CSRD: The challenges for companies and how to overcome them
The European Commission has taken a significant step towards the enhancement of corporate disclosure on sustainability matters by adopting the Corporate Sustainability Reporting Directive (CSRD) in April 2021 and presenting the first set of 12 European Sustainability Reporting Standards (ESRS), as part of the European Green Deal.
The objective of these standards is to ensure transparency and comparability of information, while standardising ESG information disclosed by companies operating within the EU. Furthermore, by mandating the disclosure of company-relevant ESG data, the CSRD aims to strengthen investor and stakeholder confidence, facilitate and ensure informed decision-making, foster responsible business practices and contribute toward the achievement of the environmental and social ambitions of the EU, including the reduction of greenwashing practices.
This Directive represents a promising shift towards a more sustainable and resilient economic landscape across Europe. It encourages companies to integrate sustainability into their operational and business culture, as well as in their reporting streams, leading to a more transparent and sustainable business ecosystem in Europe, driving change across the world.
The standards
After the public consultation and the feedback process on the first set of draft standards, the European Commission adopted the Delegated Act on the first set of ESRS on 31st of July 2023. Taking into consideration the feedback and the proposed moderation to the draft standards, EFRAG and the Commission made a series of modifications to the standards. The key changes include:
- All the standards, disclosure requirements and data points are now subject to companies' materiality analysis results, with the only exception being the disclosure requirements in ESRS 2 which are mandatory for all companies.
- Based on the results of the materiality analysis, for the topical ESRS standards that are not considered material, the companies are not required to include an explanation. However, in the case of the ESRS E1 Climate change, it is now mandatory to provide a detailed explanation of why the company has deemed the topic to not be material, taking into account the significance and gravity of such matters for the environment and society.
- To ensure the effective application of standards, reduce the pressure on companies and the associated costs, some phase-ins (i.e., a time extension) for specific disclosures were introduced (see timeline section below). Additionally, certain data points were converted to voluntary, while for some of the mandatory data points, some flexibility is allowed. For example, biodiversity transition plans and particular indicators related to ‘nonemployees’ are part of the disclosures that were converted to voluntary.
Besides the cross-cutting ESRS 1 and ESRS 2 standards, with the 10 topical ESRS on Environmental, Social and Governance matters, sector-specific standards, along with proportionate standards for listed SMEs and standards for non-EU companies are expected to be adopted in the future. Eight sector-specific standards have been announced, giving priority to Oil and Gas, and Coal, Quarries and Mining.
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