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Responsible Change and Universal Transparency Through Far-Reaching Standardization – How the CSRD Will Change ESG

Quality InsightsApril 21, 2023

The EU has long believed that investors and consumers are entitled to understand the Environmental, Social and Governance (ESG) impact of organizations in a clear, easily comparable way.

The CSRD origin story

Although existing regulations, including the Non-Financial Reporting Directive (NFRD), were a step in the right direction, they have come to be considered inadequate and replaceable. The NFRD has been particularly criticized because it implies that ESG has no financial relevance.

Investors find that many ESG reports omit crucial or useful information, use differing and confusing metrics and focus on different things, making it difficult to trust the data or benchmark organizations against one another. Inevitably, this impacts sustainable investment, one of the EU’s focal points.

Adoption ignites the spark of change

The European Council overwhelmingly voted to adopt the landmark Corporate Sustainability Reporting Directive (CSRD), first proposed in April 2021. The European Financial Reporting Advisory Group’s (EFRAG) new EU legislation means that, from 2025, large EU and non-EU companies must submit public reports going beyond financial reporting to disclose their sustainability impact.

The CSRD will unite financial data, ESG information and assurance for the first time, and will expand upon and replace the NFRD.

Like the NFRD, the CSRD outlines ESG reporting requirements for organizations, but will considerably expand upon the NFRD’s scope, in terms of who needs to report and what needs to be reported.

The CSRD aims to establish a shared framework for reporting non-financial data. The belief is that by enforcing thorough, robust and standardized reports, everyone, from policymakers and investors to clients and consumers, can make informed decisions concerning an organization’s ESG performance.

The directive stands to accelerate responsible change and create transparency across all sectors by standardizing the disclosure, reporting and assurance of sustainability metrics. Long-established reporting practices will also undergo widespread reform.

The CSRD has been hailed by many, including SGS, as “a new epoch”, “a watershed moment” and “the spark of change” for ESG.

Who does the CSRD apply to?

The directive will have a significantly larger reach than the NFRD, increasing the number of organizations affected from 11,000 to about 50,000. For EU-based organizations and non-EU organizations with EU-based subsidiaries or securities on EU-regulated markets, the pathway to more sustainable practices will be unavoidable. But the European Commission has planned a phased rollout to ensure compliance.

As well as organizations currently in the NFRD’s scope, the CSRD will impact all EU-based organizations with:

  • A EUR 40 million or more net turnover
  • At least EUR 20 million in assets
  • 250 or more employees

Every listed organization, except micro-enterprises, will also be affected.

What will organizations face?

With the CSRD confirmed, organizations will face these key facts:

  • The CSRD will remove all ambiguity
  • ESG will be part of the annual report process
  • Sustainability information will sit alongside its financial counterpart
  • ESG information will be treated with the same rigor and suspicion as financial information
  • The amount of data that needs collecting will significantly increase
  • The number of people involved in the integrated reporting process will significantly increase
  • Sustainability information will be audited

What must be reported?

The CSRD aims to improve ESG report accessibility, trust and transparency, as well as better demonstrate the financial value of sustainability information. Organizations must present this information in a standardized format that enables investors to compare companies and their ESG efforts.

Organizations must disclose information on:

  • The environment
  • Treatment of staff and the approach to social issues
  • Human rights
  • Anti-bribery and corruption
  • Board diversity

What do the reporting requirements include?

Double materiality

Organizations must disclose their impact on social and environmental issues, and how these issues are likely to affect the organization going forward.

Forward- and backward-looking analysis

Organizations must supply retrospective and forward-looking analyses. This means sharing quantitative, such as measured impact to date, and qualitative information, such as targets, strategy and risk assessments.

Stricter rules on climate-related disclosures

Crucially, the CSRD will call for disclosure of Scope 3 emissions, indirect carbon dioxide emissions produced by all organizations throughout the supply chain connected to the original organization.

Enforced audits

For the first time, all sustainability information in a report must pass through an audit process to verify accuracy before publication.

How does the CSRD fit with other legislation?

Given the many and different mandates and legislation, it can be challenging to understand how they all fit with each other. The CSRD will also incorporate existing EU regulations, especially:

  • Sustainable Finance Disclosure Regulation (SFDR), which sets out ESG disclosure obligations for financial market participants
  • EU Taxonomy, a classification system of environmentally sustainable economic activities

The CSRD, SFDR and EU Taxonomy will work together to promote sustainable investments. Bundling them aims to align the requirements, helping to reduce complexity and avoid duplicating reporting requirements.

What are the key challenges?

As the CSRD is much more detailed than the NFRD, organizations will need to collect vast amounts of data that must be accurate and verifiable. Scope 3 emissions are especially difficult to track.

Organizations already reporting under the NFRD inevitably face a steep learning curve, while those needing to produce their first ESG report under the CSRD have an even greater challenge.

Crucially, the CSRD will be incorporated into national law throughout the EU. Depending on how strict individual countries are about enforcement, noncompliance could result in penalties or prosecution.

Why choose CSRD services from SGS?

As a leader in sustainability for over 30 years, our ESG and legal and regulatory experts can help you to:

  • Successfully understand and navigate the CSRD, fulfilling all requirements, including those of specific countries
  • Fully engage all staff, particularly C-level and the board
  • Clarify your vision and goals
  • Prepare, so there are no surprises while decisions become easier
  • Remain agile within a developing reporting landscape. This includes assessing the processes and tools associated with daily operations throughout your organization
  • Access all required data while we confirm whether it is secure, verifiable and connected

SGS ESG disclosures and sustainability report assurance (SRA) under the spotlight

Disclosing and reporting your ESG performance demonstrates your commitment to sustainability.

Our ESG Disclosures and SRA service provides third-party verification of ESG information for a more consistent and accurate disclosure.

What are the benefits?

Our ESG Disclosures and SRA service helps you to:

  • Comply with regulatory requirements
  • Ensure ESG data integrity and transparency
  • Reduce legal risks
  • Avoid greenwashing
  • Inspire peers and foster ESG innovation
  • Reinforce internal reporting processes

How is it done?

Our service is carried out in line with the requirements of reporting and assurance standards – the standards or guidance that you adhere to when producing an ESG or sustainability report. The options available include the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), Task Force on Climate-related Financial Disclosures (TFCD) and AA1000 AccountAbility Principles.

Assurance standards are the rules we adhere to when conducting an assurance engagement or evaluating how you produce the report. The options include AccountAbility’s AA1000 Assurance Standard, the International Standard on Assurance Engagements 3000 (ISAE 3000) and assurance protocols developed by our experts.

ESG claims on aspects, such as carbon emissions, energy use, community engagement and health and safety, can be verified objectively to provide increased confidence in the accuracy and validity of published information.

Additionally, our experts from around the world can help assure that your ESG disclosures and reports meet the requirements set by the relevant stock exchanges in major markets.

Discover our comprehensive ESG portfolio.

For further information, please contact:

Jason Hulbert
Associate Marketing Manager
t: +44 7912426878

About SGS

We are SGS – the world’s leading testing, inspection and certification company. We are recognized as the global benchmark for sustainability, quality and integrity. Our 97,000 employees operate a network of 2,650 offices and laboratories, working together to enable a better, safer and more interconnected world.

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