Compliance & Risk Management | Sustainability Reporting: The CSRD’s impact moving forward

The Corporate Sustainability Reporting Directive (CSRD) introduces comprehensive sustainability reporting obligations starting with the financial year 2024. Such development is not just noteworthy—it's a call for businesses to step up their efforts. This newsletter aims to explain the background of the new reporting requirements and to underscore the importance of a legal review of sustainability disclosures.

Strategies and steps to avoid potential reputational and legal risks will vary between different companies as each must consider their own industry specificities and corporate profile. Despite these particularities, there are common considerations that apply to companies across various sectors. Strengthening the focus on robust reporting, supported by the continued and enhanced use of standardized reporting frameworks, significantly contributes to improving transparency and credibility.

It should be clear to readers which reporting standards, frameworks, and guidance are adopted throughout the report, especially if different standards are used in specific sections of the report. In addition to good faith and cautionary statements, the reporting language on how goals and objectives described should reflect best efforts and, most importantly, not leave room for performance assurances.

Furthermore, the report should outline the preparation process, resources used, and the extent of external verification. It must clearly explain the methodologies for calculating emissions, reference external scientific sources, and specify the basis for forward-looking statements. Technical terms should be precisely defined, and the language should be clear and avoid superlatives. In other words, avoid using words like “highest”, “lowest”, “best in class” and similar.

Redefining Corporate Responsibility in the Energy Sector

Amidst the global climate crisis and energy transition efforts, the role of the energy industry has never been more scrutinized. Stakeholders, including investors and regulators, expect increasing transparency on environmental protection measures and accountability on emissions, making sustainability reporting increasingly important to the assessments of any given company.

Sustainability reporting essentially encompasses the non-financial metrics used to evaluate a company’s performance, most commonly divided into environmental, social, and governance (ESG) impacts. Previously used as an additional marketing piece, nowadays these reports are not just informational, bearing legal implications and influence on a company’s reputation. Investors prioritize ESG performance markers when evaluating their next investment, while regulatory bodies are intensifying compliance requirements. The CSRD and the European Sustainability Reporting Standards (ESRS) are a direct result of this trend.

The CSRD introduces a mandate for exhaustive sustainability reporting, centered around the principle of double materiality. This requires companies not only to outline their impact on sustainability matters but also to evaluate how these issues might influence their financial resilience and operational survival. The compliance timeline kicks off with the 2024 financial year, with the first reports expected in 2025. The ESRS, submitted in December 2023, provides a comprehensive blueprint for ESG disclosures, designed for equivalence with international norms to facilitate the reporting endeavor. External verification required by it ensures the reliability of disclosures, and legal responsibility for accuracy extends to non-financial information.

Although only mandatory in 2025 for reporting on the 2024 fiscal year, it’s ideal to begin to prepare and take internal measures to be ready. To facilitate this, the European Financial Reporting Advisory Group (EFRAG) offers clarity on reporting requirements:

Interoperability with Existing Frameworks: EFRAG and the Global Reporting Initiative (GRI) have worked together to establish a significant degree of compatibility between the ESRS and GRI standards. Consequently, data already compiled for GRI reports can be effectively utilized for materiality assessments in accordance with the ESRS, thereby facilitating a smoother transition to these new reporting requirements. It is important to note, however, that unlike the ESRS, the GRI standards do not mandate the consideration of double materiality.
Sector-Specific Guidance: The ESRS provides general standards that apply to all sectors, and it is anticipated that sector-specific standards will be introduced soon. This ensures that disclosures are both relevant and tailored to the distinct ESG concerns of each industry.
Materiality-Centric Reporting: Companies are not required to report on every ESG topic listed in the topic-specific ESRS. Instead, they should focus on those topics that are material to their operations. This approach underscores the importance of a thorough materiality assessment to identify which sustainability matters are significant for the company.
Early Materiality Assessment: Performing a materiality assessment early is crucial. Companies must understand where gaps exist in order to disclose risks effectively and strategize accordingly. Additionally, data collection for reporting will need to commence in 2024 to meet the reporting deadline in 2025.
Identifying Material Risks: In discerning material sustainability matters, organizations must pinpoint their significant impacts, risks, and opportunities, while setting aside non-material concerns. Material risks are those with the potential to influence stakeholder decisions and significantly affect a company’s financial results, operations, or reputation. Non-material risks, although potentially relevant internally, do not generally necessitate public disclosure due to their minor impact on the company’s overall performance.
Supply Chain Considerations: The ESRS materiality assessment extends beyond a company’s immediate activities to encompass the activities of both direct and indirect suppliers. This comprehensive view ensures that companies account for the full scope of their sustainability impact, including that of their supply chain.

In a more recent development, EFRAG has announced a partnership with the European Committee for Standardization (CEN) and the European Committee for Electrotechnical Standardization (CENELEC). This collaboration aims to harmonize sustainability reporting standards across Europe, making the CSRD requirements more straightforward to implement. It promises to bring uniformity with existing European standards and to reduce redundant efforts. This partnership is particularly noteworthy for businesses as it represents a significant step towards simplifying the sustainability reporting process in line with the CSRD. Companies are encouraged to stay informed about the activities of this group, as they may have a considerable impact on the evolution of sustainability reporting.

As part of the same wave of regulations, the Corporate Sustainability Due Diligence Directive (CSDDD) further obligates companies to proactively identify and mitigate human rights and environmental risks in their operations and supply chains. This directive is aligned with the objectives of the Paris Agreement and imposes stringent fines (5% of the company’s turnover) for non-compliance.

The CSDDD was scheduled for consideration in February 2024. However, its adoption process has encountered challenges, with some member states, including Germany and Italy, expressing reservations. As a result, the definitive timeline for the directive’s enactment is currently unclear. The forthcoming EU elections may impact the legislative process, as the directive’s progress depends on securing sufficient support within the European Parliament. The timing of the vote is also a factor, and any potential delays could affect the directive’s advancement.

Implementation in Norway of the EU Directives

Norway is proactively aligning with international standards by integrating the CSRD into its national legislation, as detailed in NOU 2023:15. The Securities Law Commission (“Verdipapirlovutvalget”) has recommended adoption of the principle of double materiality, a move that is expected to bring approximately 2,100 Norwegian companies under the new regulatory framework. Following the Commission’s report and its public consultation period ending on September 4, 2023, the Ministry of Finance is now crafting a legislative proposal that will introduce changes primarily to the Accounting Act, the Auditing Act, and the Securities Trading Act.

The CSRD will broaden the scope of sustainability reporting to encompass all large enterprises, with certain small and medium-sized enterprises on regulated markets also required to report. Definitions for ‘large,’ ‘small,’ ‘medium-sized,’ and ‘micro-enterprises’ are set by specific financial and employee thresholds. The Securities Law Commission is divided on whether the obligation to prepare sustainability reports should apply to all enterprise types accountable under the Accounting Act or be limited to those covered by the directive obligations under the CSRD. The majority favors a gradual approach that aligns with EEA standards and limits reporting costs, while the minority advocates for a broader scope with potential exceptions or simplifications to be justified on a cost-benefit basis.

Looking Ahead

As regulations move forward, maintaining a steadfast commitment to accurate and standardized reporting is crucial. These practices not only ensure transparency but also strengthen credibility and foster trust among all stakeholders. By doing so, businesses underscore their dedication to addressing sustainability and climate-related challenges.

Questions? Do not hesitate to reach out to our Compliance & Risk Management team.