The new Corporate Sustainability Reporting Directive will affect the ESG reporting of nearly 50,000 companies. Charlie Knapp at Intelex Technologies outlines what to expect and how to prepare for the changes.
CREDIT: Hirun Laowisit/Alamy
The expectation for companies to align their business with environment, social and governance (ESG) factors is increasing at a rapid rate. Improving awareness of sustainability issues, and the impact that these can have on economic value, mean that companies are coming under rising pressure to tackle their negative impact on society and the environment and to demonstrate effective, regulatory-compliant corporate leadership and practices.
In response, the European Union (EU) is bringing sustainability reporting in line with financial reporting, with the introduction of the Corporate Sustainability Reporting Directive (CSRD). Effective from 2024, the new regulations mean that companies operating in the European Economic Area (EAA) will need to be more detailed in their sustainability reporting. Covering issues such as environmental, social and human rights, plus governance factors, companies will be required to audit and disclose both the effect of their business on the world around it and the impact of these concerns on their business.
Ultimately, more than 75% of businesses in the EEA will need to disclose their ESG performance. The CSRD regulations will introduce significant changes for what companies will need to report, what data they will need, and what processes they are required to have in place. All of this can be seen as a daunting undertaking to implement and achieve, especially for those larger companies needing to meet the earlier deadline for when the reporting regulations come into place.
We hear from many business leaders that their current sustainability reporting approaches won’t take them where they need to go. Increasingly complex reporting needs, isolated information silos, and laborious data transformations hinder timely insight sharing and proactive action.
The implementation of the reporting directive is set by the European Commission to facilitate the achievement of the Green Deal targets and to define a common reporting framework for non-financial data. The directives aim to increase the quality of information and transparency about companies’ environmental and social impact.
The new framework will see the rollout of the disclosure principle called ‘double materiality’ which requires companies to report on how sustainability issues impact their business and how their operations in turn affect people and the planet.
These new regulations updates previous corporate sustainability reporting under the 2014 Non-Financial Reporting Directive (NFRD), a regulatory framework that mandates sizeable public interest entities to report on their sustainability performance since 2018 – which some companies will already have been following. In being more ambitious than NFRD, with advanced rules that extend beyond the continent, CSRD regulations pitch Europe as a frontrunner in the reporting standards space – laying the foundation globally.
Compared to 12,000 companies reporting under the NFRD, almost 50,000 companies are expected to be impacted by the CSRD, making up 75% of business in the EEA.
The new reporting rules initially apply to large public-interest companies with more than 500 employees:
In addition to the NFRD reporting requirements, these companies will need to report on the following:
The management report is required in a single electronic reporting format. It is expected that the Commission will require to digitally ‘tag’ the reported information, so it is machine-readable and feeds into the European single access point envisaged in the Capital Markets Union Action Plan.
Therefore, introducing a consolidated, robust and effective reporting framework though the use of purpose-built software solutions will help to address many issues surrounding conflicting standards, gaps in reporting, and lack of comparability of sustainability data.
The application of the CSRD will take place in four stages:
Companies should start acting now in preparation for the new rules and I would recommend the following steps:
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