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Corporate Sustainability Reporting Directive

Corporate Sustainability Reporting Directive

Sustainable and responsible corporate governance is increasingly determining corporate actions in the boardrooms. A good ESG rating will have a significant impact on corporate success in the future, and the topic of ESG is receiving correspondingly strong attention in the media. Since 2017, large companies, insurance companies and banks have been obliged to report on sustainability. Based on the EU’s Non-Financial Reporting Directive (NFRD), non-financial reporting is usually included in the annual financial statements and comprises information and lists of commitments to environmental protection and nature conservation, social responsibility, human rights, dealing with corruption and ensuring diversity on supervisory boards and management floors.

However, as part of the EU Green Deal and the EU Action Plan “Financing Sustainable Growth”, the NFRD was fundamentally revised and expanded to make the presentation of information more comparable and transparent and to clarify its relevance. The draft of the new “Corporate Sustainability Reporting Directive (CSRD)”, which has been available since 2021, was adopted by the European Council on November 28, 2022.

In this article, we summarize the latest information on the new sustainability reporting, answer the most important questions and provide valuable tips on how you can prepare for the implementation of the CSRD (Corporate Sustainability Reporting Directive) in your company.

 

[infobox headline=”At a glance”]

  • The new Corporate Sustainability Reporting Directive aims at creating comparable and reliable reporting about both financial and non-financial topics within a company
  • The concept of double materiality looks both at the impact of a company’s own activities on the environment and recognizing ESG aspects that may affect the company, its strategies and activities
  • In total, around 50,000 companies in the EU and 15,000 in Germany alone will be affected by the CSRD regulations in the future.
  • With our ESG management System, Magility supports its customers in the implementation of the Corporate Sustainability Reporting Directive and the preparation and creation of your sustainability reporting

[/infobox]

 

What is the role of the CSRD?

According to the Commission, the Corporate Sustainability Reporting Directive is intended to ensure “that adequate, accessible information is available on the risks for companies in connection with sustainability aspects and on the impact of the companies themselves on people and the environment.” The goal is to create comparable and reliable reporting, with an equally weighted non-financial part added to its traditional financial-oriented part in the future. In addition, all of a company’s business relationships and supply chains will be subject to sustainability scrutiny. Until now, existing legislation on the disclosure of non-financial information has often been considered inadequate or even unreliable. The new CSRD initiative will fundamentally change the scope and nature of sustainability reporting. 

In order to achieve the European Commission’s goal, companies will have to take care of two things in the future: 

  1. The application of new ESG accounting standards, the European Sustainability Reporting Standards (ESRS), and 
  2. the independent auditing and certification by an auditor of the reporting based on these standards.

Sustainability information must also be accessible digitally.

While the CSRD provides the formal requirements for reporting, the ESRS define the content. The ESRS take up existing regulations, such as the standards of the GRI (Global Reporting Initiative) and the SASB (Sustainability Accounting Standards Board) and the rules of the TCFD (Task force on Climate-related Financial Disclosures), but at the same time make the content clearer. New, uniform rules for the EU are thus defined, including the concept of double materiality. Specificially, this means that the impact of a company’s own activities on the environment is no longer the only factor to be considered. Equally, how ESG aspects affect the company and its strategies and activities must now also be taken into account.

Source: Magility GmbH

What are the advantages of the new reporting directive?

The advantages of this new transparency and uniformity are obvious. Stakeholders, such as investors, but also consumers, should find their own decision-making easier, for example with regard to investments or purchases that are also based on sustainability aspects. But it will also encourage and enable companies to give their ESG measures a bigger stage and thus tap into new customer groups and investors.

As non-EU companies are now also required to report for the first time, the European Commission’s initiative strengthens equal opportunities in the EU. For small and medium-sized enterprises (SMEs), this offers a major incentive to also voluntarily expand their reporting to include sustainability topics. The EU is thus laying the foundation for a global standard of sustainability reporting and wants to put an end to greenwashing.

Which companies will be subject to the new directive in the future?

As things stand at present, the audit obligation will apply to the first companies as early as 2025 (reporting year 2024), with others to follow by 2029.

companies affetcted by the corporate sustainability reporting directive

Source: Magility GmbH

 

In total, around 50,000 companies in the EU and 15,000 in Germany alone will be affected by the CSRD regulations in the future. Compared to the current NFRD EU Directive 2014/95/EU, the new directive also changes the scope and timing of the reporting obligations. Whereas companies previously had to report on environmental protection, social responsibility, anti-corruption and bribery as well as diversity on company boards, the CSRD goes even further: in addition to the “double materiality” already mentioned, further forward-looking information including the setting of targets as well as documentation of progress will be required in the future. Information on intangible assets must also be disclosed. As a matter of principle, reporting must comply with the Sustainable Finance Disclosure Regulations (SFDR) and the EU tax directives.

How do I know what to report about?

