Companies of all sizes and industries are increasingly expected to communicate their sustainability performance. This helps demonstrate their commitment, transparency, and credibility to their stakeholders. To meet this requirement, several frameworks provide organizations with tools to measure, manage, and disclose their environmental, social, and governance (ESG) impacts. In this article, we will discuss the voluntary frameworks that offer flexibility to companies (Part I). In a subsequent article, we will cover the regulated framework introduced by the European CSRD (Corporate Sustainability Reporting Directive), which imposes legal sustainability reporting obligations on large companies and listed SMEs (Part II).
PART II - CSRD
Effective from January 5, 2023, the European CSRD (Corporate Sustainability Reporting Directive) represents a significant step forward in corporate sustainability regulation. Replacing the Non-Financial Reporting Directive (NFRD), the CSRD aims to increase transparency on environmental, social, and governance (ESG) issues by expanding its scope and strengthening reporting obligations based on harmonized standards, the ESRS (European Sustainability Reporting Standards). Along with the European taxonomy, the CSRD is a key pillar of the European Green Deal, whose goal is to make Europe the first continent to achieve net-zero greenhouse gas emissions by 2050.
Which companies are affected, and what are the implementation deadlines?
While the NFRD applied to about 11,000 companies in the EU, the CSRD significantly broadens its scope to cover approximately 50,000 companies, including not only large companies but also listed SMEs.
Since January 1, 2024, the CSRD has been gradually applied to companies depending on their size and nature, as detailed in the table below.
Category of Companies | Applicability Criteria | First Reporting Year (Fiscal Year) | Reporting Deadline |
Large Companies | Meeting at least two of the following criteria: • More than 500 employees • Net turnover > €40 million • Total assets > €20 million | January 1, 2024 | 2025 |
Large Companies (not subject to NFRD) | Meeting at least two of the following criteria: • More than 250 employees • Net turnover > €40 million • Total assets > €20 million | January 1, 2025 | 2026 |
Listed SMEs | All EU or non-EU SMEs listed on the European regulated market (excluding microenterprises). | January 1, 2026 (option to defer to 2028) | 2027 (option to defer to 2029) |
Non-European Companies | Significant subsidiaries or branches in the EU (Net turnover > €150 million in the EU) | January 1, 2028 | 2029 |
Public Interest Entities | Includes all public interest entities (banks, insurance companies, etc.), regardless of size | January 1, 2024 | 2025 |
What sustainability standards does the CSRD set?
To ensure relevant, comparable, and reliable reporting, the EU has developed - based on the work of EFRAG - the European Sustainability Reporting Standards (ESRS). These standards define the specific information companies must disclose in their reports. Several categories of standards are distinguished: universal ESRS (principles and general information) and thematic standards.
The thematic standards are divided into 10 topics within 3 categories: environment, social, and governance. Concerning the environment, the CSRD requires companies to provide information on five key areas: climate, pollution, water and marine resources, biodiversity and ecosystems, and resource use and circular economy.
Regarding the "Climate" standard or ESRS E1, companies must describe their climate change strategy, including short-, medium-, and long-term climate objectives. This includes their plans for climate change adaptation, mitigating global warming through greenhouse gas (GHG) emission reductions, and their carbon neutrality targets. This reporting requirement ensures that companies implement a transition plan compatible with the scenario set by the Paris Agreement (1.5°C).
What is the principle of "double materiality"?
The ESRS introduced the concept of double materiality. This principle requires companies to report not only on the environmental and social impacts that could affect their financial performance (financial materiality) but also on the impacts of their activities on society and the environment (environmental and social materiality). This ensures a comprehensive view of companies' ESG performance.
Based on the analysis of this double materiality, companies have significant freedom in choosing the ESRS standards they wish to report on. However, this rule is reversed for the ESRS E1 (Climate) standard, where companies are required to report unless they can prove that this issue is not relevant to them. In practice, due to their activities, companies will find it challenging to avoid this obligation if they emit GHGs.
How do climate contribution projects fit into the CSRD framework?
Beyond the various actions a company can take to reduce its climate impact (see our article), they can invest in climate contribution projects aimed at avoiding or absorbing GHGs. They can deploy their own projects or finance projects through carbon credits on the voluntary carbon market.
In this scenario, as part of their CSRD reporting, companies must distinguish between insetting projects (conducted within their value chain) and offsetting projects (conducted outside their value chain). Companies are expected to disclose the total emissions covered by the project, the type of project, the share of projects within the EU, and the share of reduction or absorption projects.
What is the impact of the European taxonomy on CSRD reporting?
The European taxonomy complements the CSRD. It establishes technical criteria to determine whether an activity substantially contributes to one of the six environmental objectives defined by the EU under the Green Deal:
Climate change mitigation
Climate change adaptation
Sustainable use and protection of water and marine resources
Transition to a circular economy
Pollution prevention and control
Protection and restoration of biodiversity and ecosystems
Companies must indicate to what extent their activities are aligned with the taxonomy, specifying the share of their turnover, capital expenditures (CapEx), and operational expenditures (OpEx) derived from sustainable activities as defined by the taxonomy. This provides a solid basis for assessing companies' sustainability and promotes responsible investments.
How to ensure robust sustainability reporting?
The CSRD and its transposition into French law require that sustainability reporting be verified by a statutory auditor (CAC) or an independent third party (OTI). In France, only CACs and OTIs accredited by the French Accreditation Committee (COFRAC) can verify the sustainability information disclosed by a company.
Additionally, beyond the management bodies, the European directive has expanded the audit committee's prerogatives to enhance the transparency and reliability of sustainability reporting.
While it is true that the reporting framework is complex and requires technical expertise to ensure the conformity of disclosed information with the standards set by the directive, it represents a significant advancement in sustainability.
Apolownia supports companies of all sizes in their CSRD reporting, particularly regarding their involvement in climate contribution projects aimed at conserving or restoring natural ecosystems.
ABOUT APOLOWNIA
Apolownia is a mission-driven company committed to making a significant impact in the climate sector.
We support businesses and funds willing to engage in long-term and impactful decarbonization strategies - within and beyond their own value chain - by designing, implementing and monitoring science-based carbon reduction projects that restore natural ecosystems.
Through technology and innovative solutions, we aim at shaping a resilient and environmentally friendly world, by encouraging the decarbonization of the economy and supporting social and environmental initiatives.
You can drive positive change for the climate, biodiversity and local communities.
Contact us to engage or for more information. Find us on www.apolownia.com.
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