With the CSRD, many Dutch businesses will have to deal with new rules from Brussels from 2024. Although the new legislation is not directly related to improving the CSR or ESG performance of your company, it will have an impact on the operations of any large company that should not be underestimated. Being transparent about concrete performance and strategic ESG policy will from now on become a strict requirement. In this article we briefly explain what the new legislation entails and we consider the intended effects of the regulations and the relationship with other sustainability legislation, such as the CSDDD. In addition, we show how companies should deal with this and how they can benefit from it. Finally, we offer an abbreviated version of our roadmap for companies to start with the CSRD.
The CSRD in a nutshell
With the CSRD, every company with more than 250 employees and a turnover of more than 40 million euros per year (or a balance sheet total of more than 20 million euros) will be required to externally report annually on their ESG impact, from the 2024 financial year. This report must also be approved by an external auditor. In addition, the report must be published in a specific data format (ESEF) so that it can be included in a central public European database.
ESG is key
Central to the CSRD is ESG performance. De facto, ESG replaces the CSR or RBC policy of companies. Where ESG was previously seen mainly as a translation of CSR policy for the financial sector, ESG as a paradigm in the field of sustainability is now the in centre. In addition, the CSRD also strategically positions ESG within the business operations.
European Sustainability Reporting Standards
The CSRD has been elaborated by EFRAG in the so-called ESRS: European Sustainability Reporting Standards. These are 12 detailed guidelines that give substance to the mandatory CSRD reporting. These detailed guidelines still have to be formally approved by the European Commission, but that can be regarded as a formality (because the approval is given via a ‘ delegated act’). Companies can now get started with these 12 guidelines.
In addition to general information about business operations (in the CSRD this is called ESRS 1 and 2), the ESRS wants companies also to report on Environment (5 guidelines), Social (4 guidelines) and Governance (1 guideline). In total, the reporting standard includes a maximum of 82 ‘ Disclosure Requirements ‘ and 1,144 data points.
Not everything needs to be reported by all companies; in addition to the general information, ESRS E1 (on climate change) and part of ESRS S1 (on own employees) are mandatory for all companies. Whether an individual guideline requires to be included in the report, is determined on the basis of the importance (materiality) of a subject for a company. For example, biodiversity (ESRS E4) will be more important for a company in the food chain than for a law firm. And a company with production locations in low-wage countries will have to report in accordance with ESRS S2, while a company with many economic activities in countries where corruption is a high risk must be transparent on ESRS G1. In addition, additional reporting requirements are imposed on companies operating in risk or impact sectors. A first version of these additional requirements is expected in mid-2023 (see box).
|Companies in sectors with a high sustainability risk or high impact will have additional reporting requirements. The sectors are named by the EU in Regulation (EC) No. 1893/2006 Sections A to H and Section L of Annex I. The sectors are:|
– Textiles, accessories, footwear, jewelry;
– Food and drink;
– Agriculture, forestry and fishing;
– Motor vehicles and road transport;
– Mining and coal mining;
– Oil and gas;
– Energy production and utilities.
CSRD makes ESG strategic
The CSRD is not just about making a company’s ESG performance transparent. At least as important is the ESG strategy that a company has developed and the way in which this strategy is being implemented. The ESRS standards have also been designed in this way: Governance, Strategy, Risk Management & Opportunities and Impact, KPIs and the objectives. This includes the involvement of stakeholders, the expected cash flow developments related to ESG, the risk identification process, transparency about the supply chain, the CO2 reduction targets in absolute figures, the associated actions, the explanation of this, the translation into C-level remuneration, and future plans for (improving) ESG performance.
The innovative aspect of this reporting framework is therefore that a company must not only report on its ESG performance for the reporting period, but also develop an ESG strategy for the short, medium and long term, including associated milestones and objectives. Boards are therefore obliged to create a strategic approach for (much) better ESG performance until at least 2030 and in some cases even until 2050. We already wrote this blog about this in 2021.
It is difficult to predict what business changes the CSRD will actually lead to, but the trend is clear: more openness ultimately leads to better ESG performance across the board. And that is what the European Commission is also counting on. The connections with other laws and policy areas are legion. Some important ones:
- The Green Deal is not a law but an EU policy that is implemented in all relevant laws. The Green deal is also a driver of new laws, such as the CSRD.
- The CSR-law has meanwhile been widely discussed in the Netherlands, in Europe this law is called the CSDDD and is about doing business decently, especially in the supply chain.
- The EU Taxonomy clarifies which activities can and cannot be called sustainable, based on their scientifically tested contribution to preventing climate change or limiting its consequences (adaptation).
- In addition, the elaboration of the CSRD in the ESRS explicitly links up with international standards such as the TFCD, SASB of the ISSB & IFRS, GRI transparency guidelines, OECD guidelines for multinational companies and the UN Guiding Principles on Business and Human Rights.
As may be clear by now, the legislator no longer looks at ESG or CSR without obligation. Companies are required to start driving positive impact. The idea is that as a result, the companies of the future will not only become more sustainable, but also more solid and resilient. There is increasing scientific evidence that a company that deals strategically with their ESG also performs better financially. For example this research from Stern NewYork University from 2022 .
CSRD as a way to achieve a resilient business
ESG has been used as a risk mitigation tool by many companies for some time now. Mapping out the negative effects of business operations and making a risk analysis based on this is logically also the first step in implementing the CSRD. Especially if we consider that ESG has been developed from the financial sector; risk management is inherent to the financial side of business. Moreover, approaching the CSRD as a risk management tool entails a certain degree of familiarity. After all, we already know this approach and are now extending the scope to the social side: E, S and the G. At Empact we call this the ‘compliance paradigm’ and is in fact the first phase of a company’s ESG maturity.
The insights generated by the CSRD exercise will need to be placed in a broader perspective in boardrooms in order to utilize its full value. These insights can play a leading role in tactical and strategic issues. For example, the decision for a new production location that takes into account the expected change in the climate. Or consider the question to what extent a long supply chain is still sustainable. But also, the more strategic questions about PMCs (product market combinations) and business models. I deliberately remain fairly abstract here, because examples simplify these insights too much in my view. Please contact us for in-depth examples and an extensive explanation.