How exactly the corporate sustainability reporting directive is now implemented is defined by the ESG accounting standards, the ESRS. The current drafts of the requirements can be found on the website of EFRAG (European Financial Reporting Advisory Group).

Source: Magility GmbH

 

ESRS 1 and ESRS 2, the General Information and Overarching Standards sections, describe and explain general aspects of the report that apply to all topics and areas. They specify how to report on the individual topics.

ESRS 2 examines strategy and business model in relation to sustainability, as well as corporate governance and organization and sustainability-related impacts, risks and opportunities. Finally, this section deals with concrete measures, allocation of resources, and key performance indicators.

The Environmental (ESRS E1 to E5), Social (ESRS S1 to S4) and Governance (ESRS G1) sections contain ten topic-specific standards, for example on climate change, environmental pollution, employee rights, corporate governance and business ethics. Which of these topics are relevant to a company is already determined in the analysis of dual materiality (ESRS 1). The standards set out in detail here what must be reported specifically on the individual topics. 

In summary: ESRS 1 defines the how of the sustainability report, ESRS 2 and the topic-specific segments define the what, i.e. the contents of the report. 

The timeline around the implementation of the CSRD at EU level

EFRAG, which submits fully developed draft standards or amendments to them to the EU for EU sustainability reporting, published the first official drafts of the new standard at the end of April 2022. On November 10, 2022, the EU Parliament adopted the reporting proposals for large capital market-oriented companies and equivalent trading partnerships, which were subsequently finalized by the European Commission. The new CSRD then officially came into force on December 19, 2022. 

timeline of the CSRD

Source: Magility GmbH

From mid-2024, the new regulations will then also be implemented in national law at EU level. For companies, this means that the first annual reports will have to be published in accordance with the new uniform requirements for sustainability reporting as early as January 2025. 

The ESRS currently still have draft status – but the standards are to be further defined and extended to sector-specific standards as early as November 2023.

Source: Magility GmbH

No time to lose: magility supports you with your sustainability reporting

The additional burden imposed by the new EU requirements is noticeable for all affected companies, but it is particularly high for small and medium-sized enterprises. They often find it difficult to track their supply and value chains and therefore cannot provide the required information in full. Despite the three-year transition period granted to SMEs, we strongly recommend dealing with the new requirements immediately and developing an implementation strategy now. On the one hand, because the conception of a new reporting already takes a lot of time from a purely technical point of view. On the other hand, companies and their management must be aware that this is a far-reaching change that cannot be anchored in the corporate culture overnight.

Magility supports you in the implementation of the Corporate Sustainability Reporting Directive and the preparation and creation of your sustainability reporting. With our ESG Management System, we help you successfully navigate through the ESRS and set your sustainability targets.

– We check if and when CSRD becomes relevant for your company
– Together we develop a viable ESG management system:

  1. Definition of material impacts
  2. Structuring of ESG measures in an ESG program
  3. Definition of the relevant goals – SDGs (Sustainable Development Goals) 
  4. Agreeing on an ESG governance model
  5. Defining the plan for ESG reporting and audits

Sustainability is a must-have, no longer a nice-to-have! We support you in this. Contact our magility ESG experts!

Megatrend ESG – Sustainability as a success factor

Megatrend ESG – Sustainability as a success factor

The digital transformation, combined with a realignment based on sustainability goals, increases companies’ chances of economic success: companies can increase their profitability in the long term through this networking and thus increase the value of the company. In addition to sustainability goals, the achievement of defined ESG targets becomes just as important a success factor. In this article, we clarify what ESG means, what the United Nations’ Agenda 2030 with its 17 Sustainable Development Goals, the so-called SDGs, has to do with it, what ESG means for companies and investors, and how to develop a sustainable ESG approach for business. 

The automotive industry is changing due to innovations in electrification, autonomous driving and smart mobility. With transportation estimated to account for between 15% and 25% of global carbon emissions, and road vehicles responsible for nearly three-quarters of that share, the environmental motivation is obvious.

The shift to more electrified and autonomous vehicles will continue to change not only traditional working conditions in the automotive industry, but also the direction of automakers.

Corporate management in the automotive industry must be characterized by technological and business expertise, in-depth industry knowledge and goal-oriented handling of strategic partnerships in order to meet the challenges of the future. In this context, the ESG megatrend is of fundamental importance.

What is ESG?

By definition, ESG reporting is the disclosure of data that explains a company’s actions and added value in three areas: environmental, social and corporate governance (principles of corporate management). ESG is the generic term for sustainable and responsible corporate governance. It is a set of guidelines that consider environmental, social and governance factors in addition to financial factors when making investment decisions. It is also a process for assessing how companies perform on each of the E, S and G factors to ultimately determine whether investments are compatible in terms of the guidelines.

What does the E in ESG stand for?

