The European Union (EU) has been making significant strides in promoting corporate sustainability and transparency. One of the key developments in this area is the introduction of the Corporate Sustainability Reporting Directive (CSRD), which aims to replace the existing Non-Financial Reporting Directive (NFRD). This article explores the implications of this transition and examines whether the CSRD is replacing the Task Force on Climate-related Financial Disclosures (TCFD).
The CSRD, as outlined on the Climate Disclosure Standards Board (CDSB) website, requires approximately 49,000 European companies to disclose detailed information in their management reports. This information covers various aspects, including business models, strategies, policies, risks, targets, due diligence, environmental matters, social and employee aspects, human rights, anticorruption, bribery, and board diversity.
One of the key areas for improvement highlighted by the CSRD is the need to make reporting on enterprise value creation mandatory. Additionally, the CSRD aims to widen its scope to include large companies with more than 250 employees. Furthermore, it seeks to strengthen the connection between non-financial and financial information, aligning with the recommendations of the TCFD.
It is important to note that this update to the NFRD is considered crucial in enhancing corporate transparency and helping the EU meet its 2030 climate and energy targets.
This directive is set to replace the NFRD in the EU and introduces broader requirements for sustainability reporting.
The CSRD affects a larger number of companies than the NFRD and aims to provide stakeholders with comprehensive data on companies' societal and environmental impacts. This increased scope ensures that sustainability reporting becomes more inclusive and transparent.
The CSRD applies to large EU companies and global businesses operating in Europe. The criteria for applicability include €40 million in net turnover, €20 million on the balance sheet, or 250+ employees. This broader applicability ensures that more companies are held accountable for their sustainability practices.
Companies already subject to the NFRD must comply with the CSRD from January 1, 2024. Other companies that are not currently under the NFRD will need to comply from January 1, 2025. This timeline allows companies to prepare for the transition and align their reporting practices accordingly.
The CSRD introduces two sets of sustainability reporting standards. The first set focuses on double materiality, which assesses the impact of sustainability issues on both the company and the broader environment. The second set, to be adopted in June 2024, will help companies fine-tune their reporting, ensuring the quality and relevance of the disclosed information.
Both frameworks aim to standardize climate and sustainability reporting, promoting transparency and accountability in capital markets.
• Objective: Both the CSRD and TCFD aim to standardize climate and sustainability reporting, focusing on transparency and accountability in capital markets.
• Governance: Both frameworks require reporting on climate-related governance structures, policies, and processes.
• Strategy: Both frameworks address the need to consider climate and sustainability risks over the short, medium, and long terms.
• Risk Management: Both frameworks emphasize the importance of disclosing processes for identifying, assessing, and managing climate-related risks.
• Metrics and Targets: Both frameworks require companies to disclose metrics and targets related to climate and sustainability risks.
• Scope: The CSRD covers all Environmental, Social, and Governance (ESG) issues, while the TCFD focuses solely on climate concerns.
• Double Materiality: The CSRD uses a double materiality approach, assessing the impact of sustainability issues on a company and vice versa. The TCFD follows a single materiality approach, focusing on how climate risks affect financial performance.
• 1.5°C Transition Compatibility: The CSRD requires disclosures aligned with a 1.5°C global warming scenario, while the TCFD requires resilience testing against a 2°C scenario.
• Mitigation Actions: The CSRD requires reporting on actions taken to mitigate negative environmental and social impacts, a requirement not present in the TCFD.
Overall, the CSRD builds upon and expands the principles set by the TCFD, incorporating a broader scope and a more holistic view of sustainability reporting.
In conclusion, the CSRD is set to replace the NFRD in the EU, bringing about significant changes in sustainability reporting. While the CSRD and TCFD share common objectives and requirements, they also have distinct differences in terms of scope, materiality approach, transition compatibility, and reporting obligations. By implementing the CSRD, the EU aims to enhance corporate transparency and contribute to its 2030 climate and energy targets.
Screen around 100 CSRD solutions in minutes not weeks, and create an individualized list of solutions.
