Preparing for the CSRD, ESRS, and the EU Taxonomy

The Corporate Sustainability Reporting Directive (CSRD), the European Sustainability Reporting Standards (ESRS), and the EU Taxonomy are groundbreaking initiatives by the European Union to enhance sustainability reporting among companies. These frameworks aim to standardize reporting practices, making it easier for stakeholders to assess and compare the sustainability performances of organizations. This article provides an in-depth guide on how companies can prepare for compliance with these regulations.

Understanding the CSRD, ESRS, and EU Taxonomy

The Corporate Sustainability Reporting Directive (CSRD), the European Sustainability Reporting Standards (ESRS), and the EU Taxonomy represent transformative elements within the European Union’s regulatory framework aimed at promoting transparency and accountability in corporate sustainability practices. These initiatives are designed to standardize sustainability reporting across the EU, providing stakeholders with clear, comparable, and reliable sustainability information. This detailed overview will delve into each of these regulatory mechanisms, outlining their objectives, scope, and implications for businesses.

Corporate Sustainability Reporting Directive (CSRD)

The CSRD is an evolution of the EU’s Non-Financial Reporting Directive (NFRD), broadening its reach and tightening its requirements. It mandates a significant expansion in the number of companies required to disclose detailed information on how they manage social and environmental challenges. The directive’s goal is to enhance the quality and scope of sustainability information available to investors, consumers, policymakers, and other stakeholders, facilitating informed decision-making and promoting sustainable business practices.

Under the CSRD, the reporting obligation extends beyond large EU companies to encompass all large companies and most listed companies, including banks and insurance companies, irrespective of their size. Furthermore, it captures non-EU companies with substantial operations within the EU or those listed on EU stock exchanges. This inclusive approach ensures a broad coverage, aiming to create a level playing field and foster a sustainable economy.

European Sustainability Reporting Standards (ESRS)

The ESRS are a set of detailed reporting standards developed to operationalize the CSRD’s mandates. These standards are ambitious in scope, aiming to significantly enhance the volume, detail, and scope of sustainability-related information that companies are required to collect and disclose. One of the key innovations introduced by the ESRS is the concept of double materiality. This requires companies not only to report on the sustainability impacts of their operations and value chain (impact materiality) but also on how sustainability issues affect their financial performance (financial materiality).

The ESRS guidelines encompass a wide range of sustainability topics, including climate change, pollution, water and marine resources, biodiversity, and social issues, among others. By adopting these standards, companies are expected to provide a comprehensive view of their sustainability performance, thereby enabling stakeholders to assess and compare sustainability practices effectively.

EU Taxonomy

The EU Taxonomy acts as a classification system, defining which economic activities can be considered environmentally sustainable. It is an essential tool for guiding investment towards sustainable projects and companies, supporting the EU’s goal of achieving a climate-neutral economy by 2050. The taxonomy sets out criteria for determining whether an economic activity contributes significantly to one or more of the EU’s environmental objectives, such as climate change mitigation and adaptation, while doing no significant harm to any of the other objectives.

For companies falling under the CSRD, reporting according to the EU Taxonomy involves disclosing the proportion of their activities that are aligned with the taxonomy’s environmental objectives. This requires a thorough assessment of their operations against the taxonomy’s criteria, including the extent to which they contribute to climate change mitigation, pollution prevention, and biodiversity protection, among others. Through this process, companies contribute to a transparent and standardized sustainability reporting ecosystem, facilitating the transition to a sustainable economic model.

Steps for Compliance

1. Familiarize with Reporting Requirements

To effectively navigate the evolving landscape of sustainability reporting under the Corporate Sustainability Reporting Directive (CSRD), the European Sustainability Reporting Standards (ESRS), and the EU Taxonomy, businesses must embark on a thorough familiarization journey with these requirements. This comprehensive understanding is not merely about ticking boxes for compliance; it’s about leveraging these frameworks to enhance transparency, drive sustainable practices, and communicate effectively with stakeholders about the environmental and social impacts of business operations.

