Navigating the ESG Landscape

Written By SuFu Company

🧭 Lately, the vocabulary of sustainability expanded with a few more terms: CSRD - NFRD - double materiality - ESRS - ESG reporting, and even more. Perhaps, like most of us, you are still confused about grasping all these legislations and/or frameworks and how they interplay with each other.

🔍 What is the CSRD?

If you are looking for more clarity in these terms within the ESG reporting landscape, then this article is tailored to clear out your confusion! Hopefully, by the end of the reading, you will have a better understanding and be able to discern the differences between the various terms.

First, let's start with the leading legislative: the Corporate Sustainability Reporting Directive (CSRD). This legislative holds a pivotal role in the European Union (EU) Green Deal, a comprehensive set of rules and guidelines designed to expedite the shift towards a sustainable economy.

On 5th January 2023, the new ambitious CSRD replaced and expanded the Non-Financial Reporting Directive (NFRD), which previously mandated companies to submit annual sustainability information. The CSRD not only sets higher standards for the depth and robustness of sustainability reporting but also encompasses categories outlined in the EU Taxonomy. Beyond climate, it addresses areas such as pollution, water, waste, and biodiversity.

The changes respond to the realization that the information previously reported often fell short of providing investors and stakeholders with a comprehensive understanding of sustainability-related risks. There is increasing demand for sustainability information to be comparable, trusted, and reliable.

Therefore, the EU aims to enhance transparency and accountability by imposing more rigorous ESG reporting requirements on large and listed EU companies. Consequently, the CSRD's scope has significantly expanded, encompassing around 49,000 entities - up from approximately 11,600 under the NFDR.

These companies need to meet at least 2 out of 3 of the following criteria: 

  • > 250 employees and/or, 

  • > €40 million turnover and/or, 

  • > €20 million total assets listed companies 

These new regulations will extend to over 70% of all EU companies, ensuring that investors and stakeholders have access to the necessary information to evaluate companies' impact on the environment and society. Moreover, this transparent approach aids investors in assessing financial risks and opportunities arising from climate change and other sustainability issues.

In addition to the NFRD basic disclosure, the following reporting requirements are introduced in the CSRD: 

  • Double Materiality Concept 

  • Formulating long-term Environmental, Social, and Governance (ESG) objectives and policies 

  • Due diligence on its operation and supply chain 

  • Disclosure of information relating to intangibles (social, human, and intellectual capital) 

  • Reporting in line with the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation 

  • Integrated reporting and mandatory external assurance 

The table below highlights how the CSRD differs from the former NFRD in the following characteristics: Since 1st January 2024, large public-interest companies already subject to the NFRD will have to apply the new rules of the CSRD in the current financial year for reports published in 2025. Whereas from 1st January 2025, companies with at least 2 out of 3 the characteristics, will have to report due to 2026 based on FY 2025 data.

🔍 What is the Double Materiality in the CSRD?

As mentioned earlier, the CSRD framework introduces the concept of double materiality, requiring organisations to disclose risks and opportunities from both financial and sustainability perspectives, with a specific emphasis on the impact of their activities on the planet and people.

Materiality, a crucial concept in finance, assesses the significance of information, events and transactions for decision-making. Double materiality builds upon this concept, acknowledging the material importance of environmental and social impacts alongside financial considerations and serves as a fundamental element of the EU’s CSRD.

This dual perspective is particularly important for sustainability reporting. The double materiality assessment identifies both the impact of an organisation's operations on the planet and people (impact outwards), and how sustainability-related developments affect the organisation (impact inwards). A topic is considered material if the impact is significant from either (or both) perspectives.

Climate change poses two primary risks to businesses. Firstly, there are physical risks, including extreme weather events and rising sea levels, which have the potential to damage company facilities and disrupt supply chains. Secondly, transition risks arise from efforts to combat climate change, such as the implementation of new regulations and shifts in consumer preferences. These risks can result in increased costs and pose challenges for companies.

The concept of double materiality is crucial for businesses as it addresses both perspectives, allowing companies to gain a comprehensive understanding of the risks and opportunities associated with climate change. This approach enables businesses to formulate robust strategies to navigate challenges and make decisions that benefit all stakeholders.

Furthermore, the assessment takes into account how external environmental changes or social issues can impact a company's operations and long-term success. For example, a company may face risks to its supply chain if climate change leads to more frequent and severe natural disasters in the regions where it sources raw materials.

The introduction of both the double materiality concept and mandatory climate reporting by the CSRD sets the stage for effective and transparent sustainability communication. Embracing the CSRD is not just a regulatory requirement; it presents an opportunity to future-proof your business, enhance your reputation, and contribute to a sustainable future.

📑 What are the ESRS?

Finally, the last piece of the puzzle you might have encountered is the European Sustainability Reporting Standards (ESRS). These are the set of sustainability reporting standards being developed by the European Financial Reporting Advisory Group (EFRAG) to facilitate sustainability reporting in accordance with the CSRD.

The ESRS aims to establish comprehensive and organized standards to assist companies in meeting the reporting requirements set by the CSRD. It offers a unified framework that ensures consistency and comparability across different companies. Understanding the ESRS becomes clearer when juxtaposed with the CSRD. The latter is the regulatory initiative that outlines corporate sustainability reporting obligations for large and listed EU companies, addressing the "why" and defining the "who" and "when."

Conversely, the ESRS serves as the reporting framework, guiding companies on how to report under the CSRD and the format for disclosure. Additionally, it also defines the scope - the what - of information that has to be disclosed, in general, and with a specific focus on environmental (E), social (S), and governance (G) aspects.

In conclusion, the CSRD and the ESRS are two sides of the same coin. While one represents the regulatory initiative, the other provides a framework for the sustainability reporting of corporations.

References:

SuFu Company
Previous

The B Corp Certification
Next

The Hidden Environmental Impact of War