How to bring your company into compliance with the new non-financial reporting standard: the Corporate Sustainability Reporting Directive1 ?
What is the Corporate Sustainability Reporting Directive (CSRD)?
The CSRD is the new European regulation which defines the information standards to be published by private companies in terms of sustainability. It will replace the old regulation ( Non Financial Reporting Directive or NFRD) and will be transposed into French law by January 1, 2024.
Determine your company's approach: mandatory or voluntary compliance?
All companies formerly subject to the NFRD, translated into French law by the publication of a Declaration of Extra-Financial Performance (DPEF), must comply with the new regulations. The CSRD modifies and fills the gaps in the old system (absence of common standards for obligated companies, absence of standardization of declarations, difficulties in comparing ESG performances), still in force for the 2023 financial year. The CSRD broadens the scope application of extra-financial reporting to European and non-European listed Small or Medium Enterprises (SMEs), and to non-European listed companies.
The obligations will gradually apply to companies from January 1, 2024 :
Doc1 . Timetable for progressive application of the extra-financial reporting obligation from January 2024
What does the extra-financial reporting of companies concerned by the CSRD consist of?
The extra-financial reporting obligation provided for by the CSRD includes two important advances. All companies are subject to the obligation to carry out “a double materiality analysis” 2 to determine the “material” information which must appear in the final report (1). Furthermore, the CSRD specifies the themes (and sub-themes) that the analysis must cover, as well as the information (in the form of “publication requirements”) which must be published at the end of the analysis, in the sustainability report (2).
(1) Harmonization of the methodology to follow: analysis of double materiality
The analysis of dual materiality is the central pillar of the CSRD 3 . On the one hand, the company identifies and analyzes the impacts, risks and opportunities (IRO) of an ESG theme on the financial performance of the company (results, cash flows, cost of capital, etc.). ): this is financial materiality. On the other hand, the company identifies and analyzes the impacts (positive, negative, real or potential) of the economic activities of the company and its value chain on the environment and the population/society: this is materiality. of impact.
All obligated companies will have to justify relevant quantitative and qualitative thresholds to identify IROs as “material” or not.
The European legislator has commissioned the European advisory body on international financial reporting standards, the European Financial Reporting Advisory Group (EFRAG), to publish guidelines to standardize the performance of the double materiality analysis 4 .
(2) Standardization of indicators / reporting standards
The CSRD provides for two types of indicators: general and thematic sustainability information standards (the “ European Sustainability Reporting Standards” or ESRS 5 ) and “publication requirements” (“Disclosure Requirement” or DR). These standardized indicators make it easier to compare companies’ ESG performances.
ESRS: general and thematic standards
The CSRD publishes 12 “European sustainability reporting standards”. Each standard is broken down into sub-themes (or “sustainability issues”) subject to materiality analysis. For each sub-theme covered by an ESRS, the analysis identifies the “material” IROs for the obligated party’s activity.
There are 3 categories of ESRS:
- Transversal standards (2) including ESRS 2 General information to be published which applies to all sustainability issues covered by the 10 thematic and sectoral standards, and whose publication in the report is strictly obligatory;
- Thematic standards (10) which cut across the 3 pillars of CSR and which are subject to the analysis of double materiality;
- Sectoral ESRS which cover standards insufficiently or not covered by previous standards, and important for all companies in a specific sector.
Publication requirements
Each ESRS theme also includes “publication requirements”. Depending on the results of the materiality analysis and the thresholds set by the obligated party, the latter publishes in its report the information relating to the “publication requirement” identified as “material”.
These thematic requirements can cut across 4 different areas of information independent of each other: Governance (GOV), Strategy (SBM), Impact, Risk and Opportunity Management (IRO) and Metrics and Targets (MT). These four areas are described by the “ESRS 1 General Requirements” standard.
Doc 2 . Classification of indicators and metrics provided for by the CSRD
Two times to distinguish: the time of analysis and the time of publication
Regarding the time of analysis, all thematic standards, publication requirements, and data points must be subject to a dual materiality analysis.
During the time of publication, separate regimes are provided for transversal standards (strictly obligatory publication) and thematic standards. Furthermore, rules regarding the burden of proof are different for the application of certain thematic standards including the standard relating to Climate Change (ESRS1, see below). Finally, the CSRD provides for exemptions from publication, among others, for the first year of reporting.
Doc 3. Regime of key provisions provided for by the CSRD
Carrying out the Carbon Balance Sheet, a first step in preparing extra-financial reporting
The specific regime provided for the application of the ESRS E1 Climate Change thematic standard, subject to a reverse burden of proof regime 6 , makes it a point of honor to carry out a Carbon Assessment.
Carrying out a Carbon Assessment, already obligatory in France 7 , becomes essential to justify the materiality or non-materiality of the Climate Change theme for the obliged company.
Carrying out a Carbon Assessment allows you to anticipate the implementation of extra-financial reporting, to quantify the impact of your activity on the climate, and to engage stakeholders in the implementation of a CSR strategy.
Sources:
1 Directive (EU) 2022/2464 of the European Parliament and of the Council of December 14, 2022 regarding the publication of sustainability information by companies.
< https://eur-lex.europa.eu/legal-content/FR/TXT/PDF/?uri=CELEX:32022L2464 >
2 The delegated act of the CSRD mentions an “analysis of the double importance”: “the importance from the financial point of view” and “the importance from the impact point of view”.
3 This is progress since previously, only the financial aspect was considered to guide investment choices. Double materiality has the same objective.
4, 2022, EFRAG, European Sustainability Reporting, Guidelines 1: Double materiality conceptual guidelines for standard-setting? (non-final version) < https://www.efrag.org/Assets/Download?assetUrl=/sites/webpublishing/SiteAssets/Appendix%202.6%20-%20WP%20on%20draft%20ESRG%201.pdf >
5 Adopted by the European Commission on July 31, 2023, they were prepared by EFRAG.
6 That is to say, even in the case where Climate Change is not considered “material” (important) for the company, the CSRD expects the obliged party to publish “ a detailed explanation of the conclusions of its assessment of the importance with regard to climate change” motivating non-materiality.
7 The CSRD thus complements the French system in terms of impact on climate change. French law requires private companies with more than 500 employees to publish a greenhouse gas emissions report (BEGES) every 4 years, and a transition plan (Decree No. 2022-982 of July 1). 2022 relating to greenhouse gas emissions assessments).
