A 6-point overview of the CSRD

On January 1er 2024, the European Commission will implement one of the world’s most ambitious pieces of ESG reporting legislation: the Corporate Sustainability Reporting Directive (CSRD).  Within two months, this new directive will directly affect more than 50,000 companies in Europe, with indirect repercussions on all companies in the value chain.  

How can you prepare for this major change, which is a challenge for all European companies?  Positivéco answers six frequently asked questions about the CSRD directive.

The CSRD is the European standard for sustainability reporting. It dictates how the reporting should be prepared, in terms of both format and content. The common electronic format adopted by Europe will allow for unlimited use of this new corporate data. 

The European NFRD directive, which currently governs extra-financial reporting by European companies, will be replaced early next year by the Corporate Sustainability Reporting Directive (CSRD). This change will also have an impact on the ‘Déclaration annuelle de performance extra-financière’ (DPEF), the French application of the NFRD. More ambitious than the NFRD, the CSRD aims to reinforce the European Union’s sustainable finance objectives by promoting international convergence in sustainability reporting. It will require European companies to disclose certain non-financial data. 

This regulatory development is part of the European Union’s “Sustainable Finance Action Plan”, the main aim of which is to involve the financial sector in the EU’s climate objectives. The regulatory package formed by the new SFDR and Taxonomy regulations requires investors to disclose a wide range of extra-financial information on their investments: greenhouse gas emissions, carbon footprint, energy consumption, gender pay gap, etc. These reporting requirements pose a problem for the investors concerned, as most companies do not publish this information, as they are not legally obliged to do so. Similarly, many companies disclose ESG information that is inaccurate, biased and difficult to compare. The CSRD aims to remedy this problem by ensuring that investors have access to standardised extra-financial data. 

By requiring European companies to report annually on their sustainability performance, the CSRD aims to improve the transparency and consistency of ESG reporting in Europe. With access to reliable and comparable sustainability information, investors will be able to redirect their investments towards more sustainable technologies and industries. 

The CSRD extends the existing scope and requirements: whereas the NFRD only provided guidelines for ESG reporting, the new directive introduces mandatory reporting standards for all large companies. The companies concerned will therefore soon have to provide improved, formatted and audited extra-financial reports that respect the principle of double materiality. 

This is an important step for ESG reporting: with the CSRD, ESG information will be subject to the same assurance standard as financial reports. From now on, companies will have to treat sustainability data with the same rigour as their financial data. 

The scope of the CSRD significantly extends that of the NFRD: the new directive will gradually cover almost 50,000 European companies, compared with 11,700 under current rules. The CSRD will also affect around 10,000 foreign companies, mainly American. 

Companies concerned by the CSRD are required to adopt a dual materiality perspective in their reporting.

The concept of double materiality has been defined by the Sustainable Finance Disclosure Regulation (SFDR):

• Financial materiality refers to the impact of risks and opportunities related to environmental, social and governance factors on a company’s results. This is an ‘outside-in’ perspective.
• Impact materiality refers to a company’s impact on its economic, social and environmental environment. It takes into account the direct impact of the company’s activities, as well as the indirect impact of its suppliers and partners. This is an ‘inside-out’ perspective.

For the AMF, the double materiality analysis carried out by companies should make it possible to identify sustainability themes reflecting the main ESG risks, opportunities and impacts of the company’s activities and value chain. Double materiality thus enables companies to provide a holistic view: investors will understand both the impact of sustainability issues on their financial situation and performance and the impact of their activities on the environment and society.

The CSRD thus marks the end of disembodied sustainability reports, consisting solely of collecting data once a year, with no strategic vision, no objectives and no steering.

It will be up to companies to carry out a double materiality analysis to identify the ESG themes on which they must collect data. The European Commission considers only climate change to be material for all entities. Companies that consider that climate change is not material to their activity will have to provide a detailed explanation.

To familiarise themselves with this dual analysis, companies can refer to the European Financial Reporting Advisory Group (EFRAG) guide on materiality analysis, currently in preparation.

The extra-financial data required by the CSRD will have to be published in a dedicated section of the company’s annual report, rather than in a separate sustainability report. Four different sections of information are expected: general, environmental, social and governance. 

Companies affected by the CSRD are required to align their reporting with the new European Sustainability Reporting Standards, developed for the occasion. The first version of the 12 European Sustainability Reporting Standards (ESRS) was published in November 2022 by EFRAG. 

Two transversal standards, ESRS 1 (general requirements) and ESRS 2 (general information) apply to all sustainability topics. Ten thematic standards address the three ESG pillars: companies will need to assess which of these ten topics are material to their business. The ESRS standards then specify precisely what needs to be assessed, measured and disclosed, including the relevant indicators and targets.  

