On 10th November 2022, the Corporate Sustainability Reporting Directive (CSRD) was adopted by the European Parliament to help investors, consumers, policymakers, and other stakeholders, evaluate a company’s non-financial performance. The aim of the directive is to update and amend the non-financial reporting requirements set for companies under the Non-Financial Reporting Directive (NFRD). In addition to increasing transparency around sustainability claims made by companies in their annual reports, the initiative aims to prevent greenwashing and ultimately divert the economic flow towards more sustainable business models throughout the European Union. For this reason, companies in scope are required to provide detailed disclosures in their management report regarding the impact that their activities have on sustainability matters. Following the adoption of the Directive by the European Parliament, EU Member-States now have 18 months to adopt it by transposing it into their national legislation.
Entities in scope Approximately, 50.000 companies are expected to be affected, with the CSRD applying to all large EU companies (including EU subsidiaries of non-EU parent companies) and to all companies with securities listed on EU-regulated markets, irrespective of whether the issuer is established in the EU. This includes listed small and medium size enterprises but excludes certain listed micro-enterprises. In addition, the CSRD applies to non-EU companies with annual EU-generated revenues in excess of €150 million and which also have either a large or listed EU subsidiary or a significant EU branch (generating €40 million in revenues). The directive will be adopted in a staged approach, with 2028 being the ultimate deadline for adoption for all entities in-scope.
Reporting requirements The CSRD requires sustainability information to be published in an entity’s management report and not a separate, standalone report. Companies need to disclose the principal actual or potential impacts related to their own operations on sustainability matters and the implementation and outcome of the due diligence process of the company’s value chain, including its products, services, business relationships and its supply chain. This implies that a double materiality reporting obligation applies in the management report, where the company must provide information on both the impacts of its activities on sustainability matters and on the sustainability matters affecting the company. Disclosures will need to be reported in accordance with the European Sustainability Reporting Standards (“ESRS”). The report should be forward-looking, disclose set time-bound targets on sustainability matters and give details on the progress of achieving such targets.
To facilitate the access, review, and comparability of sustainability information, CSRD companies will need to prepare the reports in a single electronic reporting XHTML format and to “tag” their sustainability information according to a digital categorisation system to be developed in conjunction with the sustainability reporting standards.
To help prevent greenwashing, the CSRD will also introduce a general EU-wide audit assurance requirement for reported sustainability information. Companies will be required to seek a “limited” assurance opinion of the reported sustainability information, while a more demanding assurance process will be required in the future, as there is already a plan in place by the European Commission to implement standards for reasonable assurance opinion before October 2028.
The European Sustainability Reporting Standards The ESRS have been developed by the European Financial Reporting Advisory Group (EFRAG) to provide a framework for companies to disclose information about their ESG performance and impact.
One of the key benefits of the ESRS is that they provide a common language for sustainability reporting. By using a standardized set of reporting guidelines, companies can more easily compare their performance to that of their peers, and stakeholders can more easily understand and compare sustainability information from different companies.
The ESRS also promote the development of consistent, reliable, and transparent reporting practices across the EU. This helps to build trust and confidence among stakeholders, and encourages companies to be more accountable for their actions
In addition to providing guidelines for sustainability reporting, the ESRS also encourage companies to take a holistic approach to CSR and sustainability. This means considering the long-term impacts of their actions on all stakeholders, including shareholders, employees, customers, suppliers, and the environment.
Overall, the European Sustainability Reporting Standards are an important tool for promoting CSR and sustainability in the European Union. By providing a framework for companies to disclose information about their ESG performance and impact, the ESRS help to drive improvements in sustainability performance and encourage greater transparency and accountability.
How can we help
ESG factors can present both challenges and opportunities for a bank’s assessment of its asset quality, capital strength, profitability, liquidity and funding. Banks need to map the obligations that they and their divisions (e.g. lending, corporate finance, wholesale markets, asset management and private banking) are subject to across the ESG framework in order to:
- Manage the risk of conflicting or inconsistent information being disclosed
- Ensure consistency and/or alignment of disclosures
- Identify the overlaps in the reporting pillars where common reporting metrics can be leveraged
We meet forward-thinking companies where they are on their ESG journey, to develop industry-focused strategies that align with their vision. We remain by their side every step of the way, from inception to implementation and ongoing monitoring.