The sustainability reporting landscape is known for its many abbreviations. To name a few of them: TCFD, SASB, GRI, NFRD, SFDR, IR, EFRAG, ESEF. And then, there is CSRD. This one will have a profound impact on all major companies in the EU. But its ripple effects have the potential to reach even small EU-based companies and any company that does business with European counterparts.
In this series of blog posts, we will guide you through the sustainability reporting landscape and explain all the major terms and abbreviations that you may encounter. Of course, if you have any questions, feel free to contact us. We are here to help you navigate and understand the many aspects of sustainability reporting.
We’ll start this series with an abbreviation that every CFO, CFRO, Sustainability manager and CEO needs to know about: CSRD.
A year from now, a new EU sustainability directive will enter into force: The Corporate Sustainability Reporting Directive (CSRD). Although it may seem far away, it is wise to start thinking about its implications. The CSRD will require all large companies in the EU to create standardised, audited and structured sustainability reports.
From 2024 onwards, the CSRD will require all companies with over 250 employees to provide more insight into the impact of their activities on society as a whole in their annual reports. The CSRD is central to the European Union's Green Deal and it aims to improve the transparency and quality of sustainability information. The predecessor of the CSRD is the NFRD (Non-Financial Reporting Directive).
The CSRD has three focus areas:
The CSRD requires a third-party audit of the mandatory, reported sustainability information.
Sustainability information must be published in a digital, machine-readable format when this new reporting directive goes into effect. In addition, it requires the mandatory information to be submitted to the European Single Access Point (ESAP).
Last but not least, the CSRD has expanded the number of companies that fall under the scope of the directive, compared to its predecessor NFRD (Non-Financial Reporting Directive). About 49,000 companies are now within the scope.
The scope of the CSRD includes European companies that meet two out of three of the following criteria:
In addition, it includes listed small and medium enterprises, with the exception of micro-enterprises. These SMEs will be required to report according to standards that are simpler compared to those that apply for large companies. SMEs are also exempt for the first three years. This enables them to prepare well in advance.
The regulation on sustainability disclosures in the financial sector, also known as the Sustainable Finance Disclosure Regulation, has been mandatory since March 2021. In addition, the SFDR is part of the European Commission's Action Plan for Financing Sustainable Growth.
The aim of the SFDR is to significantly reduce the risks and effects of climate change and work towards achieving the UN Sustainable Development Goals and the Paris Climate Agreement targets. The SFDR applies to all financial market parties, like banks, pension funds, investment firms, asset managers and life insurers. In addition, the SFDR applies to financial advisors with three or more employees who are providing advice related to insurance-based investment products.
All of these parties must comply with the information requirements, regardless of whether they offer sustainable financial products or not. There are differences in transparency requirements at both the company and product level if products are marketed as “sustainable.”
The scope of the SFDR includes the following:
To fulfil the transparency obligations of the SFDR, financial market participants need comparable and reliable information about their portfolio companies. The CSRD will help to address part of this information gap and enhance the quality of this information.
But the information gap may not be entirely closed. For instance, it may still be difficult to gather reliable information from companies outside the scope of the CSRD, such as companies outside Europe.
In 8 years, the climate and energy targets of the European Green Deal should be achieved. The current COVID-19 pandemic has reinforced the importance of sustainable projects and activities that make our businesses, health systems, societies and economies more resilient. The EU taxonomy was developed to achieve this. It is a classification system that provides a common and clear definition of “sustainability.”
According to Kermit the Frog, it’s not easy being green. But the Intergovernmental Panel on Climate Change (IPCC) tells us we have no choice. Luckily, the European Commission has been working on a clever way to make being green easier: the EU Taxonomy, a classification system for sustainable activities. This taxonomy is a list of environmentally sustainable economic activities that companies, investors and policymakers can use to steer decision-making. It’s part of a larger plan to respond to the climate emergency. Read more
The EU Taxonomy provides a list of environmentally sustainable economic activities. This taxonomy has an important role to play, both in encouraging sustainable investments within the EU and in the implementation of the European Green Deal.
Businesses, investors and policy makers benefit from this EU Taxonomy. Primarily because it sets clear definitions for economic activities that can be considered environmentally sustainable, or help in the transition. It provides more certainty for investors and protection against greenwashing, thereby enhancing the credibility of the sustainable investment market. It also helps companies become more climate-friendly, identify who is most in need of investment, and channel capital towards sustainable business activities.
In July 2020, the Taxonomy Regulation came into force. This regulation set the foundation for the EU taxonomy and established four overall conditions that an economic activity must meet in order to be considered environmentally sustainable.
The Taxonomy Regulation includes the following environmental objectives:
Creating a sustainability report may seem difficult at first, and it can be a lot of work. But the rewards are worth the effort. Not only will you be compliant with upcoming rules and regulations. You will also get valuable information on where you actually stand in terms of sustainability. It gives you a better understanding of the areas you need to make progress on. It increases your transparency and credibility. Furthermore, it builds trust in your sustainability performance, within the organisation and between the organisation and its stakeholders, including customers and capital providers.
Do you have questions about sustainability reporting? Please contact us.