Coming into force in the European Union (EU) in January 2024, the Corporate Sustainability Reporting Directive ("CSRD") represents a significant expansion of the scope of mandatory extra-financial reporting by companies within the EU.
The CSRD will replace the previous Non-Financial Reporting Directive ("NFRD") and aims to:
This article aims to identify the main changes introduced by the CRSD about the NFRD, and also to go back over the details of the reporting process, paying particular attention to the Climate Change standard (ESRS E1).
The CSRD will be phased in gradually (1 and 3 years) from January 1, 2024. The application will be deferred according to the categories of companies concerned.
CSRD implementation timetable (source: AMF) - is updated as of January 1, 2024 to take into account the higher thresholds of the amended Accounting Directive (Directive 2013/34/EU). Each member state will need to implement the directive up to the increase of thresholds by 25% by the end of 2024. Regarding French Law, the implementation decree has been published.
The thematic scope of CSRD is deliberately broad, covering the environment, social aspects and governance (ESG). The expected information is specified and framed within the European Sustainability Reporting Standards (ESRS) developed by the European Financial Reporting Advisory Group (EFRAG). An initial set of twelve standards has been proposed by EFRAG.
Among these standards, ESRS 2 is the subject of a universal reporting obligation. All companies will be required to disclose both information and general principles. Reporting on standards that are not subject to a universal reporting obligation is subject to a double materiality analysis.
Beyond universal mandatory reporting, companies will have to define the relevance of additional ESRS standards according to the impact of the sustainability categories on their financial performance (financial materiality) and the impact of the company on the ESRS sustainability categories (impact materiality).
ESRS standards by reporting obligation (Source: EFRAG)
ESRS E1, which concerns climate change only: if a company concludes that climate change is not a material issue, and therefore does not report by this standard, it must provide a detailed explanation of the conclusions of its materiality assessment about climate change.
Reporting on ESRS 1 must respect the ESRS 2 elements and the methodology defined in ESRS 1.
ESRS E1 disclosures - Climate change
Illustration of the principle of double materiality
ESRS 2 - General Information makes it universally mandatory to disclose material impacts, risks, and opportunities to a company's strategy and business model. It also makes it mandatory to describe the process by which companies identify and prioritize their Impacts, Risks, and Opportunities (IROs) indicators.
As we have already seen, the CSRD is made up of universally mandatory standards and mandatory standards based on the materiality of the company concerned.
For example, a company with a material impact on water, or whose business model relies on water resources, is required to publish information relating to ESRS 2 - General Information.
Materiality-based reporting requirements for companies in the context of the CSRD
To ensure a high level of data quality, the CSRD will require third-party auditing of the data reported in the sustainability report. From 2025, limited assurance will be required. The European Commission will study the possibility of requiring reasonable assurance (a stronger form of audit) from 2028.
Specific insurance standards have yet to be drawn up by the European Commission. It has been established that EU member states may set their standards, provided they do not duplicate those of the Commission.
Directive 2006/43/EC on auditing has already established requirements for auditors who will be carrying out audits on behalf of a third party. The CSRD should include provisions enabling auditors qualified before 2024 to acquire the theoretical knowledge needed to carry out audits on the new types of reports.
The audit must be carried out by statutory auditors approved by the competent authority of the member country. However, legislation allows member states to authorize independent assurance service providers. Independent auditors must comply with the equivalent requirements specified in the Audit Directive 2006/43/EC.
Update December 6, 2023: CSRD transposition in France by ordinance: Ordinance no. 2023-1142 of December 6, 2023 on the publication and certification of sustainability information and on the environmental, social and corporate governance obligations of commercial companies.
Chapter 2 of the Ordinance specifies that third-party verification may be carried out by either a statutory auditor (whose obligations and rules have been modified) or an independent assurance provider (IAP). They will be supervised by the newly-created Haute Autorité de l'Audit (H2A), and will be required to undergo significant training.
Update December 6, 2023: France being the first to transpose the CSRD has chosen sanctions that meet the following criteria: effective, proportionate, and dissuasive following the indications contained within the directive itself. These will encourage the companies concerned to move quickly to draw up their next sustainability reports.
First of all, it will be possible for any person to apply to the courts for the reports to be made available (subject to a fine) (article 10 of the Ordinance).
In the event of non-publication of the sustainability report, the companies concerned may be banned from accessing public procurement (calls for tender), possibly coupled with a fine (to be determined by decree).
Failure to audit sustainability information (article 15 of the Ordinance) will result in a fine of up to 30,000 euros and up to 2 years' imprisonment.
In the event of obstruction of the audit (article 15 of the Ordinance), the penalties will be more severe: a fine of up to 75,000 euros and up to 5 years' imprisonment.
EFRAG is currently developing a second set of ESRS standards, which will be submitted by July 31, 2023, and approved by the European Union in June 2024. This second set focuses on standards for listed SMEs, for non-European companies including a turnover greater than 150 million euros, as well as the following sectoral standards:
ClimateSeed, a player providing solutions to companies committed to the fight against climate change and achieving the objective of global carbon neutrality, announces its participation in the Produrable Show, on September 12 and 13, 2023. For the 3rd consecutive year, ClimateSeed joins this flagship professional event in the Sustainable Development and CSR agenda in Europe.
The European Commission published on June 12, 2023, a draft delegated act accompanied by an annex that supplements the accounting directive as amended by the CSRD. This draft delegated act defines the European sustainability reporting standards (European Sustainability Reporting Standards – ESRS) applicable to European companies; it includes two transversal standards and ten standards covering environmental, social, and governance topics; it is open for reviews for a period of four weeks, from June 9 to July 7, 2023.