European Union’s CSR Directive (CSRD) – What are the Benefits?

07 Sep 2023

Approximately 50,000 EU businesses and 10,000 outside the EU will be affected by CSRD. In this blog Elma Christian - Global Business Development Director, Intertek Business Assurance outlines some of the benefits to companies both in the EU and the US.

The E.U. Corporate Sustainability Reporting Directive (CSRD) requires ESG reporting on a level never seen before and will capture a whole host of companies that previously were not subject to mandatory nonfinancial reporting requirements, including public and private non-EU companies that meet certain EU-presence thresholds.

For US companies, the CSRD rules will result in mandatory reporting on a broader set of ESG topics than those required under current and proposed Securities and Exchange Commission (SEC) rules.

In this blog we will discuss:

• Objectives of CSRD
• Advantages for early CSRD compliance
• If the proposed SEC climate disclosure rule is expected to be eligible for equivalence
• Reporting options for U.S. companies with E.U.-based subsidiaries
• initial steps to start preparing for CSRD compliance.

Are there any advantages for companies complying with CSRD early?

With the European Sustainability Reporting Standards (ESRS), the European Commission will provide concrete indicators and information to report on. Using these, companies can better understand their performance through gathering the required ESG data for their reporting, allowing them to identify developments and patterns. Furthermore, the ‘double materiality’ principle on which the CSRD is built, pushes companies to get a stronger hold on their impact on society (‘impact materiality’) and the impact of ESG topics on enterprise value (‘financial materiality’). This can provide new insights in risks and opportunities, as well as stir strategic redirection and innovation.

When companies get a grip on the non-financial indicators relating to corporate activities, they can expect new insights to arise.  For example, new opportunities for cost savings (including energy reduction) and innovations in the production process. In addition, early compliance with ESG reporting in the long term offers scope for streamlining company own production and supply chain from a sustainability point of view. In this way, company can enter into strategic partnerships and identify future bottlenecks at an early stage. This guarantees the continuity of the supply chain at the time the directives enter into force.

Could early compliance with the directive result in companies attracting more capital?

Investors and financial institutions aim to minimize risk while maximizing return. To that end, most investors with a long-term horizon already use ESG information for decision making. The CSRD was designed to improve the consistency, reliability, and comparability of information on material ESG risks and opportunities, to make money flow towards sustainable activities. Being able to comply to the high demands of the CSRD increases transparency and trust in your company and shows investors that you are aware and in control of your risks. Therefore, the CSRD can enhance investors’ engagement in companies that do comply but could also exclude non-compliant companies from their investments.

Not only are investors more likely to invest in companies complying with CSRD, it also can lead to a more favorable reputation. With the ESG data of companies being open for anyone who is interested, the reputation of companies is on the line. Companies taking ESG more into account, can gain a competitive advantage over those who tend to put it on a lower priority.

So In essence the aim of the CSRD is to drive companies to take ESG more seriously?

Yes. When the predecessor of the CSRD, the Non-Financial Reporting Directive (NFRD), was introduced, this legislation (though more limited than the CSRD) gave companies in scope the push many of them needed to look at ESG more seriously. Even though the starting point is compliance, we noticed with our customers and other companies that ESG does get more embedded in the company, and that it gives the people internally the leverage and support they need from higher up in the organization. As the information is published externally (and will also be subject to scrutiny by auditors), we see that companies really want to improve their performance, resulting in actual action.

In line with the proposed tightening up of climate ambitions, the EU will introduce more stringent legislation on ESG over the coming years.  Early anticipation of how this affects your own corporate activities and drawing up strategic plans to reduce any negative impact will ensure that your company is more agile and future-proof to face these challenges. Actively focusing on ESG provides companies with a competitive advantage over those that have no reporting obligation yet.

Could this result in more clarity on reporting obligations and have a positive impact on the costs?

The CSRD standardizes sustainability reporting, which prevents companies from having to make a choice in (voluntary) reporting frameworks (to name a few: GRI, SASB, TCFD, SDGs, and the list goes on), as well as having to provide ad hoc ESG information to different parties. Although administrative costs might increase, according to EFRAG the average EU company will save tens of thousands of euros a year if the need for additional information requests is eliminated. With all data found in the same place, it will be clearer to external parties where all data is stored, meaning the number of requests for additional information will reduce over time.

Is the proposed SEC climate disclosure rule expected to be eligible for equivalence?

Although the EC has indicated that it will allow in-scope non-E.U. companies (such as U.S. parent companies) to use sustainability standards equivalent to the ESRS, it has not yet decided which standards will be deemed equivalent. If the European Commission decides that another country’s sustainability reporting standards are not equivalent, it may nonetheless allow companies to continue using such standards during an appropriate transition period, thus providing reasonable time for them to prepare to report in accordance with ESRS or an approved equivalent standard. When the appropriate transition period comes to an end, the companies would be required to report in accordance with ESRS or an approved equivalent standard. ESRS disclosure requirements are extensive, with roughly 80 requirements covering both quantitative and qualitative disclosures, and go well beyond the requirements of the SEC’s proposed rule on climate-related disclosures. As of now, it is still not clear whether the SEC’s proposed rule, when finalized, will be an eligible ESRS-equivalent standard.

What are the reporting options for U.S. companies with E.U.-based subsidiaries?

The CSRD provides three different reporting options for non-E.U. parent companies with E.U.-based subsidiaries — one global reporting route and two E.U. reporting routes — to ensure that all entities within the scope of the CSRD ultimately report the required information. The global reporting route allows a U.S. parent company to report in accordance with the CSRD for itself and for all of its subsidiaries.

However, U.S. parent companies that are within the scope of the CSRD for enterprise-level reporting starting in 2028 and have a large subsidiary listed on an E.U.-regulated market will need to report at the consolidated U.S. parent-company level while continuing to separately report sustainability information in the management report for the large subsidiary listed on an E.U.-regulated market.

The E.U. reporting route provides two additional options. The first, which is available until 2029, allows the largest E.U. subsidiary to produce a consolidated report containing information for all E.U. subsidiaries within the scope of the CSRD. This option is only allowed if the E.U. subsidiaries are not held by an E.U. holding company. The second option allows each E.U. subsidiary within the scope of the CSRD to issue a separate sustainability report.

What are some initial steps that companies can take to start preparing for CSRD compliance?

First, companies should conduct a boundary assessment to see whether they fall under the scope of the CSRD. If companies do fall under its scope, it is important to determine the timeline of reporting and to prepare accordingly. Two key elements of the CSRD are its double materiality lens, which requires reporting on material impacts and risks relevant to investors and other stakeholders, and its requirement to have limited assurance over all disclosed sustainability information. If a topic is material, it needs to be disclosed; and if a topic is disclosed, it needs to be assured. Therefore, companies within the scope of the CSRD should prioritize conducting a double materiality assessment by considering both financial and impact materiality and evaluating and strengthening their processes and controls over their sustainability information so they can be “assurance ready”.

An important point to remember is that under CSRD requirements companies will also be required to obtain third party assurance in relation to their CSR disclosures.

Does this mean companies will need to be independently audited to ensure they comply with the reporting rules?

Reporting must be certified by an accredited independent auditor or certifier. To ensure the companies ultimately comply with the reporting rules, an independent auditor or certifier must ensure that the sustainability information complies with the certification standards that have been adopted by the EU. So the reporting of non-European companies must also be certified either by a European auditor or by one established by a third country.