CSR reporting will never be the same again

As we get a lot of questions on CSRD reporting i have tried to write a brief history/summary and latest updates on this topic.

It started mainly with Directive 2014/95/EU and EU law requiring large companies to publish information related to:

• environmental matters
• social matters and treatment of employees
• respect for human rights
• anti-corruption and bribery
• diversity on company boards (in terms of age, gender, educational and professional background)

Thus helping investors, civil society organisations, consumers, policy makers and other stakeholders to evaluate the non-financial performance of large companies and encourages these companies to develop a responsible approach to business.

In 2017 and in 2019 came further EU guidelines on climate related information.

Communication from the Commission — Guidelines on non-financial reporting: Supplement on reporting climate-related information (europa.eu)

However that directive has it limits as certain company reports could be considered as "greenwashing" as the claims and figures are hard to verify, often unsubstantitated, regularly open for interpretation and thus implying that the operations/products seem better then they actually are.

So on?April 21st?2021, the Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD), which would amend the existing reporting requirements of the Non Financial Reporting Directive (NFRD).

The proposal:

• extends the scope to all large companies and all companies listed on regulated markets (except listed micro-enterprises)
• requires the audit (assurance) of reported information
• introduces more detailed reporting requirements, and a requirement to report according to mandatory EU?sustainability reporting standards
• requires companies to digitally ‘tag’ the reported information, so it is machine readable and feeds into the European single access point envisaged in the capital markets union action plan

The Commission’s proposal for a CSRD envisages the adoption of EU sustainability reporting standards ( ESRS ). The draft standards will be developed by the European Financial Reporting Advisory Group (EFRAG).

The CSRD will require companies with more than 250 employees and more than €40M turnover and/or more than €20M in total assets to comply. The regulations will also apply to all listed companies, except microenterprises with fewer than 10 employees and less than €20M in turnover.

It should be noted that the Exposure Drafts do not include SME-proportionate standards. The EFRAG states that SME-proportionate and sector-specific standards are being developed and will be submitted to a separate public consultation as soon as possible.

Under ESRS, all reporting companies must disclose all material information on sustainability-related impacts, risks and opportunities. And they must account for greenhouse gas (GHG) emissions, including indirect Scope 3 emissions in metric tons of CO2 equivalent. As physical product companies supply chains represent one of the largest sources of GHG emissions and environmental impact.

Most companies are therefore investing in supply chain transparency, supplier engagement, and carbon accounting efforts to calculate their Scope 3 emissions, achieve climate targets, and reduce business risk.

This means internal data collection and multiple verification processes (including third party social audit firms) will be crucial to ensure complete and accurate reporting. Please note that the ESRS disclosures would also cover non-employees (next to direct staff), workers in the value chain, consumers and end-users.

Fast forward we are now April 29th 2022, as EFRAG announces the release of its initial draft of the rules and requirements for companies to report on impacts, opportunities and risks under CSRD.

These exposure drafts ( EDs ) covering a broad set of environmental social governance (ESG) topics including climate change, pollution, resource use and circular economy, biodiversity and ecosystems, water and marine resources and workers in the value chain.?

EFRAG is seeking feedback on:

• the overall ESRS architecture, content and substance
• on the practicality and efficiency of the proposed approach to materiality
• whether the ESRS and the proposed disclosure requirements do promote relevant, verifiable, understandable, comparable information and ultimately are adequate to support the production of faithful information
• whether the ESRS and the proposed disclosure requirements do strike the right balance between relevance, feasibility, preparation costs and decision-usefulness
• the completeness of the ESRS, in terms of datapoints and of disclosure requirements, per each sustainability topics / subtopics
• the implementation prioritisation/phasing-in opportunities and options to ensure the ESRS strike the right balance between covering all CSRD requirements and stakeholders’ expectations, paying particular attention to sustainable finance related needs, while achieving a reasonably ambitious enhancement of current reporting practices.

The ESG of European Sustainability Reporting Standards Regulations fall into three categories: Environmental, Social and Governance.?

• ESRS 1 - General principles
• ESRS 2 - General, strategy, governance and materiality assessment
• ESRS E1 - Climate change
• ESRS E2- Pollution
• ESRS E3 - Water and marine resources
• ESRS E4 - Biodiversity
• ESRS E5 - Resource use and circular economy
• ESRS S1 - Own workforce
• ESRS S2 - Workers in the value chain
• ESRS S3 - Affected communities
• ESRS S4 - Consumers and end users
• ESRS G1 - Governance , risk management and internal control
• ESRS G2 - Business conduct

The draft is available for public consultation with a deadline for comments of 8 August 2022.

More info via this link Public consultation on the first set of Draft ESRS - EFRAG

Or download the master PDF that links to all other doc’s ?Download (efrag.org)

IMPORTANT

This means companies need to prepare to plan and implement their ESRS compliance approach by 2023 in order to be ready for the 2024 reporting cycle and stay compliant.?

Companies should start thinking about the effects that the standards would have on processes and systems of internal controls to ensure that sustainability information is equivalent in terms of quality as financial information and could be audited initially with limited and later reasonable assurance.

ESRS timeline so far:

? May 2022 - first draft ESRS standards for public comment

? 8 August 2022 - End deadline for the public comments

? September 2022 - EFRAG sends ESRS reporting standards to the EU Commission

? October 2022 - EU Commission adopts sustainability reporting and disclosure standards

? November/December 2022 - EU Member States adopt the EU Directive into national law

? 2023 - Companies need to track their ESG strategy, risks, and performance

? 2024 - Companies disclose an ESRS compliant report for their 2023 fiscal year

? 2025 - Companies will report ESRS for fiscal year 2024

? 2027 - SME's start their own ESRS streamlined reporting

Brussels, Monday 6th of June 2022