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Feb 01 2024

CSRD Compliance Guide: Navigating EU Sustainability Reporting.

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CSRD Compliance Guide: Navigating EU Sustainability Reporting.

The European Union's new Corporate Sustainability Reporting Directive (CSRD) is not just a game-changer for EU companies – it also has major implications for US businesses with operations or subsidiaries in the EU. As the new rules take effect and member states begin to translate them into national law, it's critical that US companies stay on top of the requirements and take proactive steps to comply.

But with so many new acronyms and standards to navigate – from the CSRD itself to the 12 new European Sustainability Reporting Standards (ESRS) – it can be challenging to know where to start. That's where this practical guide comes in. As someone who has spent their career [advising companies on sustainability strategy / building ESG reporting tools / whatever your relevant background is], I've seen firsthand the challenges and opportunities that come with this new era of sustainability reporting. My goal is to help US companies make sense of the EU's expanding rulebook and position their businesses for success in the years ahead.

So let's dive in. The first thing US companies need to understand is who is covered by the CSRD. The directive applies to three main categories of companies:

  • Companies with securities listed on an EU-regulated market, including both EU and non-EU entities with listed debt or equity securities (with limited exceptions).
  • "Large" EU companies that are not listed, defined as those exceeding certain asset, revenue, and workforce size thresholds in two consecutive years. This includes EU subsidiaries of US companies that meet the criteria.
  • EU companies that are part of a "large group" and not listed, encompassing EU entities (including EU subsidiaries of US companies) that are parents of a group exceeding certain size thresholds in two consecutive years.

In addition, consolidated sustainability reporting will be required for non-EU headquartered companies at a global level if they generate a certain amount of revenue in the EU and have at least one EU subsidiary or branch that meets the criteria. There are some exemptions depending on how the company consolidates its sustainability reporting.

Once you've determined whether your company is covered by the CSRD, the next step is to understand what you'll need to disclose. The CSRD requires comprehensive and granular disclosures covering the entire spectrum of sustainability topics, as detailed in the 12 new ESRS standards. These disclosures span everything from sustainability strategy and targets to products and services, business relationships, and incentive programs. Importantly, the information reported may not be limited to a company's own operations but could extend to direct and indirect business relationships across the value chain – a potentially challenging area given the scope and reliance on third-party information.

Another key concept to understand is "double materiality," which requires companies to report not only on how sustainability matters affect their business development and performance, but also on the impact they have on a range of sustainability matters. The CSRD also introduces a mandatory assurance obligation for all reported sustainability information – a notable difference from the US Securities and Exchange Commission's proposed climate disclosure rule.

So what does all of this mean for your sustainability reporting strategy?

With EU member states required to incorporate the CSRD's provisions into national law by early July 2024, and reporting set to begin as early as fiscal year 2024 for some companies, it's imperative to start preparing now. Key steps include:

  1. Evaluating the scope and applicable effective dates of the CSRD for your company, as well as any alternatives for reporting at different levels within the organization.
  2. Understanding what compliance with the disclosure requirements will entail, including which sustainability matters are material and consideration of the EU taxonomy.
  3. Creating an implementation plan that includes understanding the wide-ranging disclosure requirements and the expected effort to obtain information and develop and implement reporting systems.
  4. Engaging key stakeholders across the organization to ensure a coordinated and comprehensive approach to compliance. This includes the chief financial officer, chief sustainability officer, and legal counsel.

While the CSRD may seem daunting at first, with the right strategy and preparation, it can also be an opportunity for US companies to strengthen their sustainability reporting and position themselves for long-term success in the EU market.

By taking a proactive and integrated approach to compliance, companies can not only meet the new requirements but also gain valuable insights into their sustainability performance and impacts, identify areas for improvement and innovation, and build trust and credibility with key stakeholders.

The EU's sustainability reporting rulebook is complex and ever-evolving, but with the right roadmap and mindset, US companies can navigate the challenges and emerge as leaders in this new era of corporate sustainability. The time to act is now – your company's future in the EU market may depend on it.

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