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Building upon the existing Non-Financial Reporting Directive (NFRD) which was issued in 2018, the CSRD expands the scope of undertakings who will have to disclose sustainability information and introduces more detailed requirements and disclosures under Environmental (E), Social (S) and Governance (G) topics.
This will apply to circa 50,000 EU undertakings. Under the CSRD, disclosures will have to be made in the annual management report of the undertaking alongside their financial statements and for the same reporting periods. This reporting will cover both the companies own operations and its value chain.
The European Financial Reporting Advisory Group (EFRAG) is responsible for drafting the new reporting standards for consideration by the EU Commission under the CSRD. These standards are known as the “European Sustainability Reporting Standards” or “ESRSs”.
The first “set” of draft ESRSs were issued by EFRAG to the EU Commission in November 2022 and are expected to be transposed into national law in EU member states during 2023. These initial exposure drafts include 2 “cross-cutting” (applicable to all undertakings regardless of sector and / or in specific circumstances) and 10 “topical” standards across E, S and G.
The draft ESRSs take into consideration existing EU regulation such as the SFDR and Taxonomy regulations, as well as considering international initiatives [1] such as the ISSB, TCFD and GRI, in order to try and lessen the burden on companies by avoiding duplication of disclosures.
Firms falling into scope of CSRD must report on their governance structures, strategy and business models and the output of a materiality assessment in relation to material sustainability matters and topics for their undertaking. Mandatory disclosures include those listed under ESRS 2 (“General Disclosures”) and E1 (“Climate”) in addition to certain disclosures under social topics outlined in ESRS S1 (“Own Workforce”).
Other topics and disclosures are subject to a double materiality assessment (financial and impact materiality). Disclosures and the sustainability statement will initially also be subject to limited assurance, moving to reasonable assurance at a later date.
Establishing ownership, internal governance and reporting structures can be a challenge to meet new regulatory requirements. In addition to this undertakings will need to complete a materiality assessment and / or gap analysis to existing sustainability reporting and define disclosures required within their management report.
Grant Thornton’s Sustainability Team have a dedicated team of SMEs in sustainability strategy, sustainable finance, regulation and sustainability reporting to help with this transition.