The first step in this journey involves delving deep into the specifics of the CSRD. This directive significantly broadens the scope of companies required to report on sustainability issues, encompassing not only large EU companies but also non-EU companies with significant activities within the EU. Understanding the CSRD means grasping which entities fall under its mandate, recognizing the timelines for compliance, and identifying the types of sustainability information that must be disclosed. Companies need to assess their current reporting practices against the CSRD’s requirements, identifying gaps and areas for enhancement to ensure full compliance.

Parallel to this, businesses must engage with the ESRS, which operationalize the CSRD’s broad mandates into specific reporting standards. The ESRS detail the how-to of reporting, outlining the topics on which companies must provide information, from governance and strategy to risk management and metrics for sustainability issues. The standards introduce the concept of double materiality, requiring companies to report not only on how sustainability issues impact their financial performance but also on how their operations and value chain impact the environment and society. This dual perspective necessitates a robust understanding of the company’s sustainability impacts, both internally and throughout its value chain, necessitating a detailed examination and, potentially, a reevaluation of existing practices.

Moreover, familiarization with the EU Taxonomy is crucial. This classification system sets the bar for what constitutes environmentally sustainable economic activities, guiding companies and investors towards genuinely sustainable investments. Companies within the CSRD’s scope must report on the alignment of their activities with the taxonomy’s environmental objectives, necessitating a deep dive into the operational specifics and how they measure against the taxonomy’s criteria.

Achieving familiarity with these requirements is not a one-off task but an ongoing process that requires continuous engagement, learning, and adaptation. Businesses should invest in training for their teams, develop robust internal processes for data collection and analysis, and engage with external experts where necessary. This deep dive into the CSRD, ESRS, and EU Taxonomy equips companies not just to comply with regulatory requirements but to integrate sustainability into their core operations, driving long-term value for their stakeholders and the planet.

2. Determine Reporting Scope and Materiality

Embarking on the journey to align with the Corporate Sustainability Reporting Directive (CSRD), the European Sustainability Reporting Standards (ESRS), and the EU Taxonomy requires companies to meticulously determine their reporting scope and materiality. This crucial phase involves a comprehensive assessment to pinpoint the sustainability topics that are pertinent to an organization’s operations and the wider impact they hold on the environment and society. Achieving this requires a thoughtful approach that blends strategic insight with a deep understanding of the business’s role in the broader ecosystem.

Determining the reporting scope entails a close examination of a company’s entire value chain, from procurement and production to distribution and disposal. This expanded view recognizes that a company’s sustainability impact extends far beyond its immediate operations, encompassing a wide array of interactions and relationships along the supply and value chains. It demands an in-depth analysis of how the company’s activities contribute to, or mitigate against, environmental and social challenges. This analysis is not static; as companies evolve and expand, so too will the scope of their sustainability impact and reporting requirements, necessitating ongoing review and adjustment.

Materiality assessment, underpinned by the concept of double materiality introduced by the ESRS, is equally paramount. This dual approach mandates companies to identify issues that are material both in terms of their impact on the company’s financial performance and their wider environmental and social consequences. It requires a delicate balance, demanding that companies be introspective about the sustainability issues that affect their profitability and operational resilience while also being outward-looking, considering the broader implications of their actions on society and the planet.

This dual materiality assessment is a rigorous process. It starts with identifying potential sustainability topics that could affect the company or that the company might impact. This involves engaging with stakeholders, including investors, employees, customers, and the communities in which the company operates, to gain diverse perspectives on what matters most. Following this, companies need to prioritize these topics based on their significance and the degree of impact, ensuring that both financial and impact materiality are considered. This prioritization should be guided by a clear methodology that is transparent, replicable, and aligned with best practices in sustainability reporting.

