Increase your sustainability transparency: implement the CSRD as a standard for sustainability reporting

Introduction

Working toward sustainability is key. Governments are introducing laws to encourage responsible behavior in this area. In this blog, we discuss the European Commission's Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS). We take you through how to operationalize this sustainability reporting efficiently and effectively. The reason for the introduction of CSRD and the ESRS is implementation of the 2015 Paris Climate Agreement by the European Union and all member states.

In this blog, we address the questions below:

1. What is the CSRD and the ESRS?
2. What goals is the EU pursuing with the CSRD and ESRS?
3. Do the CSRD and the ESRS apply to my organization?
4. What are the requirements?
5. Efficient implementation and demonstrable mastery of sustainability requirements

What is the CSRD and the ESRS

The CSRD is a specific and demanding directive requiring large and small and medium-sized enterprises (SMEs) and some non-EU companies to publish sustainability information in their management report. As of Jan. 1, 2025, large companies and public interest entities must report how they deal with sustainability, also known as ESG (Environment, Social & Governance), for fiscal year 2024. These companies already have experience with this as they have been under the Non-financial Reporting Directive (NFRD) since 2016. For small and medium-sized companies, this directive is new as of 2027 but compared to large companies, there is a lighter regime.

The CSRD is further elaborated in sustainability reporting standards and are called European Sustainability Reporting Standards (ESRS). The ESRS describe rules for the design and disclosure requirements of the sustainability report. They contain rules and guidance on what the sustainability report should look like. The European Financial Reporting Advisory Group (EFRAG) prepares the draft ESRS and sends them to the European Commission as advice. The European Commission uses EFRAG's advice to come up with the final ESRS as delegated EU legislation. The European Commission adopted the first four ESRS by the end of July 2023. The final EU delegated legislation will be published soon. These are directly operative and do not require transposition into national law. See overview below (source: https://www.ser.nl/-/media/ser/downloads/thema/imvo/csrd-en-esrs.pdf)

Important to realize that the CSRD and the ESRS is not just "dry" fact reporting, but is an action plan for the company to perform better, compete and be more innovative. Below is an overview of the ESRS structure which consists of 2 general reporting standards and 10 thematic reporting standards:

The ESRS adopted and mandatory (EU delegated legislation) on June 30, 2023 consist of:

• The ESRS 1 contains an explanation of the general reporting requirements. It is important to read it carefully so that the concepts (including dual materiality) become clear.
• The ESRS 2 contains 16 concrete general reporting requirements that must be followed by the organization. These requirements cover reporting principles, governance, strategy, impact, risk and opportunity management, and metrics and targets.
• The ESRS E1 contains 12 concrete reporting requirements related to climate change and are related to the requirements from the ESRS 2.
• The ESRS S1 contains 19 concrete reporting requirements related to its own personnel, and these requirements are also related to those in the ESRS 2.

These ESRS contain general and more specific requirements on climate change and own personnel. The remaining ESRS will be published in the coming years and will cover environmental, social and governance topics.

The last three standards above are integral to Perium, you can start working on them right away.

What goals is the EU pursuing with the CSRD and ESRS?

The EU has three goals in mind with the introduction of the CSRD and ESRS, namely:

1. Shifting capital flows from the gray to the green economy. Among other things, to get investors and banks to invest more in companies making the transition to sustainable operations or start-ups with green/circular products.
2. Make sustainability an integral part of risk management. This puts sustainability into a company-wide PDCA cycle.
3. Encourage transparency (unambiguous) and long-term thinking. This is reflected in sustainability reporting that makes companies more comparable. This enables investors and financiers to make better decisions on what to invest their money in.

Do the CSRD and the ESRS apply to my organization?

The CSRD and ESRS rules go into effect between 2024 and 2028:

• Starting Jan. 1, 2024, large public-interest companies (more than five hundred employees) already covered by the current Non-Financial Reporting Directive (NFRD) will have to deal with preparing these reports in 2025 for the previous fiscal year.
• From Jan. 1, 2025, large companies not yet covered by the Non-Financial Reporting Directive (NFRD) (2 out of 3: more than 250 employees and/or €40 million in sales and/or €20 million in total assets) will have to deal with preparing these reports in 2026 for the previous fiscal year.
• As of Jan. 1, 2026, listed SME companies will face these reports in 2027 for the previous fiscal year.

Of course, any organization can use the CSRD and the ESRS on a voluntary basis.

Note! Even if your company does not fall under the reporting requirements of the CSRD and the ESRS, you may still have to deal with this. For example, if you supply products and/or services to a company that does fall under the CSRD and the ESRS. That company will ask you to report on certain matters. For example, about the CO2 emissions associated with the production of the products to be supplied, or if there is unequal pay between men and women for the same work or between local employees and employees from other European countries working here.

What are the requirements?

Sustainability reporting should be a clearly identifiable part of the board report. The sustainability report must be reviewed by an external "assurance provider. This may be the external auditor who also audits the financial statements, but may also be another external auditor. It is still unclear whether assurance providers other than the external auditor will soon be allowed to assess the sustainability report in the Netherlands.

Reporting companies are required to include all material sustainability information in their management report. When determining material sustainability information, the 'double materiality' principle is applied. This means that materiality is determined from both a financial materiality (what is the impact of, for example, climate change on the company) and an impact materiality (what is the impact of the company on its environment).

Efficient implementation and demonstrable mastery of sustainability requirements

For most organizations, it is a substantial change that must be implemented. It is essential to do this in a structured manner. We recommend performing at least the steps below:

1. Determine which employees are or will be working on sustainability and what tasks, responsibilities and authority they have. Read up on and follow publications from, for example, industry associations and reports from other organizations. Tip: especially look at publications on the SER website (CSRD and the ESRS: questions and answers). A useful and readable report on sustainability can be found on Zeeman's website(https://www.zeeman.com/media/wysiwyg/pdf/MVO_verslag_2021.pdf).
2. Map your organization and context and engage with your stakeholders. Aim to do a dual materiality analysis.
3. Take stock of what you are already doing on sustainability and what is still needed from the obligations of the CSRD and the ESRS (gap analysis).
4. Set policy for sustainability. Answer where you want to be in 3 years and how to get there (Plan of Action).
5. Implement a framework to achieve demonstrable compliance. Ensure that this framework provides accurate and up-to-date information and a strong PDCA cycle to remain in compliance with the CSRD and ESRS.
6. Collect sustainability data. Determine what data is relevant, how reliable it is and what information is still missing.
7. Compile an initial report and discuss it with your accountant to determine where improvements are needed.

A key element of the CSRD and the ESRS is risk management. Within the ESRS, this is called "impact, risk and opportunity management. This is essential because organizations can better assess the necessary next steps based on sustainability risks.

To help organizations get started faster and more effectively, we have already set up the Perium platform with ESRS 2, E1 and S1 and linked these to the most common sustainability risks. With this, the framework (see step 5) with a lot of relevant information is in place and the directing function (PDCA cycle) in the platform will ensure that the right actions, at the right time are picked up by the right employee.

Start on time, start now. For more information, visit our website at https://perium.uk/normen/duurzaamheid/

Authors: Ed van Zoelen and Arjan Kremer

If you have any questions, call Ed at 06- 55 33 53 90 or Arjan at 06-12 74 76 25