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EU CSRD - 6 Steps to Enhanced Compliance
The Corporate Sustainability Reporting Directive (CSRD), implemented in November 2022, marks a significant shift in the way European businesses approach sustainability reporting. This EU directive mandates large companies to disclose their environmental, social, and governance (ESG) performance, fostering transparency and accountability within the corporate landscape. This article delves into the intricacies of the CSRD, exploring its obligations, sanctions, application process, and the entities it binds.
Understanding the Application
The CSRD application extends to a broad range of companies operating within the European Union. Here’s a breakdown of the entities it applies to:
1. Listed Companies: All large companies listed on regulated markets in the EU are subject to the CSRD. This includes companies on stock exchanges and other regulated markets for financial instruments.
2. Non-Listed Companies: The Directive also applies to certain non-listed companies that meet two out of three of the following criteria:
It’s important to note that the specific application thresholds might be adjusted by member states. Companies should consult with relevant authorities to determine their CSRD reporting obligations.
Identifying the Obligated Parties
The CSRD obliged parties are the companies that must comply with the directive’s reporting requirements. These include:
1. Parent Companies: The CSRD applies to the parent undertaking of a group. The parent company is responsible for consolidating the sustainability information of its subsidiaries.
2. Subsidiaries: While not directly obligated to report under the CSRD, subsidiaries within the scope of consolidation must provide necessary data to the parent company for consolidated reporting.
3. Third-Party Service Providers: In some instances, companies might outsource specific aspects of sustainability reporting to third-party service providers. However, the ultimate responsibility for the accuracy and completeness of reported information still lies with the obligated company.
Unveiling the Obligations of the CSRD
The CSRD outlines a comprehensive set of obligations for qualifying companies. Let’s dissect these crucial aspects:
A. Double Materiality: A core principle of the CSRD is double materiality. Companies must report on both aspects of sustainability:
1. Impact on Sustainability Factors: This entails disclosing the company’s environmental and social impact on factors like climate change, resource depletion, human rights, and labor practices.
2. Impact of Sustainability Factors on the Company: Companies must also report how these very sustainability factors (e.g., climate change regulations, resource scarcity) affect their business model, financial performance, and long-term viability.
B. Sustainability Reporting Standards: The Directive mandates adherence to specific CSRD reporting standards. These standards, established by the European Commission, will define the format, content, and scope of sustainability reporting. While the final standards are still under development, they are expected to be aligned with existing frameworks like the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB).
C. Mandatory Assurance: The CSRD emphasizes the credibility and reliability of reported information. It requires companies to undergo mandatory assurance by an independent auditor. This independent verification ensures the accuracy and completeness of the reported sustainability data.
D. Digital Reporting: The Directive promotes digital accessibility and data exchange. Companies must report their sustainability information in a digital, machine-readable format. This standardized format facilitates easier analysis and comparison by investors, stakeholders, and regulatory bodies.
Potential Sanctions for Non-Compliance
Financial Penalties: Member states have the authority to impose financial penalties on non-compliant companies. The specific amount of these penalties will vary depending on the severity of the offense and national regulations.
Reputational Damage: Non-compliance with the CSRD can severely impact a company’s reputation. Investors, consumers, and other stakeholders increasingly consider ESG factors when making decisions. Failure to adhere to the Directive can be seen as a lack of commitment to sustainability, potentially leading to negative publicity and investor disengagement.
Exclusion from Listing: In extreme cases, non-compliance might result in exclusion from listing on regulated markets within the EU. This could significantly hinder a company’s ability to access capital and raise funds.
Comprehensive and verified sustainability reporting builds trust with investors, consumers, and other stakeholders. Here are 6 steps to enhance your compliance:
1. Get the CSRD reporting standards
While final CSRD reporting standards are under development, the European Commission provides draft versions and outlines key principles. Familiarize yourself with these drafts to understand the expected format, content, and scope of the reports. Existing frameworks like the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) can offer valuable guidance and can likely serve as a foundation for the final CSRD standards.
2. Conduct a double materiality assessment
You need to assess:
a. Impact on Sustainability Factors: Analyze how your business activities impact environmental and social factors, such as climate change, resource depletion, human rights, and labor practices.
b. Impact of Sustainability Factors on the Company: Evaluate how these very sustainability factors might affect your business model, financial performance, and long-term viability. Consider risks and opportunities associated with these factors.
3. Establish data collection and management processes
Reliable and accurate data collection and management are crucial for effective CSRD reporting. Implement robust processes to gather relevant data on your environmental, social, and governance performance. Utilize existing data collection systems and consider investing in new technologies to streamline data gathering and ensure data quality.
4. Engage with stakeholders
Stakeholder engagement is vital for comprehensive and credible reporting. Consult with relevant stakeholders like investors, employees, and communities to understand their sustainability concerns and priorities.
5. Integrate sustainability reporting
CSRD compliance should not be viewed as a one-time exercise. Integrate sustainability reporting into your overall business strategy by:
a. Setting clear sustainability goals and objectives.
b. Aligning your sustainability efforts with your company's mission and values.
c. Continuously improving your sustainability performance and proactively addressing identified ESG risks and opportunities.
6. Use of technology:
Rely on advanced technologies such as AI and blockchain to increase the efficiency and security of your compliance processes. Solutions like those from DISS-CO can help you meet the requirements of the CSRD more effectively.
Compliance with the CSRD
Use our AI and Blockchain powered Software as a Service (SaaS) to comply with the CSRD quick and easy.