The E in ESG stands for Environmental, and describes the ecological impact of a company’s operations. It is analyzed how its activities affect the environment and how it deals with environmental risks. This applies both to direct operations and to the entire value chain, examples of which include shortages of resources  and their management, conservation of natural resources, treatment of people and animals, and greenhouse gas emissions.

What does the S in ESG stand for?

The S in ESG stands for Social Criteria. The strengths and weaknesses of companies’ actions in their social environment are analyzed and assessed. This includes, among other things, the relationship with employees, suppliers, customers and the community level. The assessment ise.g. based on the following criteria: Working conditions, health and safety, social interaction, activities in conflict regions, and diversity.

What does the G in ESG stand for?

The G in ESG stands for Governance, i.e. corporate governance, and deals with its design, particularly in the areas of accounting, executive compensation models, internal control system (ICS), gender equality and, where applicable, shareholders’ rights. Investors and the public are interested in maximum transparency of corporate processes, and governance provides the necessary basis for trust.

Hand in hand with the ESG approach: The 17 SDG goals

Closely linked to the topic of ESG is also the 2030 Agenda for Sustainable Development, which was adopted by all member states of the United Nations in 2015. It is a shared approach to peace and prosperity for people and the planet, now and in the future. At its core are the 17 Sustainable Development Goals (SDGs), which are  an urgent call to action by all countries – developed and developing – as part of a global partnership. They recognize that  eliminating poverty and other deprivations must go hand in hand with strategies to improve health and education, reduce inequality, and spur economic growth – all while combating climate change and working to protect our oceans and forests.

Today, the Sustainable Development Goals Division (DSDG) in the United Nations Department of Economic and Social Affairs (UNDESA) provides support in terms of content and capacity building for the SDGs and related thematic issues (e.g. water, energy, climate, urbanization, oceans, science, transport, and technology), the Global Sustainable Development Report (GSDR), partnerships, and for small island developing states. The DSDG plays a key role in evaluating the United Nations’ system-wide implementation of the 2030 Agenda, as well as in advocacy and outreach related to the SDGs. To make the 2030 Agenda a reality, broad support for the SDGs must translate into strong commitment by all stakeholders to implement the global goals. The DSDG is designed to help to foster this commitment.

These are the following goals that go hand in hand with the ESG factors:

© Backwoodsdesign-stock.adobe.com

© Backwoodsdesign-stock.adobe.com

Who cares wins: The importance of ESG for companies and investors

Investing in ESG already began in the 1960s. ESG investing evolved from so-called “socially responsible investing” (SRI), which excluded capital investments in industries associated with business activities such as tobacco, weapons or goods from conflict regions. The term ESG was established by former UN Secretary General Kofi Annan in 2004 and led to the first “Who cares Wins” study in 2005, developed with the world’s largest institutional investors and banks.

Today, ESG is growing and evolving rapidly as many investors seek to incorporate ESG factors into the investment process. Similarly, the Portfolio Decarbonization Coalition, a United Nations-sponsored group of 27 mainly European institutional investors and asset managers controlling $3.2 trillion in assets, has pledged $600 billion to fund green projects and investments.

On the legal side, European regulations are pushing for effective  implementation of ESG factors in the financial sector and everywhere else. The ESG framework is being pushed in the EU because it is a mechanism to support the Green Deal and ensure the implementation of a more sustainable economy. ESG factors will play an increasingly important role in evaluating companies, not only for investors but also for consumers and stakeholders. Companies are becoming increasingly aware that they must manage their environmental impacts in innovative ways to remain successful. Sustainability is the new ideal, and the development of sophisticated methods for assessing ESG activities and their impacts is key to its realization.

Magility’s ESG approach – goals, strategy and transformation

For companies to stay ahead of regulations and the competition and reap all the benefits, they need to integrate the ESG approach into the core of their corporate philosophy. 

What is the best approach? Magility offers them a methodology that takes sustainability and ESG factors into account. It is recommended to incorporate ESG into the corporate philosophy from the outset and align corporate objectives accordingly. This allows companies to be more diversified and equal in the way they operate, promote the health and well-being of employees, and in this way also generate a positive impact on their local environment and beyond that in general.

Magility’s ESG consulting approach consists of 3 phases:

© Magility GmbH

© Magility GmbH

 

The ESG control loop – your business success after implementation 

Magility uses the following control loop for sustainable awareness and management of ESG activities: 

© Magility GmbH

As a result of an implementation, your company will be enabled to play in the top league of sustainable companies.

In addition, such implementation can also have a positive impact on the operating result of your company. It depends very much on how the different levers and measures are prioritized and implemented. With our experience we can support you in making the right choice and accompany you during the implementation.

If you want to position your company sustainably for the future and our implementation method has aroused your curiosity, we look forward to hearing from you.

Start your ESG reporting with magility. Feel free to contact our CEO Dr. Michael Müller for more information and  follow us on LinkedIn as well. We are looking forward to it!