Overview of the Corporate Sustainability Reporting Directive (CSRD)
The Corporate Sustainability Reporting Directive (CSRD) represents a major evolution in corporate reporting within the European Union.
It replaces the Non-Financial Reporting Directive (NFRD) and expands its reach from approximately 11,000 to 50,000 companies. The directive aims to standardize and enhance the transparency of sustainability information that businesses provide, covering both the financial impacts of a company’s activities and their broader environmental and social implications.
Introduction to CSRD
The CSRD was introduced by the European Commission to establish a comprehensive framework that enhances sustainability reporting standards for EU companies. It aims to promote transparent, consistent, and comparable reporting practices, enabling stakeholders to make informed decisions based on detailed environmental, social, and governance (ESG) information.
Who is Affected by CSRD?
Listed Companies: All companies listed on stock exchanges are subject to the CSRD requirements.
Large Companies: Companies meeting at least two of the following criteria:
- Revenue: Annual net revenue exceeds EUR 40 million.
- Employees: Average number of employees during the financial year is more than 250.
- Balance Sheet: Total balance sheet exceeds EUR 20 million.
Small and Medium-Sized Enterprises (SMEs):
- SMEs are included if they are listed on EU-regulated markets.
- Specific conditions apply, tailoring the directive’s requirements to the scale and complexity of these smaller entities.
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These criteria ensure that a broad spectrum of enterprises, from multinational giants to smaller, market-listed companies, are integrated into the CSRD’s scope, enhancing the directive’s impact on improving transparency and sustainability reporting across the EU’s market landscape.
Goals and Scope of the CSRD
The directive is crucial in promoting transparency and accountability by mandating companies to disclose comprehensive information on their sustainability practices. This includes current efforts and future strategies and targets. The clear reporting requirements hold companies to high standards and improve sustainability knowledge and practices among investors and stakeholders.
Double Materiality Assessment
The double materiality assessment is a pivotal component of CSRD reporting that profoundly influences the scope of reporting. This assessment is more complex than traditional approaches like those utilized by the Global Reporting Initiative (GRI) due to its requirement for a dual-focused analysis.
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It consists of:
Impact Materiality (“Inside-Out” Perspective):
Considers the impact (actual or potential, positive and negative, over short-, medium-, and long-term horizons) that the company has on sustainability matters. These impacts include those caused or contributed to by the company’s operations, products, or services through its business relationships. The materiality of these impacts is assessed based on their severity (scale, scope, and irremediable nature) and likelihood.
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Financial Materiality (“Outside-In” Perspective): Focuses on how sustainability matters affect the company. This includes impacts on current or future cash flows, development, performance, position, cost of capital, or access to finance. The scope of financial materiality for sustainability reporting is broader than that used in determining materiality for financial statements. It includes risks related to value creation that may not meet the financial accounting definition of assets/liabilities but still contribute to the generation of cash flows or business development. The materiality of these risks is evaluated based on the likelihood of occurrence and the magnitude of their potential financial effects.
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Graph: Double Materiality Illustration
This dual approach of the double materiality assessment ensures a thorough evaluation of both how a company affects the environment and society and how environmental and social factors, in turn, could impact the company.
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Graph: Double Materiality View
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