Ultimately, determining the reporting scope and materiality is about making strategic choices. It involves deciding what sustainability information is most critical to disclose, both to meet regulatory requirements and to inform stakeholders effectively about the company’s sustainability journey. This process is integral to building a sustainability report that is not just compliant but also meaningful, offering a clear and comprehensive view of the company’s sustainability endeavors, challenges, and achievements. Through this detailed examination, companies can ensure that their reporting not only meets the high standards set by the CSRD, ESRS, and EU Taxonomy but also drives genuine progress towards a more sustainable and resilient future.

For more information on materiality analysis, refer to our article How to Perform a Double Materiality Analysis to Comply with the CSRD: A Comprehensive Guide in 5 Steps

3. Collect and Manage Relevant Data

In the intricate tapestry of compliance with the Corporate Sustainability Reporting Directive (CSRD), the European Sustainability Reporting Standards (ESRS), and the EU Taxonomy, the meticulous collection and management of relevant data stands as a cornerstone activity. This stage is where theoretical compliance frameworks meet the practical realities of a company’s operations, requiring a systematic approach to gather, validate, and manage sustainability-related data. This process not only underpins the integrity and credibility of sustainability reports but also serves as a reflection of the company’s commitment to transparency and sustainable development.

The journey of data collection and management begins with establishing a robust data architecture that is capable of capturing a wide array of sustainability metrics across the company’s operations and value chain. Given the broad spectrum of data required under the CSRD and ESRS — encompassing environmental impacts, social practices, and governance structures — companies must ensure that their data collection mechanisms are both comprehensive and versatile. This involves integrating sustainability data collection into the core operational processes, ensuring that data related to energy consumption, greenhouse gas emissions, labor practices, and supply chain management are systematically captured and recorded.

Managing this wealth of data demands sophisticated systems that can not only store and process large volumes of information but also ensure its accuracy, consistency, and accessibility. Data quality is paramount, as inaccuracies or inconsistencies can significantly undermine the credibility of sustainability reports. Implementing rigorous data verification processes, employing advanced data analytics tools, and ensuring regular audits are essential practices that help maintain the integrity of the data collected.

Moreover, the dynamic nature of sustainability reporting, influenced by evolving regulatory standards and stakeholder expectations, requires that data management systems be flexible and adaptable. Companies must stay abreast of changes in reporting standards and be prepared to adjust their data collection and management practices accordingly. This agility is crucial for ensuring that the sustainability report remains relevant and aligned with current requirements.

In addition to these technical aspects, the human element of data collection and management cannot be overlooked. Building a culture of sustainability within the organization is essential for ensuring that employees across all levels and functions understand the importance of accurate data reporting and are committed to maintaining high standards of data integrity. Training and awareness programs, clear communication of data collection protocols, and the establishment of accountability mechanisms are key to fostering a culture that supports rigorous and responsible data management.

In essence, collecting and managing relevant data for sustainability reporting is a multifaceted process that demands technical sophistication, strategic foresight, and organizational commitment. By embedding these practices into their operations, companies can not only achieve compliance with the CSRD, ESRS, and EU Taxonomy but also lay the groundwork for continuous improvement in their sustainability performance, driving meaningful progress towards a sustainable future.

4. Report Preparation

The preparation of a sustainability report in alignment with the Corporate Sustainability Reporting Directive (CSRD), the European Sustainability Reporting Standards (ESRS), and the EU Taxonomy is a critical and complex endeavor. This task goes beyond mere compliance; it’s an opportunity for companies to communicate their sustainability journey, achievements, and challenges. Crafting a report that not only meets regulatory requirements but also resonates with stakeholders necessitates a deliberate and detailed approach.

The groundwork for report preparation involves synthesizing the vast amounts of data collected and analyzed in the earlier phases. This data, reflective of the company’s environmental, social, and governance (ESG) impacts, as well as its financial implications, forms the backbone of the report. The challenge lies in presenting this data in a way that is both accessible and meaningful to a diverse audience, including investors, customers, employees, and regulatory bodies.

