“Financial services industry and more specifically the banks, are contributing to more than 90% of carbon emissions worldwide through their financing,” said Vanessa Müller, partner, consulting, ESG services leader at EY Luxembourg. She explained that the initial intent of the regulation is “to reorient those capital flows towards activities that are considered as having a more sustainable impact.”
The second objective, Müller noted, is to “mainstream sustainability into risk management.” Thomas Göricke, director, asset management at Elvinger Hoss Prussen, said that he believes that sustainable information has been “elevated” to a level of importance that is equivalent to financial information.
Sustainability standards: comparable but complicated
The European financial reporting advisory group, EFRAG, was mandated in September 2020 by the European Commission to work on non-financial disclosure which resulted in the “[CSRD embodying] the sustainability reporting standards,” said Hakan Lucius, head of corporate responsibility at the European Investment Bank. “As such there are reporting standards on the environment, on social and governance issues.”
Lucius said that the sustainability standards are complicated because it is a multidisciplinary challenge that requires knowledge in different fields of activities: CO2 emission, biodiversity, circularity, etc. It is “not a job for one person,” but “a team effort.” To ease the process, “the current draft, which is being worked on to become legislation, will be industry agnostic.” The second step will be “sector specific” as “the challenges are different from one industry to the other.”
This report is no longer only based on narratives, but it’s also based now on data and quantitative information.
With the EU’s Sustainable Finance Disclosure Regulation (SFDR) coming into force in 2021, CSRD will require “a harmonised set of standards, which we hope will increase comparability and the reliability of data,” said Göricke, a demand that will also help and benefit the investment management industry.
“Under the taxonomy regulation, the asset managers [which] are required to report on the CSRD will have to also disclose the percentage of their turnover and operational capital expenditure [of the companies in their portfolios], which are directly associated with the activities linked to taxonomy aligned activities,” said Göricke. In other words, all these regulations–SFDR, the EU’s ‘green’ taxonomy, CSRD–are “slowly coming together.”
Single materiality is not enough
CSRD introduces the concept of “double materiality,” which looks at the impact of a company on its environment but also at how “external element[s are] impacting the operation and the financials of a company.” Müller added that “this report is no longer only based on narratives, but it’s also based now on data and quantitative information” and will be subject to audit on a mandatory basis.
Scope and timeline
Given the urgency and the extent of the climate crisis, the scope of the regulation has been enlarged from around 11,700 companies to cover “almost 50,000 companies in Europe.” Müller explained that the corporate sustainability reporting directive will apply to companies as soon as they meet two out of the three criteria at the consolidated level of a group: more than 250 employees, more than €40m in turnover and/or a balance sheet accounting for more than €20m in total assets.
It will not only apply to EU companies but also to foreign groups having significant activities–generating €150m in turnover–in the EU, said Göricke.
The implementation will take place in waves with the first one involving the companies already in the scope of the non-financial directive–“so already producing the reports”–but with the FY24 report to be audited in 2025. The second wave will apply to companies fulfilling the criteria outlined above applying to FY25, to be audited in 2026, whereas the third wave will cover smaller companies from FY26 onward.
CSRD entered into force on “5 January 2023 and the member states have until July 2024 to implement the directive into national legislation,” said Göricke.