CSRD – Start or wait?
We have extensively blogged about the CSRD and the European Sustainability Reporting Standard (ESRS) that comes with it (more information can be found here and here). This blog post focuses on the timelines and implications of the CSRD and the ESRS for European corporations.
Based on what we know so far (see our mid-2022 update on the CSRD for more information), the implementation of the CSRD will follow a step-by-step approach:
- Those companies that fall under the NFRD will have to report for the first time under the CSRD in 2025 based on 2024 data. The ESRS will become the mandatory reporting framework.
- In 2026 more companies will face mandatory reporting requirements under the CSRD (for details on that, see the mid-2022 update on the CSRD mentioned above).
It is the last quarter of 2022, and European corporations are facing the question of when and how they should start to align internal processes and allocate resources to meet the reporting requirements that come with the CSRD and ESRS.
Time may run out fast – how corporations can use the remaining time efficiently.
There is some time left until all European corporations will have to report on their sustainability performance under CSRD – at least at first glance. First, however, European corporations should consider that the CSRD and the ESRS reporting standard will be demanding and extensive.
And it is not only regulatory requirements that are becoming increasingly relevant for companies in the context of their sustainability performance reporting, but also frequently inquiries from stakeholders on sustainability issues to which companies must provide adequate answers. That also gives rise to reasons for dealing with a company’s sustainability reporting as early as possible.
CSRD, ESRS and stakeholder requirements for sustainability reporting
A clearer picture of the demanding requirements that companies face can be derived from how the “CSRD”, “EU Taxonomy”, and “SFDR” or “Sustainable Finance Disclosure Regulation” are interconnected.
Context – CSRD, ESRS and EU Taxonomy
The CSRD, SFDR and EU Taxonomy are core elements of the European Green Deal. Simply put:
- Under the CSRD, corporates report on their sustainability performance.
- The SFDR introduces disclosure requirements for financial market participants and financial advisors (products with environmental or social characteristics/objectives – Art. 8 or 9).
- The EU Taxonomy is a system for classifying economic activities to determine which activities are environmentally sustainable.
The interaction of these three core instruments is intended to guide financial flows to sustainable investments. Disclosure under the EU taxonomy and the SFDR are already taking effect.
That indirectly increases the requirements for companies to report on their sustainability performance, even if they are not obligated to sustainability reporting according to the CSRD yet.
European corporations should not underestimate the requirements for sustainability reporting under the ESRS since it is no longer a mere “collection of numbers”. Instead, questions are asked about sustainability strategy and the resources allocated for it. Other examples include double materiality assessments or reporting Scope 1, 2 and 3 emissions.
These are examples of questions where adequate answers are probably not yet available in the required level of detail at many companies.
In addition to regulatory requirements, stakeholders’ expectations can be essential in how fast a company may start with its sustainability performance reporting. Many companies in the B2C, as well as in the B2B segment, have already successfully positioned themselves on sustainability topics and thus convinced their customers.
Topics can range from social aspects along the supply chain to decarbonization and product lifecycle assessments. The keyword “Scope 3 emissions” also fits in with this since the awareness of CO₂ emissions is steeply rising. So no wonder that companies are looking at how they can decarbonize their processes and supply chains. That, in turn, impacts the companies which are part of such a supply chain and then have to analyze their CO₂ emissions.
ESG also radiates into the area of human resources. The company’s workforce, as well as potential future employees, is one of the most critical stakeholder groups. We have reported on the relevance of ESG and sustainability in this context here.
What are the advantages of aligning early with the CSRD?
Even if getting started with ESG often involves a steep learning curve, companies should understand that getting started with ESG is a process. We have blogged about how to get started with ESG before (you can find our blog post here).
For companies that are likely to comply with the requirements of the CSRD, an early orientation towards the ESRS framework is advisable, as this will be the reporting standard that will form the basis for future sustainability reporting.
Those companies that do not fall under the regulations of the “CSRD”, but would like to position themselves substantially on the subject of sustainability, can select from many potential reporting frameworks.
In any case, companies should prepare for a long-distance run rather than a sprint
ESG and sustainability reporting are processes that become more refined over time. Therefore, it is essential to get a good overview and develop an ESG strategy that is authentic and maps “E”, “S”, and “G”.
It will be necessary to provide the resources needed – such as a company-wide ESG team or ESG management to confidently respond to inquiries from internal and external stakeholders and answer them with helpful information, reports and insights.
The time until the CSRD takes effect should be efficiently used by corporations. Also, for a specific necessary “test run” of the reporting, with which possible data gaps can be identified and closed.
Back to the initial question: CSRD – Start or wait?
There are many good reasons to get started with sustainability performance reporting early.
In our estimation, efficient use of the remaining time is essential because the implementation process takes time and comes with complex challenges. In addition to compliance requirements, getting started with sustainability performance reporting and establishing sustainability processes within the company offers companies the option of better assessing their ESG-relevant opportunities and risks and promoting stakeholder communication.