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What is CSRD and ESRS?
A simple guide to CSRD and ESRS for businesses.
July 21, 2023
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In January 2023, the European Union (EU) implemented the Corporate Sustainability Reporting Directive (CSRD), marking a pivotal moment for over 50,000 companies operating within its borders. The CSRD aims to foster sustainability reporting consistency and comparability by introducing a set of new requirements that companies must adhere to. Alongside the directive, companies are also expected to follow the European Sustainability Reporting Standards (ESRS), which lay out specific reporting guidelines to assess environmental, social, and governance (ESG) performance.
In this guide, we'll take you through the essentials of CSRD and ESRS, helping your business embark on its sustainable reporting journey.
The CSRD, also known as the EU Corporate Sustainability Reporting Directive, has emerged as a significant step towards achieving greater sustainability and transparency in the corporate world. It replaces the previous EU Non-Financial Reporting Directive (NFRD) and introduces stricter reporting guidelines that encompass an additional 40,000 companies.
Under CSRD, companies are now required to report on their ESG performance annually, aligned with the ESRS. This includes disclosing risks, opportunities, and impacts related to their sustainability practices. Additionally, businesses subject to the CSRD must undergo a double materiality assessment, evaluating both the impact on people and the planet, as well as the financial implications of sustainability issues.
The CSRD is rolled out in phases, with different types of companies mandated to comply over time. The compliance timeline continues, gradually covering more companies until full implementation is achieved.
– 2023: The CSRD was implemented.
– 2024: Large companies covered by the NFRD with 500+ employees, 40 million EUR net turnover, or 20 million EUR in assets must comply.
– 2025: All large companies with 250+ employees, 40 million EUR net turnover, or 20 million EUR in assets must comply.
– 2026: Listed SMEs with over 10 employees, 700,000 EUR net revenue, or 350,000 EUR in assets must comply with a simplified reporting standard.
– 2028: Non-EU companies with 150 million EUR net turnover in the EU (with at least one subsidiary/branch in the EU) must comply.
Non-compliance with CSRD can have serious repercussions for businesses. Failure to meet reporting requirements may result in legal penalties, reputational damage, and even exclusion from certain markets or investment opportunities.
The ESRS serve as the specific reporting standards that companies must follow under CSRD. As of now, there are 12 drafts available, which include both cross-cutting and topical standards.
The general requirements standards form the foundation of reporting. ESRS 1 outlines the essential requirements, while ESRS 2 covers aspects like general strategy, governance, and materiality assessment. Notably, the "General Disclosures" standard is mandatory for all companies, while other disclosures depend on the outcomes of the double materiality assessment.
These standards delve into a company's environmental impact, addressing areas such as climate change (ESRS E1), pollution (ESRS E2), water and marine resources (ESRS E3), biodiversity and ecosystems (ESRS E4), and resource use and circular economy (ESRS E5). Recent updates provide some flexibility for smaller companies, allowing them to exclude certain disclosure requirements initially.
The social-related standards focus on matters affecting people within and beyond the company. They cover areas such as own workforce (ESRS S1), workers in the value chain (ESRS S2), affected communities (ESRS S3), and consumers and end-users (ESRS S4). Similarly, recent updates provide smaller companies with some leeway in disclosing certain information in their initial years of implementing the standards.
The governance standard revolves around a company's conduct and ethical practices. It encompasses areas like supplier relationship management, prevention of corruption and bribery, and whistleblower protection.
Before reporting under the ESRS, companies must undertake a double materiality assessment. This evaluation helps identify relevant ESRS requirements based on both their impact on people and the planet, as well as their financial implications for the company. Combining these factors allows businesses to focus on material risks and opportunities and include vital information in their reports.
Complying with CSRD and ESRS might seem like a daunting task, but with the right approach, your business can smoothly embark on its sustainable reporting journey. Here are some practical steps to kickstart your CSRD compliance:
Begin by assessing your company's current sustainability framework. Identify the gaps between your existing practices and the CSRD requirements. Develop a double materiality assessment to understand which ESRS standards are relevant to your business. This step will help you set up a robust due diligence process and define appropriate metrics to measure the impact of your sustainability efforts. Remember, the ESRS cleverly incorporates existing EU legislations and frameworks like the TCFD, EU Taxonomy, and SFDR, making it easier to align with established standards when the directive comes into effect.
While the ESRS are still in draft form, waiting for their finalisation is not necessary. Begin reporting on the "General Disclosures" standard (ESRS 1 and ESRS 2), which is mandatory for all companies. Additionally, assess which other ESRS requirements apply to your business and the information you need to disclose.
To comply with CSRD, you'll need to gather substantial data from your suppliers, operators, and company partners. Establishing a smooth and efficient data collection process is vital. Collaborate with external companies to ensure data sharing is convenient for all parties involved.Furthermore, it's essential not only to present the data but also to provide insights into how you collected and analyzed it. Implementing a dedicated ESG platform can streamline your data collection process, making it easier to compare and report information accurately.
At Futureproof, we understand the challenges and opportunities presented by CSRD and ESRS. Our team of sustainability experts is here to support your business throughout its sustainable reporting journey.
Navigating CSRD and ESRS requirements can be complex, but you don't have to do it alone. Our experts will guide you through every step, ensuring your business stays on track and meets all reporting obligations.
Our platform is designed to make sustainability reporting efficient and effective. From data collection to analysis and reporting, Futureproof streamlines the entire process, saving you time and resources.
We understand that each business is unique, and sustainability strategies must be tailored to your specific needs. Our team will help you identify challenges and turn them into opportunities, enhancing your sustainable performance.
Embracing CSRD and ESRS is not just about compliance; it's a transformative journey towards a sustainable future. By adhering to the Corporate Sustainability Reporting Directive and following the European Sustainability Reporting Standards, your business can make a positive impact on society and the environment while fostering transparency and trust with stakeholders.At Futureproof, we're committed to supporting your business every step of the way. Let us be your partner in sustainable reporting, empowering you to navigate the complexities of CSRD and ESRS with confidence.
Get in touch with our team today to embark on your journey of meaningful and impactful reporting. Together, we'll build a better world for generations to come.
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