporting standards specify forward-looking information, retrospective information and qualitative and quantitative information.
In addition, the Directive also indicates the obligation of sectoral reporting, i.e. related to the type of activity that a given business entity conducts.
It is worth noting that at the end of July this year the first set of the so-called European Standards for Sustainable Development Reporting (CSRS) was published. This set contains the following reporting intervals:
- 2 general standards:
- ESRS 1 General requirements
- ESRS 2 General disclosures
- 10 thematic standards:
- E – Environmental issues:
- ESRS E1 Climate Change
- ESRS E2 Pollution
- ESRS E3 Water and marine resources
- ESRS E4 Biodiversity and ecosystems
- ESRS E5 Resource Use and Circular Economy
- S – Social issues
- ESRS S1 Own workforce
- ESRS S2 Employees in the value chain
- ESRS S3 Affected Communities
- ESRS S4 Consumers and end-users
- G – Management issues
- ESRS G1 Business Conduct
- E – Environmental issues:
Who is affected by the CSRD Directive and when does it enter into force?
The CSRD will enter into force gradually, and Member States still have some time to implement it in their legal systems.
The criterion that is most important when covering individual enterprises with their material scope is their size. Anyway:
- Public companies employing more than 500 employees and those that were also subject to the reporting obligation under the previous Directive will be covered by these regulations from 1 January 2024 and will be obliged to submit the first report in 2025.
- Companies that meet 2 out of 3 criteria will be covered by these regulations from 1 January 2025 and will be required to submit their first report in 2026:
- employ more than 250 employees;
- a minimum turnover of EUR 40 million;
- The value of the assets is not less than 20 million euros.
- Companies that meet 2 out of 3 criteria will be covered by the regulations from 1 January 2026 and will be required to submit the first report in 2027:
- employ more than 50 people;
- the turnover amounts to a minimum of millions of euros;
- The value of the assets is not less than EUR 4 million.
When analysing the regulations in question, it is impossible to come to a different conclusion than that the introduction of requirements (even if it is gradual) resulting from the CSRD Directive will be a kind of revolution for many business entities.
The wide scope of the subject matter and the multitude of thematic areas affected by the Directives will force companies to engage a large part of the staff in order to catch the information necessary to be included in the reports on an ongoing basis.
In addition, in our opinion, due to the often specialized data that will have to be extracted from the processes taking place in companies, it will force companies to either create new positions in companies or to cooperate with external entities.
These reports will be important because they will be audited by experts, practically on a par with financial statements.
Therefore, there is no doubt that all these above-mentioned activities will involve considerable costs that will have to be incurred.
As Ulve, we recommend, in the first place, to carry out a CSR audit, which will allow you to determine to what extent, at the moment, your company fits into the requirements imposed by the CSRD Directive and to what extent you will be able to catch the data needed for ESG reporting in your production processes.
First draft ESRS reporting standards – https://ec.europa.eu/finance/docs/level-2-measures/csrd-delegated-act-2023-5303-annex-1_en.pdf
Terms and abbreviations used in ESRS standards – https://ec.europa.eu/finance/docs/level-2-measures/csrd-delegated-act-2023-5303-annex-2_en.pdf