CSRD stands for Corporate Sustainability Reporting Directive, regulations that govern how organizations must report on sustainability. CSRD (adopted by the EU in April 2021) is the successor to the 2018 Non-Financial Reporting Directive (NFRD). The NFRD prescribes how organizations must report on topics such as human rights, anti-corruption and anti-money laundering, board of director diversity, social and employee rights. The NFRD focused only on PIEs – Organizations of Public Interest (+ 11,600 companies in the EU).
The CSRD will apply to ALL organizations that meet 2 of the 3 following conditions:
- More than 250 FTE employed
- More than €40 million in sales per year
- More than €20 million in total assets
This means that from 2024, at least 49,000 companies in the EU will have to start reporting on the impact of their activities on people and the environment. Not only will the CSRD apply to more organizations, but the reporting requirement will be greatly expanded. Starting in 2026, the CSRD will apply to all small and medium-sized enterprises (SMEs).
Finally, the report must be available digitally. The CSRD directive is intended to provide greater transparency and better quality of sustainability reporting.
So the question is not whether your organization should produce a sustainability report, but when!
What is the point of sustainability reporting?
The CSRD stems from the NFRD, a financial guideline. Therefore, a major reason for tightening the NFRD is financially motivated, as part of the measures stemming from the European Green Deal to enable investment toward sustainable activities. It gives pension funds, banks and investors better insight into a company’s sustainability indicators.
The European Commission writes:
“Investors increasingly need to know about the impact of companies on people and the environment. If the market for green investments is to be credible, investors need to know about the sustainability impact of the companies in which they invest. Without such information, money cannot be channeled toward environmentally friendly activities.”
But in addition to the financial obligation, there is also a moral obligation. Drastic steps are needed to limit global warming to 1.5 degrees Celsius. This will not succeed if, on a voluntary basis, only a small number of organizations account for their sustainability policies. Sustainable business is only feasible if every organization, large or small, provides insight into what its impact on people and the environment is. And not only provides insight, but also defines actions on how to reduce that impact.
What should I start reporting on and by when?
The starting point of the reporting is the double materiality principle. What does that mean? Dual materiality captures the impact of sustainability-related risks and opportunities on the organization. Consider, for example, resource scarcity, severe drought and image damage.
In addition to these sustainability-related risks and opportunities to the organization, the company’s ecological and social impact on people and the environment must also be reported.
Examples include carbon emissions, loss of biodiversity or violation of human rights. So it is about impact on the organization (outside in) and impact of the organization on the environment (inside out).
Schematically, this looks as follows:
Source: KPMG study ‘No way out’ 2021
The scope of the NFRD reports was mainly reporting on the past year. CSRD reports primarily report on the future. Therefore, measurable long-term sustainability goals should be included in the report, with progress tracked annually. Non-financial, intangible indicators such as social, human and intellectual capital must also be reported. Finally, all reporting has a mandatory external audit.
Organizations meeting the requirements as of 2024 must provide a sustainability report for 2023.
These organizations should be preparing now.
Where should I start?
If you already meet the balance sheet total, turnover and/or employee criteria, then you should get started right away! Start by creating the dual materiality matrix: what impacts my organization and what impact do I have to my environment? Based on this matrix, you will have insight into which themes are important to your organization.
For each theme, establish what you want to achieve, in what time frame and how you will monitor progress. Above all, set the bar high.
Ensure that goals are defined in policies and actions, monitor progress, and report on them annually. Do not be afraid to report on which goals you have not yet met, but do include in your plans what you are going to change in order to meet them.
The progress reports are a good starting point for an auditor’s external review. Establish with the auditor in advance what the sustainability report should look like so that the organization gets used to preparing it.
Even if you do not yet meet the CSRD criteria, it is advisable to start sustainability reporting now. Not only does it strengthen your position in the capital market, it also gives you a competitive advantage over parties that do not (yet) have a sustainability strategy.