You may be familiar with ESG reporting, but are you familiar with the new Corporate Sustainability Reporting Directive (CSRD)? The Corporate Sustainability Reporting Directive (CSRD) is a new EU legislation under which large companies will have to publish reports on their environmental and social impact activities.
For the first time, sustainability reporting will be made mainstream, placed on an equal footing to traditional financial reporting, independently audited and based on common EU standards. The main purpose of the CSRD is to improve sustainability reporting and drive the European single market toward a more sustainable and inclusive economic and financial system.
And it is happening soon, with companies required to submit a report in January 2024, for the 2023 financial year. Companies need to position themselves to have the report on sustainability today, or risk falling behind. We outline what you need to know below.
According to a report by Deloitte, the objective of the proposed CSRD is:
“to improve the existing requirements of the EU’s Non-Financial Reporting Directive (NFRD), in order to better harness the potential of the European Union in the transition to a fully sustainable and inclusive economic and financial system, in accordance with the European Green Deal and the UN Sustainable Development Goals”.
Many companies that have already put sustainable financial reporting at the heart of their business objectives will no doubt have a number of questions: what is the proposed CSRD, who does it apply to, when does it come into effect, and what does it mean for food businesses? In this blog post, we seek to answer those questions.
What is the Corporate Sustainability Reporting Directive?
The CSRD is the new EU legislation requiring all large companies to publish regular reports on their environmental and social impact activities. The Directive extends the scope and reporting requirements of the already existing Non-Financial Reporting Directive — a regulatory framework that has mandated sizable public interest entities to report on their sustainability performance since 2018. More on this can be found here.
As companies unpack the outcomes from Finance Day at COP26, the need for reliable and accurate reporting is more important than ever before. CSRD ensures that companies will be required to report the reliable and comparable sustainability information that investors and other stakeholders need. It should also assist companies in meeting increasing demands for transparency in their sustainability information.
The new directive encourages companies to develop more responsible approaches to business and will help investors, consumers, policymakers and other stakeholders to evaluate the non-financial performance of large companies.
To whom does the Corporate Sustainability Reporting Directive apply?
EU rules on non-financial information apply to all large companies and all companies listed on regulated markets. These companies are also responsible for assessing the information at the level of their subsidiaries.
A large company in this context is one that meets at least two of the three following criteria:
- > 250 employees and/or
- > €40M turnover and/or
- > €20M in total assets.
In total, the new directive applies to over 49,000 companies, covering over 75% of the total turnover within EU companies.
For non-European companies, the requirement to provide a sustainability report applies to all companies generating a net turnover of €150 million in the EU and that have at least one subsidiary or branch in the EU. These companies must provide a report on their environmental, social and governance (ESG) impacts, as defined in this directive.
When does the Directive come into effect?
The application of the regulation will take place in three stages:
- 1 January 2024 for companies already subject to the non-financial reporting directive.
- 1 January 2025 for large companies that are not presently subject to the non-financial reporting directive.
- 1 January 2026 for listed SMEs, small and non-complex credit institutions and captive insurance undertakings.
How does the CSRD differ from the Non-Financial Reporting Directive?
The Corporate Sustainability Reporting Directive is an amendment to the 2014 Non-Financial Reporting Directive. It introduces more detailed reporting requirements and ensures that large companies are required to report on sustainability issues such as environmental rights, social rights, human rights and governance factors.
Under current EU directives, companies are required to report on environmental protection; social responsibility and treatment of employees; respect for human rights;anti-corruption and bribery; and diversity on company boards, in terms of age, gender, educational and professional background.
Within the CSRD, companies are to report on:
- Business model and strategy incorporating sustainability matters and the impact of 1.5˚C temperatures in line with Paris Agreements.
- Targets and progress made to achieve those targets.
- Roles and responsibilities of management.
- The company’s sustainability policy, including due diligence.
- Adverse impacts connected with the value chain.
- Description of principal risks related to sustainability matters.
- Reporting in line with Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation.
Companies need to provide:
- qualitative and quantitative information,
- both forward-looking and retrospective information, and
- information that covers short, medium and long-term time horizons.
What does the CSRD mean for businesses?
The CSRD signals a landmark policy shift towards greater transparency when it comes to the tracking and reporting of scope 3 emissions — a critical element in the fight against climate change, as these represent a significant chunk of industry’s overall carbon footprint. Within the hospitality and food sector (HaFS), this is particularly relevant: WRAP estimates that scope 3 can account for up to 90% of the emissions of a typical food business.
Regardless of whether your company is legally required to comply with the CSRD, accounting for scope 3 emissions is crucial. Failure to do so can result in a significant underestimation of your company's climate change impact, preventing effective mitigation strategies. There are a number of real benefits associated with measuring scope 3 emissions. In addition to minimising environmental impact, understanding scope 3 emissions also allows organisations to:
- increase corporate accountability,
- be prepared for the advent of potential regulations in the future,
- improve the energy efficiency of end products, potentially at numerous points throughout the value chain,
- evaluate and improve procurement strategies, and see cost reductions as a result,
- be guided by sustainability in future product design, and
- potentially boost sales, since today’s consumer is increasingly attracted to ethical business practices.
How should I begin?
In the Deloitte report mentioned above, it was suggested that companies take a phased approach to implementation. Three phases were outlined as follows:
Phase 1: Performing a baseline assessment
This includes a (re)assessment of existing sustainability reporting processes; conducting interviews with key internal stakeholders to get an understanding of the existing data management processes; benchmarking your baseline against that of selected industry peers; and mapping out your global supply chain.
Phase 2: Getting assurance ready
This phase includes performing a scan of upcoming regulatory obligations and noting when they will come into force; creating a training plan for key employees on EU regulations; creating a matrix per strategic KPI on the requirements of limited and reasonable assurance; analysing the existing carbon reporting process and investigating the feasibility of replicating this for other KPIs; and implementing an internal control framework on non-financial information.
Phase 3: Create an actionable roadmap
Creating an actionable roadmap to get assurance ready includes the development of a taxonomy mapping and a governance plan; building a data management framework and seeking insights on the required audit documentation; and considering digital solutions for data management in order to ensure reliable ESG reporting.
In analysing your supply chain in order to identify and fix problem areas, your business can not only comply with the CRSD, but also safeguard against future legislative developments. However, measuring scope 3 emissions is a process that brings its own inherent challenges; because of the variety of scope 3 emissions, and the fact that they occur throughout all stages of the value chain, they can be hard to define and difficult to calculate. Let Foodprint do the hard work for you.
Foodprint by Nutritics is a reliable and fully automated scope 3 reporting and carbon labelling system for food businesses, making it more straightforward than ever to track and measure the environmental impact of your business. Read more about Foodprint here, or get in touch today at email@example.com learn how Foodprint can make sustainability easier for your food business.