What is the CSRD?

The European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD) is a legislative measure that mandates comprehensive sustainability reporting for a wide array of companies, aiming to enhance the reliability and comparability of sustainability information disclosed by businesses, and thereby fostering greater accountability while supporting the EU’s sustainability goals.

Why was the CSRD created?

The CSRD was designed to address the shortcomings of the Non-Financial Reporting Directive (NFRD), established in 2014, which required particular large companies to disclose information on how they operate and manage social and environmental challenges. 

However, the NFRD was seen as insufficient due to its limited scope and inconsistent reporting standards as it applied only to large public-interest entities with over 500 employees, allowing companies to choose their reporting frameworks. This lack of standardization made it difficult for stakeholders to assess and compare sustainability performances reliably.

The CSRD addresses these gaps by broadening the scope of reporting requirements and standardizing the disclosure practices, ensuring that companies provide detailed and reliable information on their environmental, social, and governance (ESG) practices. The directive emphasizes the integration of sustainability into business strategy and operations, requiring that companies disclose not only their impact on the environment and society, but also how sustainability risks affect their performance.

The CSRD was developed in response to increasing demand from investors, consumers, and other stakeholders for more robust and transparent sustainability reporting. By aligning corporate disclosure practices with the EU’s Green Deal and Sustainable Finance Agenda, the EU’s CSRD aims to facilitate the transition to a sustainable economy by establishing standardized reporting, enabling stakeholders to make informed decisions, and promoting corporate accountability for sustainability impacts.

Who must comply with the CSRD?

The directive applies to:

  • Large public-interest companies with more than 500 employees.
  • Large companies meeting two out of three criteria: more than 250 employees, €40 million in turnover, or €20 million in total assets.
  • Listed small and medium-sized enterprises (SMEs) and other undertakings.

Non-EU companies with a net turnover exceeding €150 million in the EU and having either an EU subsidiary meeting the above criteria or a branch generating over €40 million in net turnover.

How will the CSRD affect businesses?

Enhanced Reporting Standards

Businesses under the CSRD must adhere to enhanced reporting standards covering a wide range of ESG factors. These include:

  • Greenhouse gas emissions
  • Biodiversity impact
  • Human rights practices
  • Anti-corruption measures

Key Requirements

  • Double Materiality: Companies must report on both the impact of sustainability issues on their business and their impact on society and the environment.
  • Business Model & Strategy: Reports should include current business models and strategies for addressing sustainability risks and opportunities.
  • Climate Transition Plans: If companies have transition plans, they must align them with the climate goals under the Paris Agreement and EU climate law.
  • Time-Bounded Targets: Companies with climate transition plans must share clear, time-bounded targets.
  • Sustainability Due Diligence: Companies must disclose their due diligence processes regarding sustainability issues.
  • Supply Chain Reporting: Comprehensive reports on the value chain, business relationships, and supply chain impacts are required.
  • Assurance: Companies must adhere to auditing that must be qualified by a third party to confirm accuracy and reliability.

Non-compliance can lead to significant penalties, including fines up to €10 million or 5% of total annual revenue, whichever is higher, along with reputational damage and loss of investor confidence. Additionally, non-compliant companies may face reputational damage, loss of investor confidence, and potential legal actions.

For example, consider a large manufacturing company with roughly 150 billion euros/dollars in annual revenue emits significant levels of greenhouse gasses and has operations in areas with critical biodiversity. If this company fails to report its emissions accurately, does not disclose its impact on local biodiversity, or lacks proper measures to mitigate these effects, it could lead to 7.5 billion dollars/euros in penalties.

How do you prepare for the CSRD?

We outline a detailed action plan below, but to prepare for the CSRD, you should consider several objectives:

Conduct a Comprehensive Sustainability Assessment

Identify and evaluate all relevant ESG factors affecting your business. This step involves mapping your supply chain to assess ESG risks and implementing due diligence procedures to monitor compliance with ESG standards.

Develop Robust Reporting Processes

Establish procedures to collect, verify, and report sustainability data in line with the European Sustainability Reporting Standards (ESRS). Utilize advanced reporting tools and platforms to streamline data collection and reporting processes.

Engage with Stakeholders

Communicate with investors, customers, and other stakeholders to understand their expectations and ensure transparency. Publish sustainability reports and maintain ongoing communication to demonstrate commitment to sustainability.

Enhance Governance Structures

Ensure that your board and senior management are actively involved in overseeing sustainability reporting and compliance efforts.

Leverage Technology

Use supplier intelligence tools to gain a 360-degree view of your supplier landscape. These tools help in real-time monitoring of ESG scores, carbon emissions, and other critical data, ensuring compliance with the new CSRD standards.

