As sustainability continues to shape business practices, with the new European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD) on the horizon, companies must consider how the directive will apply to them and question the relevant scope and timelines. It is essential for UK companies to understand what the CSRD is, why it matters, and how to prepare for its requirements, especially if they have EU connections.

What is the CSRD?

The CSRD is a new regulatory framework introduced by the European Union (EU) to improve and standardise sustainability reporting. It builds upon the Non-Financial Reporting Directive (NFRD) and expands the scope of corporate reporting on environmental, social, and governance (ESG) factors to cover an organisation’s entire value chain.

The CSRD is part of the EU's broader European Green Deal, aiming for greater corporate transparency on environmental and social impacts. Its goal is to provide investors, customers, and stakeholders with more comprehensive data on companies' sustainability performance.

What is Double Materiality?

A unique feature of the CSRD is the concept of double materiality, which requires businesses to report on:

• Financial materiality: How sustainability issues impact the company’s financial performance.
• Impact materiality: How the company’s activities affect the environment and society. This ensures companies provide a broader view of their sustainability impact, not just financial metrics.
  
  

Why Does CSRD Matter?

The CSRD addresses key challenges in current sustainability reporting:

• Increased transparency: Companies must provide more detailed and comparable ESG information through the creation of an annual sustainability statement, which must be disclosed alongside their annual financial accounts.
  
  
• Broader scope: While the NFRD applied to large public-interest companies, the CSRD applies to a wider range, gradually expanding its scope to include large private companies and listed SMEs (small and medium-sized enterprises).
  
  
• Mandatory audits: Sustainability statements will need to be independently verified, ensuring the accuracy of disclosed data and compliance with the legislation.
  
  
• Global alignment: The CSRD aligns with international standards, such as the International Sustainability Standards Board (ISSB), fostering consistency in reporting.
  
  

Which Businesses Are Affected?

Although the CSRD is an EU directive, UK companies that operate in or have subsidiaries in the EU will also be affected. Initially, the CSRD applies to:

• Large EU companies (250+ employees).
  
  
• Non-EU companies (including UK firms) generating over €150 million in the EU, if they have branches or subsidiaries there.
  
  
• EU subsidiaries of non-EU parent companies.
  
  

This means many UK businesses with a presence in the EU will need to comply with the directive, despite Brexit.

Organisations which are close to these thresholds should take note, as they are likely to decrease year-on-year to encompass a greater number of entities.

What Information Will Companies Need to Report?

Under the CSRD, businesses are required to report detailed information throughout their value chain on:

• Environmental factors: This includes climate change mitigation, resource use, biodiversity, pollution, and waste management.
  
  
• Social factors: Companies will need to disclose information on workforce diversity, employee conditions, human rights in supply chains, and community engagement.
  
  
• Governance: Corporate governance structures, executive remuneration, anti-corruption measures, and sustainability-related decision-making processes will need to be reported.
  
  

Additionally, reporting must align with the European Sustainability Reporting Standards (ESRS), developed to provide detailed guidance on how businesses should report ESG data, ensuring consistency and thoroughness.

Benefits of the CSRD

While the CSRD imposes new reporting obligations, it also offers several benefits:

1. Transparency and trust: Openly reporting on sustainability can build trust with investors and other stakeholders.
   
   
2. Access to capital: Businesses with strong ESG performance may attract more investment as sustainable finance becomes mainstream.
   
   
3. Competitive advantage: Companies that integrate sustainability into their operations can differentiate themselves in the market, especially as consumer demand for sustainability grows.
   
   
4. Risk management: Reporting on environmental and social risks allows businesses to identify areas of improvement, manage reputational risks, and future-proof their operations.
   
   

Preparing for CSRD: Key Steps for Businesses

With the CSRD set to take effect in 2024 and full reporting requirements phased in by 2025, it is essential that businesses start preparing now. Key steps include:

1. Understand the requirements: Review the specific obligations under the CSRD and assess whether your business is affected, particularly if you have EU operations or supply chains.
   
   
2. Conduct a materiality assessment: Identify the most relevant ESG issues for your business by evaluating both the risks and opportunities they present.
   
   
3. Strengthen data collection processes: Ensure that you have systems in place to gather accurate ESG data across your operations. Collaborating with supply chain partners is essential to obtaining the necessary information.
   
   
4. Align with recognised frameworks: The CSRD aligns with global standards such as the GRI (Global Reporting Initiative) and SASB (Sustainability Accounting Standards Board), sharing the goal of enhancing transparency and accountability in sustainability reporting, while introducing mandatory requirements for companies within the EU.
   
   
5. Prepare for audits: External assurance of sustainability reports is mandatory under the CSRD. Ensuring readiness for these audits will be key. Proactive consultation with sustainability experts or auditors can help you meet the standards.
   
   
6. Incorporate sustainability into your strategy: Rather than treating sustainability as a compliance exercise, integrate ESG factors into your long-term business strategy. This will not only help with reporting but also position your business as a leader in sustainability.
   
   

Conclusion: A New Era of Corporate Accountability

The Corporate Sustainability Reporting Directive (CSRD) represents a significant shift in how businesses must approach sustainability reporting. Strategic planning and proactive steps are crucial for UK companies with EU ties when preparing for the CSRD. While these new requirements may seem complex and challenging, they also present opportunities for businesses to showcase leadership in sustainability, build resilience and enhance transparency.

By having an expert on your side, such as Boxfish, businesses can stay ahead of the curve, ensuring they are ready to meet the CSRD's complexities and enjoy the benefits of improved sustainability performance.