To ensure the report’s relevance and readability, companies must adhere to the structure and content guidelines set forth by the ESRS. This includes providing detailed disclosures on governance practices, business strategy, risk management related to sustainability issues, and the achievement of sustainability targets. A clear narrative that connects the company’s sustainability initiatives with its long-term business strategy and performance is essential. This narrative should be supported by concrete metrics and examples, demonstrating the company’s progress towards its sustainability goals and adherence to the principles of double materiality.

Moreover, the requirement for reports to be human and machine-readable, as mandated by the European Single Electronic Format (ESEF), adds another layer of complexity. This necessitates the use of specific digital reporting tools and formats, ensuring that the report is not only accessible to all stakeholders but also compatible with automated data analysis systems.

The report should also explicitly address the company’s alignment with the EU Taxonomy, detailing how its operations contribute to or detract from the EU’s environmental objectives. This involves a meticulous assessment of the company’s activities against the taxonomy’s criteria, offering transparency about the sustainability of its operations.

In preparing the sustainability report, companies should view the process as an iterative dialogue with stakeholders. Engaging with stakeholders throughout the report preparation process can provide valuable insights and feedback, ensuring that the report addresses their concerns and interests. This engagement not only enhances the report’s relevance but also strengthens stakeholder relationships.

5. Assurance and Continuous Improvement

The final stage in aligning with the Corporate Sustainability Reporting Directive (CSRD), European Sustainability Reporting Standards (ESRS), and the EU Taxonomy involves not just the assurance of the sustainability report but also a commitment to continuous improvement in sustainability practices. This dual focus on validation and evolution underscores the dynamic nature of sustainability reporting—a process that is both an endpoint and a starting point for deeper integration of sustainable practices into the core of business operations.

Assurance serves as a critical checkpoint in the sustainability reporting process, providing stakeholders with confidence in the accuracy and reliability of the information presented. Under the CSRD, this involves obtaining limited assurance on the report from the outset, with a view towards escalating to reasonable assurance in the future. This progression reflects a growing emphasis on higher standards of scrutiny and transparency in sustainability reporting. For companies, navigating this assurance process means establishing robust internal controls and documentation practices to substantiate the data and statements within the report. This often requires partnering with external auditors or assurance providers who specialize in sustainability reporting to ensure that the report meets the highest standards of accuracy and completeness.

However, the journey does not end with the publication of an assured report. Continuous improvement is the hallmark of a genuinely sustainable organization. This requires companies to adopt a proactive and iterative approach to sustainability, using the insights gained from the reporting and assurance process to inform strategic decisions and operational adjustments. Continuous improvement involves regularly revisiting sustainability goals, metrics, and strategies to reflect emerging challenges, stakeholder expectations, and regulatory developments. It also means fostering a culture of sustainability within the organization, where every employee is engaged in and accountable for the company’s sustainability objectives.

Key to this process of continuous improvement is the establishment of feedback loops with stakeholders. By actively seeking out and responding to feedback on the sustainability report and broader sustainability practices, companies can ensure that their efforts remain aligned with stakeholder expectations and best practices in the field. This engagement can uncover new opportunities for innovation in products, services, and processes that not only enhance sustainability but also drive business growth and resilience.

In essence, assurance and continuous improvement in sustainability reporting are intertwined processes that reinforce each other. Together, they ensure that sustainability reporting is not just an exercise in compliance but a strategic tool that drives better business practices, stakeholder engagement, and long-term value creation. Through diligent assurance practices and a commitment to continuous improvement, companies can navigate the complexities of the CSRD, ESRS, and EU Taxonomy, positioning themselves as leaders in sustainability and corporate responsibility.

Compliance with the CSRD, ESRS, and the EU Taxonomy requires a comprehensive approach that integrates sustainability deeply into the corporate strategy and reporting processes. By understanding these regulations, determining material topics, collecting and managing relevant data, preparing the required reports, and undergoing assurance processes, companies can not only comply with the regulations but also enhance their sustainability performance, contributing to a more sustainable and resilient economy.

To find out the exact steps you need to take to comply with CSRD and become a leader in sustainability, download our complete guide: DC Consultants’ step-by-step guide to EU & UK ESG compliance