Blog - Corporate Sustainability in light of the CSRD: a new chapter for businesses

In a global context of increasing focus on sustainability, the European Union has embarked on an ambitious path of reforms in recent years, aiming to take the lead in the transition to a sustainable economic-financial system, demonstrating a strong commitment to achieving climate neutrality by 2050. 

The approval and publication on December 16, 2022, in the Official Journal of the EU, of Directive No. 2022/2464 on corporate sustainability reporting, known as the Corporate Sustainability Reporting Directive (CSRD), within the context of the European Green Deal, represents a significant step. The CSRD amends the previous Non-Financial Reporting Directive (NFRD) of 2014, requiring member states to adopt it within 18 months of its publication, transforming the landscape of non-financial information disclosure. 

The primary objective of the CSRD is to address the gaps identified in the NFRD, improving transparency and providing investors, analysts, consumers, and other stakeholders with clear and comparable information on companies' sustainability performance.

To whom the csrd applies

The transition to CSRD compliance will occur progressively starting in 2024, primarily guided by the legacy of the NFRD and company size.

The scope of companies involved in sustainability reporting will thus significantly expand. According to EU estimates, the number of companies currently preparing Non-Financial Statements will increase from 11,700 to approximately 50,000, including about 4,000 in Italy. Non-listed SMEs can also voluntarily report on their sustainability activities, as many are required to do so by clients according to Green Procurement practices. Additionally, the chain effect generated by the mechanism will require companies obligated to report to collect information from their entire supply chain.

Key innovations introduced by the CSRD

• Double Materiality: Organizations are required to report both on the impact of their activities on sustainability and the impact of sustainability on their finances. This approach aims to provide a comprehensive view of corporate sustainability performance.
• Sustainability governance: To develop sustainability strategies and track ESG goals, companies must provide detailed information on the involvement and responsibilities of governance bodies regarding sustainability issues, highlighting their skills and capabilities. They must also introduce incentives for governance members linked to achieving these goals and transparently report the mechanisms for awarding such incentives in their disclosures.
• The application of ESG aspects in the value chain: Companies, when drafting the sustainability report, must consider not only their internal operations but also include information on material impacts, risks, and opportunities related to the entire value chain resulting from due diligence activities (as also indicated in the proposed new Corporate Sustainability Due Diligence (CSDD) directive) and materiality analysis.
• Inclusion of ESG risks in the corporate risk management model: To respond to the changing risks they face and investor interest in the financial implications, companies must consider risks related to climate, environmental, health, and social issues within their risk management model.
• Sustainability and corporate strategy: Companies must illustrate how they integrate sustainability into their strategies and operations. Additionally, they must incorporate sustainability information directly into the Management Report rather than presenting it in a separate document, promoting greater integration between financial and non-financial data.
  
• Uniform standards: To promote comparability of information, companies must adopt a single reporting standard called ESRS (European Sustainability Reporting Standard).
  
• External verification: The directive requires the involvement of external experts for the audit and verification of information provided in sustainability reports to ensure the reliability and integrity of disclosed information.
  
• Transparency and accessibility of reports: The CSRD emphasizes the importance of transparency and accessibility of information on sustainability issues. Companies are required to digitize the information in their reports.
  

ESRS Reporting Standards

CSRD reporting is based on the new European Sustainability Reporting Standards (ESRS) issued by the European Financial Reporting Advisory Group (EFRAG) on behalf of the European Commission. These standards provide a detailed framework regarding the information companies must disclose. Such information is divided into cross-cutting, environmental, social, and governance categories.

The standards provide crucial information to investors to evaluate the sustainability impact of the companies they invest in. They are also developed considering contributions from the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI), ensuring a high level of interoperability between European and global standards and avoiding unnecessary duplication in company reports.

By June 30, 2024, the directive will be integrated by introducing sustainability reporting principles proportional and relevant to the capabilities and characteristics of small and medium-sized enterprises and the scope and complexity of their activities.

In conclusion

2024 will be a crucial year for companies aspiring to genuine sustainability.

The introduction of the CSRD and ESRS standards represents a significant step forward in sustainability reporting. These not only provide a clear and demanding regulatory framework for EU companies but also serve as a clear invitation for businesses to transform their corporate vision, embracing sustainability as an integral part of their DNA.

It will be interesting to see how companies embrace this challenge, and the hope is that sustainability will become increasingly central to business strategies.

Marialuce Ribellino