Starting on January 5, 2023, the EU introduced the Corporate Sustainability Reporting Directive (CSRD) to replace the existing reporting framework of SFDR and broaden the scope of companies covered, from 11,000 initially to now 50,000 companies in the EU to follow new sustainability reporting rules, corresponding to 75% of all EU companies turnover.

The CSRD, established by the European Commission, offers a unified framework for non-financial data reporting. This significantly alters the depth and nature of companies' sustainability reports. The goal is to ensure consistent and comparable reporting of companies' environmental, social, and governance (ESG) activities. Hence, all companies under CSRD must follow the European Sustainability Reporting Standards (ESRS).

The ESRS is a set of 12 guidelines covering different ESG areas. Most have passed the drafting stage. Notably, these guidelines streamline the necessary data, modify mandatory disclosures, and are more aligned with other regulations like the Sustainable Finance Disclosure Regulation (SFDR), the International Sustainability Standards Board (ISSB), and the Task Force on Climate-Related Financial Disclosures (TCFD).

Who Needs to Comply and When?

The first group of companies earning €150 million (US$166) a year and having listed securities on the bloc’s regulated market must submit their CSRD-compliant report on January 1, 2025, for the fiscal year 2024, so planning should begin now.

Below, we have listed the key CSRD requirements you should know about:

1. CSRD necessitates a holistic approach to sustainability management and disclosure, taking into account impacts both before and after your operations.
2. CSRD calls for a "double materiality" reporting method, which might be broader than what some U.S. firms are used to, based on SEC or ISSB materiality definitions.
3. An independent third party must audit all reports (mandatory assurance is required).
4. The annual management reports should encompass both financial and non-financial (sustainability/ESG) data.
5. Reports must comply with the twelve European Sustainability Reporting Standards (ESRS) that have been established so far.
6. Information reported must be marked and presented in a standard digital format (ESEF/XBRL) to facilitate machine readability.
7. Reports must account for Scope 3 emissions, which are indirect emissions resulting from a company's activities across the supply chain.

CSRD timeline

CSRD compliance is expected to be mandatory for more than 50,000 companies over the next few years:

• Listed companies: companies publicly listed on a stock exchange, except for micro-undertakings.
• Listed SMEs.
• Non-EU firms with a net turnover of €150 million and at least one significant subsidiary or branch in the EU.
• Subsidiaries of global non-EU firms are only exempt from having to report when their non-financial information is included in the parent company’s consolidated management report.
• Large enterprises: companies that meet at least two of the following criteria: employ a minimum of 250 staff members, generate an annual turnover exceeding €40 million, and possess a balance sheet total exceeding €20 million in assets.

Early compliance has benefits

There are 12 ESRS drafts available at the moment, including 2 cross-cutting drafts and 11 drafts addressing particular topics. Depending on your operations, size, and industry, you will need to adhere to certain standards. However, according to the EU's most recent changes in July 2023, the "General disclosures" standard is the only one that everyone must follow. For example, data points related to product design or packaging lifecycle would be relevant only to companies that manufacture physical goods, but not to service providers. Another example: biodiversity and ecosystems/deforestation would apply to businesses that use raw materials extracted from forests and other ecosystems (e.g., cotton, cattle, soy, palm oil). 

Companies that proactively address and integrate ESG factors unlock significant value and lay the groundwork for long-term success:

• Improve risk management: By addressing ESG-related risks, businesses safeguard their operations, minimize costs, and bolster their reputation.
• Enhance efficiency and cost savings: Sustainable business practices often lead to more efficient use of resources, resulting in significant cost savings.
• Boost brand reputation: A strong commitment to ESG and sustainability can elevate a company's brand image, attracting new customers and fostering loyalty among existing ones.
• Attract top talent: A focus on ESG and sustainability helps businesses attract and retain top talent.
• Gain better access to capital: Companies with robust ESG performance can attract investment and benefit from lower borrowing costs due to reduced perceived risk.

What does the ESRS cover?

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Although the ESRS are still drafts, the changes are unlikely to be significant, so there is no reason to wait until they are finalized. Early compliance with the Corporate Sustainability Reporting Directive (CSRD) has various advantages:

• It allows companies to gain new insights into their non-financial indicators, leading to potential cost savings and innovations in production processes, such as energy reduction. 
• As the EU plans to introduce stricter legislation on environmental, social, and governance (ESG) factors, early compliance helps companies anticipate and minimize any negative impacts, making them more agile and future-proof. 
• Moreover, companies that actively focus on ESG reporting gain a competitive edge over those without reporting obligations. 
• Enables the streamlining of production and supply chains, facilitates strategic partnerships, and ensures continuity in the face of future directives.

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Embracing Technology for Compliance

To comply with the CSRD, you must collect data from suppliers, operators, and company partners. However, it can be challenging to convince these external companies to share their data. That's why it's important to create a secure, simple, and efficient process for collecting, sharing, and organizing data that benefits everyone involved. 

The European Financial Reporting Advisory Group (EFRAG), the organization responsible for formulating the CSRD standards, issued its CSRD Implementation Guidance for value chains in August 2023. The group strongly encourages businesses to embark on this journey promptly and consider incorporating technological advancements into their strategies.

"They [companies] should consider an investment in technology, as well as clear processes and controls to collect data and report the information [...] and will also need time to set this up."

- EFRAG Implementation Guidance for value chains

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To ensure effective compliance management, companies are leveraging modern technologies like blockchain. These tools help maintain transparency and traceability across complex supply chains and facilitate compliance with regulations.

Blockchain, or distributed ledger technology (DLT), provides a secure, tamper-proof record of transactions, enabling greater transparency and traceability across the entire value chain. This increased visibility helps businesses demonstrate their commitment to ESG principles and ensure the integrity of their supply chains.

Additionally, combining blockchain with DLT, artificial intelligence (AI) and machine learning technologies can identify compliance risks, detect patterns and trends in data, and automatically take action to prevent breaches, gain valuable insights, streamline processes, and foster innovation in the pursuit of sustainability goals.

Furthermore, companies are also embracing digital product passports to improve traceability. These digital tools store and manage data about a product's lifecycle, from production and use to recycling and disposal.

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Conclusion

In essence, the CSRD and ESRS will compel companies to embed sustainability at the heart of their supply chain management, driving them to make data-driven decisions to reach their sustainability goals.

At Finboot, we understand the importance of embedding sustainability in your supply chain management. That's why we've created this insightful ebook that explores the role of the CSRD and ESRS in driving sustainability, the value of trusted data, and the transformative impact of emerging technologies like blockchain in facilitating ESG reporting.

If you want to stay ahead of the game and meet your CSRD reporting requirements, this ebook is a must-read:

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