In January 2022 my brilliant colleague Erich wrote an in-depth piece on the EU Corporate Social Responsibility Directive (CSRD). This directive is part of a larger legislative package to help achieve the EU’s sustainability goals. The developments around the CSRD are going lightning fast, so today I’ll give you an update.
In the mid-2010s, the NFRD (Non-Financial Reporting Directive) was launched. With this directive, the EU amended existing corporate reporting rules to include topics regarding corporate social responsibility. The idea is that this reporting would provide investors with the company-level data they needed to make sustainability-oriented investment decisions.
But the NFRD left too much room for interpretation between the EU Member States. The result: too many disparities between reporting of corporates in different States, and thus hardly comparable data.
And then came the Paris Agreement and the EU’s ambition to become the first net zero continent. This cannot be done without the involvement of companies. And therefore, these developments led to the creation of the CSRD. Amen!
The CSRD further standardizes ESG reporting for large EU companies, with the goal of making companies more accountable for their impact, making capital flow to companies that address and not aggravate the sustainability crisis, and reducing systemic risk to the financial system.
Since January, a lot has changed. In the bullets below, we’ll update you on the latest news and developments around the CSRD.
The moment CSRD comes into effect and companies have to start reporting, has been delayed multiple times. The current projections are:
Large entities are those meeting two of three criteria: a balance sheet total of over €20 million, net revenue of over €40 million and 250 or more employees.
In March 2022, a new set of working papers was published. These working papers are draft European Sustainability Reporting Standards (or ESRS), that are open for internal and public consultation. The public consultation was launched on April 29th.
Currently, the EFRAG – the body that is developing the ESRS – is in 100 days of public consultation, in which all relevant stakeholders can provide input on whether the draft ESRS are ‘fit for purpose’. During the 100 days of consultation, outreach events and user test focus groups are organized.
This way, the EFRAG is reviewing whether the proposed architecture of the CSRD is relevant, whether the implementation principles are appropriate and whether the content of the currently proposed ESRS is relevant. It is also looking into options for phasing in the implementation of the CSRD.
Following the public consultation, and also following processes at SRB (the Single Resolution Board, the authority of the European Banking Union that sets norms, procedures and practical regulations for banks in the EU), and at TEG (Technical expert group on sustainable finance) the EFRAG expects to do another update of the standards. Sometime before November 2022
In November 2022, the EFRAG proposes a first set of ESRS to the European Commission. In early 2023, the EU is expected to adopt the ESRS.
We’ve seen the term ‘rebuttable presumption’ getting more attention. It is related to the concept of ‘double materiality’ which has been an explicit part of the CSRD since the beginning.
Let’s first discuss double materiality. Materiality used to entail figuring out the impact of the company on the environment. If this impact is substantial, the topic (for example climate change, or biodiversity) is ‘material’. This is also called ‘impact materiality’. Double materiality means not only the impact of the company on the environment, but also the impact on the company of the environment. This is called ‘financial materiality’.
The rebuttable presumption principle gives the company the possibility, if justified, to not disclose an individual disclosure requirement or an individual datapoint within a disclosure requirement.
This means that if the company performs a double materiality assessment and it concludes that a specific ESRS requirement is not material, it is allowed to leave this requirement out of the company report. This principle is introduced to manage the amount of mandatory disclosure requirements for companies.
But what a double materiality assessment actually entails, is not clearly defined in the standard. Companies and auditors disagree on this. Potential development of sector-specific guidelines on what topics are material for that sector (instead of companies individually deciding on what’s material for them), are expected to solve this.
The company is allowed to choose between three ways of disclosing:
My colleague Jessica Steinhoff joined one of the outreach events of the EFRAG. There she picked up some worries that the EFRAG has on the implementation and the success of the CSRD. This is what she found:
Have you already started preparing for the CSRD? Don’t panic. Okay maybe panic a little. It’s a lot, but we’ve got you covered. Send us an email and we’ll explain what we can do for you.