Action Plan for Complying with the CSRD

1. Understand the Implementation Timeline

  • January 1, 2024: Large public-interest companies with more than 500 employees (already subject to the NFRD) must begin reporting. Reports due in 2025.
  • January 1, 2025: Large companies with more than 250 employees, €40 million in turnover, or €20 million in total assets (not subject to the NFRD) must begin reporting. Reports due in 2026.
  • January 1, 2026: Listed SMEs and other undertakings must begin reporting. Reports due in 2027.
  • January 1, 2028: Small and medium enterprises, small and non-complex credit institutions, and captive insurance undertakings must begin reporting, with an option to voluntarily opt out until 2028.

2. Develop a Sustainability Reporting Framework

Map Your Supply Chain:

  • Identify all tiers of your supply chain.
  • Assess ESG risks at each tier to ensure comprehensive coverage.

Implement Due Diligence:

Establish Clear Policies:

  • Develop and communicate policies on environmental impact, social responsibility, and governance practices.
  • Ensure these policies are aligned with international standards and best practices.

3. Collect and Maintain Relevant Data

Gather Comprehensive ESG Data:

  • Document all relevant sustainability practices and impacts across your operations.
  • Include detailed information on greenhouse gas emissions, biodiversity impact, human rights practices, and anti-corruption measures.

Prepare Detailed Reports:

  • Ensure reports meet ESRS requirements and cover all specified areas, including strategy, policies, risks, and performance indicators.
  • Utilize advanced reporting tools and platforms to streamline data collection and reporting processes.

4. Assess ESG Compliance Risk in Your Supply Chain

Conduct a Comprehensive Risk Assessment:

Mitigate Identified Risks:

  • Implement measures to address any identified risks, such as training programs, corrective action plans, or supplier engagement initiatives.
  • Monitor the effectiveness of these measures and adjust as necessary.

5. Ensure Transparency and Accountability

Publish Reports:

  • Make sustainability reports publicly available and accessible on your company’s website and other relevant platforms.
  • Ensure reports are easily understandable for all stakeholders.

Engage Stakeholders:

  • Maintain ongoing communication with stakeholders, including investors, customers, employees, and communities.
  • Regularly update stakeholders on progress, challenges, and achievements in sustainability efforts.

Enhance Governance Structures:

  • Ensure that your board and senior management are actively involved in overseeing sustainability reporting and compliance efforts.
  • Establish a sustainability committee or designate a sustainability officer to lead these initiatives.

Utilize Technology:

  • Leverage supplier intelligence tools for real-time monitoring of ESG scores, carbon emissions, and other critical data.
  • Use these tools to gain a 360-degree view of your supplier landscape and ensure compliance with the new CSRD standards.

6. Implement Assurance Measures

Independent Audits:

  • Ensure all sustainability information is independently audited by a third party.
  • Confirm the accuracy and reliability of your reports through these audits.

Continuous Improvement:

  • Regularly review and update your sustainability practices and reporting processes.
  • Stay informed about changes in regulations and best practices to ensure ongoing compliance and improvement.

By following this comprehensive action plan, companies can ensure compliance with the CSRD, enhance their sustainability practices, and contribute to the EU’s broader sustainability objectives.

Given the dynamic nature of these regulations, the information provided herein may not be exhaustive or current. It is not intended to replace guidance from your legal counsel or official statements from government agencies.

How can Craft help?

Craft’s supplier risk management solutions are designed to streamline compliance with the CSRD and enhance sustainability reporting. With our platform:

  • Identify risky suppliers with in-depth company profiles and easily scalable due diligence
  • Continuously monitor your supplier network for changes and potential violations.
  • Document your efforts for proof of compliance
  • Collaborate and share information across teams for faster risk mitigation.

Learn More

Related Regulations

Understanding and implementing the CSRD will be crucial for procurement and supply chain professionals to ensure compliance, drive sustainable practices, and maintain transparency in reporting. By leveraging tools and solutions like Craft’s, you can effectively manage your ESG risks and meet regulatory requirements.

Conclusion

The CSRD represents a significant shift in corporate sustainability reporting, requiring businesses to adopt more comprehensive and standardized reporting practices. By preparing strategically and leveraging the right tools and frameworks, companies can ensure compliance, enhance their sustainability practices, contribute to the EU’s broader sustainability objectives, and participate in improving Earth’s environment.

 

If you liked this blog, you may enjoy our Expert Perspective with Elvire Regnier, seasoned procurement executive and founder of Regenerative-Advisory. Elvire’s journey includes leadership positions such as Chief Procurement Officer and strategic advisory roles at top-tier firms like Alix-Partners and Kearney, Yoplait, Colgate-Palmolive, Unilever Group, L’Occitane, and more. 

For a comprehensive and detailed overview of the CSRD, refer to the official sources and documents provided by the European Commission:

For an overview of regulations affecting the global supply chain, visit our compliance hub.

In this article

  • What is the CSRD?

  • Why was the CSRD created?

  • Who must comply with the CSRD?

  • How will the CSRD affect businesses?

  • How do you prepare for the CSRD?

  • Action Plan for Complying with the CSRD

  • How can Craft help?

  • Related Regulations

  • Conclusion