With the Corporate Sustainability Reporting Directive (CSRD), the European Commission requires companies to report on sustainability in their annual reports. Between 2024 and 2029, approximately 50,000 companies are expected to be affected by the CSRD. To help them get started with extensive reporting, European guidelines have been published: the European Sustainability Reporting Standards (ESRS).
These and other initiatives, such as the EU Taxonomy for Sustainable Economic Activities and the EU Green Bond Standard, demonstrate a determination to provide a legal basis for EU policies on environment, climate, public health, and biodiversity. These structures increase transparency and make it easier to identify and finance sustainable activities under more favourable terms. Meanwhile, it is a challenge for many companies to comply with the guidelines. Uncontrolled regulatory pressure is a risk to the EU’s competitiveness. Therefore, a less extensive CSRD is being developed for smaller companies.
Member states have eighteen months to convert the CSRD into national law. Between 2025 and 2029, about 50,000 companies are obligated to submit sustainability reports for the first time. The first will be the largest companies of public interest that are already obligated to report on sustainability by the Non-financial Reporting Directive (NFRD). They must implement the ESRS starting fiscal year 2024. The year after, the obligation will be extended to companies that, during the past two years, met at least two of the following conditions: they have more than 250 employees, have a turnover over 50 million euros a year, and/or have more than 25 million euros on the balance sheet. Non-EU controlled companies that meet these criteria or have a branch office in Europe with a turnover of more than 40 million euros must also submit this report. Finally, there is a group of smaller companies that are not required to report but do provide services or products to larger companies. These larger companies will become more critical about the sustainability of their suppliers and service providers, and therefore these smaller companies will also need to provide information on CSRD-related themes.
When reporting, companies publish material information about their impact on people and the environment (impact materiality) and sustainability issues that affect the company financially (financial materiality). This concept is called ‘double materiality’. In addition to transparency, the CSRD obligates companies to formulate targets. Progress is monitored and compared to an initial baseline measurement. There are ten thematic standards on which companies can report, varying from biodiversity and the circular economy to labour rights in the chain. Companies are given the responsibility to identify and prioritize their own material themes in consultation with their environment. Subsequently, ‘double materiality’ expects companies to be open not only about their impact on the living environment within each theme, but also about the impact of these themes on the company itself and the risks associated with them.
Collecting data and processing it effectively is a challenge. Companies should invest in new systems and professionalize to meet the new requirements. The coming months, many companies will be working on this for the first time.
“I can imagine that non-listed companies in particular feel that they are not yet ready to report on such a broad line. Therefore, we recommend you start preparing the double materiality analysis step by step. The first step is to identify the different possible material themes. This can be done using a desktop analysis from various sources, including the ESRS. A starting point, for example, is research into the dominant sustainability themes in your own sector or connecting with sustainability standards for the sector that have already been established, such as the GRI Standards. With this analysis you compile a ‘long list’ of themes.
The second step is to map your own environment by investigating which stakeholders, such as customers, suppliers, employees, residents, and financiers are affected by your business activities. Step three concerns a stakeholder dialogue: discuss the long list with those around, so it can be reviewed and shortened. In this way, a clear list of themes that are important for the company to include in its reporting is created.”Rado Georgiev Sustainability advisor at BNP Paribas