With the Corporate Social Responsibility Directive (CSRD), the EU has initiated a new phase of sustainability reporting. Both the scope and the number of companies subject to reporting requirements have been significantly expanded. However, the directive not only offers companies a framework for orientation (with no alternative). It can also bring a number of benefits by minimising risks and liabilities, making companies more resilient and opening up new opportunities in the “green economy”. Unfortunately, the complicated structure of the CSRD means that understanding and, above all, implementing it is no child’s play, especially at the beginning. But fortunately, there is a remedy. We give you 10 valuable tips.
CSRD in a nutshell
The CSRD is an important milestone on the way to a standardised format for sustainability reporting and one of the most significant steps in external corporate reporting for many years.
- The CSRD aims to enhance the transparency and accountability of companies in relation to environmental, social and governance (ESG) issues. By promoting greater transparency, accountability and stakeholder engagement, the CSRD seeks to achieve positive social and environmental outcomes while promoting long-term value creation for companies and society as a whole.
- The future inclusion of the sustainability statement in a company’s management report means that sustainability reporting will also have the same legal status as the balance sheet report in
- Sustainability statements as part of the CSRD must be prepared in accordance with the European Sustainability Reporting Standards (ESRS). These were developed by the European Financial Reporting Advisory Group (EFRAG) and adopted by the EU Commission as part of delegated acts.
- All ESRS standards together consist of over 1000 data points, which poses a major challenge for many companies.
- As an EU directive, the CSRD (as opposed to a regulation) must be transposed into national laws. A corresponding implementation law in Germany is currently still pending. However, a draft has already been submitted to the relevant ministries and stakeholders for comment.
Centrepiece of the CSRD (and ESRS)
The centrepiece of the CSRD is the implementation of the double materiality analysis. The principle of dual materiality in sustainability reporting means that companies must assess sustainability issues both according to:
- how their activities affect the respective topic (inside-out), as well as,
- how the sustainability issues themselves influence the company and its work (outside-in).
The ESRS standards require the assessment of sustainability aspects in relation to:
- the materiality of the impact (impact materiality) and on
- the financial aspects (financial materiality).
The ESR standards specify which sustainability aspects must be assessed. The list is to be expanded to include company-specific topics (ESRS1 AR16 ff. in the version dated 22 December 2023).
Objective of the CSRD
The CSRD is intended to make a significant contribution to the implementation of the European Green Deal to create a fully sustainable economic and financial system within the EU.
- To this end, the directive aims to harmonise reporting practices within the EU and introduce mandatory standards for sustainability reports.
- This standardisation should enable meaningful comparisons between companies and make it easier for investors, consumers and other stakeholders to make informed decisions.
- The main aim is to channel funds into more sustainable business models and companies.
10 tips for dealing with the CSRD
- Define core business with upstream and downstream value chains
In order to be able to assess the sustainability topics required by ESRS, it is important to define your company’s core business and the upstream and downstream value chain linked to it (ESRS 1 §62 ff., 22.12.2023).
- Train employees and build capacity
Provide the necessary resources within your organisation and designate responsibilities to ensure the execution and implementation of the reporting required by the ESRS standards.
Conduct training for your employees to raise awareness of non-financial topics and strengthen their ability to report on the new topic (CSRD Standards Delegated Act, §23).
- Carry out a materiality analysis
Conduct a detailed materiality analysis to identify the material financial and non-financial issues that are critical to your organisation and your stakeholders. This is a strategically important step, as it allows you to filter out from over 1000 data points those that are relevant to your company!
Follow the procedure set out in the ESRS standards. EFRAG has provided a helpful guide to carrying out the double materiality analysis here ( downloadpdf).
- Consult stakeholders
Actively consult your stakeholders to develop a better understanding of their expectations and needs and ensure that relevant topics are addressed in your report.
Use the data to give silent stakeholders a voice. Endeavour to engage specifically on certain aspects so that you can go into depth on the topic with experts. This will allow you to assess the relevance of the topics from other perspectives.
Do not bring all stakeholders on board, but only those who are also connected to the respective sustainability issues. (CSRD Standards Delegated Act, ESRS1 §22, AR7)
- Integration of sustainability risks and opportunities
The CSRD emphasises the importance of integrating sustainability aspects into corporate decision-making processes. Companies are required to disclose information on how they identify, assess and manage sustainability risks. By integrating sustainability into your strategic planning and risk management, your company can mitigate risks, capitalise on opportunities and improve its long-term resilience.
- Aim for integrated reporting
Strive to present financial and non-financial information in a coherent report to provide a comprehensive picture of performance and impact. (CSRD Standards Delegated Act)
- Apply international standards and frameworks
Use recognised international standards and frameworks such as the GRI Standards or the TCFD Framework to structure and improve your non-financial reporting.
Plan time for the financial assessment of sustainability issues and do not underestimate this point. It proves to be the biggest challenge for most companies that were not previously required to report.
- Carry out regular reviews and improvements
Regularly review your non-financial reporting and identify opportunities for improvement. This will help you to ensure that your reports remain up-to-date and relevant.
- Sharing and learning best practices
Engage with other companies and industry organisations to share best practices in dealing with double materiality and learn from each other. Read already published sustainability reports that are based on the ESRS standards to get an idea of the scope of the data within the reporting. As an example, here is the Ørsted Annual Report 2023 (pdf-download).
- Seeking external support
Seek expert support for the implementation of reporting in accordance with the CSRD. In particular, the requirement to provide reporting in the European Single Electronic Format (ESEF) almost always requires the involvement of external IT consultants.
Understanding the directive and interpreting the data points is also a challenge. We will be happy to help you. In the first step, for example, with a CSRD readiness check. Find out more here.
Conclusion
For companies seeking to transition to a more sustainable future, the CSRD provides a framework to guide them towards responsible and resilient business practices. In addition, compliance with the CSRD can bring a number of benefits to companies, such as a positive image, better risk management, access to capital and increased competitiveness.
By making sustainability a core business principle, companies can not only minimise risks and liabilities, but also benefit from the opportunities that arise in the green economy.
However, the implementation of CSRD using the ESRS standards is not only a milestone for most companies due to its complicated structure and understanding, but also a challenge. It requires a great deal of resources, especially at first.