• 5 standards for environmental issues
  • ESRS E1 : Climate change
  • ESRS E2 : Pollution
  • ESRS E3 : Aquatic and marine resources
  • ESRS E4 : Biodiversity and ecosystems
  • ESRS E5 : Resource use and circular economy

• 4 standards for social issues
  • ESRS S1 : Employees
  • ESRS S2 : Workers in the value chain
  • ESRS S3 : Affected communities
  • ESRS S4 : Consumers and end users

• 1 governance standard 
  • ESRS G1 : Responsible business conduct

To avoid deliberate and accidental greenwashing, the CSRD also stipulates that any company referring to “low-carbon” or “sustainable” activities must demonstrate how these are aligned with the European taxonomy.  

The company’s management report will have to be published in a single European xHTML electronic format. Digital tags will be integrated into ESG reporting to facilitate reading, data comparison and searching within reports. 

All data published as part of the CSRD will also have to be audited by an independent third-party organisation. As this third-party assurance applies to data whose selection depends on a materiality analysis, it can be expected that the materiality test will also be audited. 

It is essential to understand that the size of the company is no longer an argument for not taking action.  

Only SMEs listed on European markets are directly affected by CSRD, and will have to comply with CSRD reporting on the basis of simplified ESRS standards. However, thanks to a two-year transition period, these companies can postpone application of the CSRD requirements until 2028, provided they justify this postponement in their management report.  

While the CSRD directive’s implementation horizon may seem a long way off for the SMEs concerned, the European authorities recommend that companies familiarise themselves with CSRD requirements and the content of ESRSs as soon as possible. 

SMEs that are not listed on European markets also have an interest in preparing for the entry into force of the new directive. From next year, small and medium-sized companies operating in the business-to-business world will have to respond to requests from their customers to take account of the impact of their supply chain.  

With the entry into force of the CSRD, sustainability reporting ceases to be the preserve of very large companies and conglomerates: SMEs have no choice but to recognise that they are an integral part of the supply chain that feeds into the sustainability reports of large corporations. This means that small and medium-sized companies need to be ready to collect the extra-financial data that will enable them to respond to their partners’ requests and questionnaires. This transition is also an opportunity for SMEs to demonstrate that their own maturity in terms of ESG integration contributes to achieving their customers’ sustainability objectives.  

So it’s not just large listed companies that need to worry about preparing for these new reporting requirements.

1. A competitive advantage

The new regulations on non-financial reporting are set to affect the entire value chain of European companies. Anticipating customer demands and complying with CSRD is an opportunity for small and medium-sized businesses to stand out from the crowd: regulators expect large companies to become increasingly strict in their selection of suppliers and service providers.

2. A comprehensive strategic analysis

CSRD reporting and the associated double materiality perspective constitute a comprehensive strategic analysis for all companies.  By applying a strategic perspective to ESG reporting, SMEs can identify areas for improvement, boost operational efficiency and foster innovation. It’s not just about ticking regulatory boxes but building a sustainable and resilient business model.

3. Informed decision-making

Sustainability reporting involves delving into the details of a company’s operations and supply chains. This gives SMEs a better understanding of their social and environmental impact, and provides them with relevant data for decision-making, risk management and cost-cutting strategies. 

4. Getting closer to your stakeholders

Embarking on the construction or improvement of ESG reporting is also an opportunity to exchange views with stakeholders: customers, employees, investors, suppliers and so on. Committing to corporate transparency and taking into account their negative impact on the environment and society can help SMEs to create new business opportunities and retain their talent.

5. Sustainability as a long-term strategy

By implementing regular extra-financial reporting, SMEs generally move from a compliance-based approach to a strategic one. Integrating extra-financial reporting into the overall strategic approach enables these companies to define a long-term vision of their sustainability strategy, and thus face up to their growing environmental and social responsibilities. 

The CSRD directive represents a real paradigm shift, introducing one of the world’s most ambitious pieces of legislation in terms of ESG reporting. This new regulation will directly affect 60,000 companies in Europe, and will indirectly affect the entire value chain of the companies concerned. It is in the interests of large, medium-sized and small companies alike to prepare for this transition now: the first step is to understand their CSRD obligations, to upgrade their materiality analysis to a double materiality analysis, and to carry out a gap analysis to establish the way forward and mobilize the necessary personnel. 

About Positivéco

At Positivéco, we see new national and international CSR regulations as vectors for positive growth.

Our job: to improve the readability of your activities for better valuation.

Since 2009, we have been supporting financial institutions, public players, and listed and unlisted companies in the evaluation of their CSR policies, the production of their extra-financial reporting and the implementation of their climate investment and aid projects. Development.

Make an appointment today and find out how to meet the new requirements of economic transparency while serving the project of your company.