In the realm of emerging sustainability regulations, United States (US) headquartered companies are often focused on North American regulations. Yet, in the ever-evolving landscape of climate accountability, it’s essential to cast our gaze across the Atlantic to the European Union (EU), where groundbreaking strides in environmental governance are transforming the global corporate climate disclosures paradigm. Against the backdrop of this transatlantic dialogue, the recent adoption of the Securities and Exchange Commission (SEC) climate rule in the US has garnered considerable attention, along with California’s Senate Bills (SB) 253 and 261. The EU’s Corporate Sustainability Reporting Directive (CSRD), with requirements for Scope 3 greenhouse gas (GHG) emissions disclosures and double materiality, has reach across the EU and implications globally. Herein, we’ll dig into the requirements of the EU’s CSRD, the impact on corporations across industry sectors and operational jurisdictions, and how to prepare for the phased in compliance deadlines, with the initial compliance period having started January 1, 2024.
What are the requirements of the CSRD?
The CSRD builds upon the EU’s Non-Financial Reporting Directive (NFRD) and implements several key requirements and initiatives:
- Expanded Scope: Companies subject to the CSRD must disclose detailed information on environmental, social, and governance (ESG) factors, including Scope 3 greenhouse gas emissions and double materiality considerations.
- Mandatory Assurance: Assurance requirements are now mandatory for sustainability reports under the CSRD, enhancing the transparency and credibility of disclosed information.
- Harmonization: The CSRD aims to harmonize sustainability reporting practices across the EU, promoting consistency and comparability in disclosures.
Who feels the impact of the rule?
The rule impacts ~50,000 companies meeting the following applicability criteria:
- Large EU companies (includes subsidiaries and branches of non-EU parent companies) which exceed at least two of the following criteria:
- 250 employees on average over the financial year
- A balance sheet total of €20 million
- A net turnover of €40 million
- Companies listed on the EU regulatory market (no size threshold)
Non-EU companies that have a turnover greater than €150 million in the EU (an estimated 3,000 US-based companies are subject to the CSRD).
What are the current deadlines or timelines associated with the rule?
The CSRD introduces phased compliance deadlines to ease the transition for affected companies. Understanding these timelines is crucial for corporations subject to the directive:
- First Year of Reporting – Starting January 1, 2024 with reporting for Fiscal Year (FY) 2024 due in 2025. In the inaugural year of CSRD reporting, the focus is on large EU companies meeting specific criteria, including employee count > 500, balance sheet total, and net turnover. Additionally, companies listed on the EU regulatory market are required to comply with the CSRD, irrespective of their size. This initial phase aims to establish a robust foundation for sustainability reporting among entities with significant operational footprints and market presence within the EU.
- Subsequent Phases of Reporting: Following the first year of reporting, the CSRD will extend its reach to encompass additional categories of companies, ensuring broader coverage and consistency in sustainability disclosures. Non-EU companies with substantial turnover in the EU will also be subject to the directive, reflecting its extraterritorial impact on global corporations operating within the European market. As implementation progresses, companies must remain vigilant and adapt their reporting practices to align with evolving regulatory requirements and expectations.
By delineating the phased approach to CSRD compliance, regulators aim to facilitate a gradual transition while enabling companies to enhance their sustainability reporting capabilities progressively. This structured approach allows organizations to allocate resources effectively, address implementation challenges, and demonstrate continuous improvement in their sustainability performance and transparency.
What is the status of the rule?
The CSRD was formally adopted by the European Parliament and Council, signaling a significant milestone in the EU’s sustainability agenda. The rule entered into force January 5, 2023. Member states of the EU are now in the process of transposing the directive into national law, with companies expected to align their reporting practices accordingly. Legislation around the European Sustainability Reporting Standards (ESRS) is ongoing, with the initial general ESRS adopted July 31, 2023. Most recently, in February 2024, the EU parliament agreed to postpone the deadline for sector specific ESRS by two years, from mid-2024 to mid-2026.
Preparedness for CSRD Compliance
There are a number of steps that corporates can take to prepare for the phased in CSRD reporting deadlines.
- Assess Applicability: Determine whether your company falls within the scope of the CSRD based on the specified criteria of the rule. If applicable to the role, understand your compliance deadlines based on your size and criteria with respect to the phased approach of the rule.
- Review Reporting Requirements: Familiarize yourself with the detailed reporting requirements outlined in the CSRD, and the referenced ESRS, including sector specific ESRS as applicable and once finalized.
- Enhance Data Collection and Assurance Processes: Invest in robust data collection mechanisms, tools to track high quality and transparent data such as the Cleartrace platform, and assurance procedures to ensure the accuracy and reliability of sustainability disclosures while simultaneously complying with the rule’s verification requirements.
- Engage Stakeholders: Collaborate with internal and external stakeholders, including investors, regulators, and civil society organizations, to understand expectations and gather input on sustainability priorities.
- Supplier Readiness: Even for companies not subject to the rule that supply or provide services to subject companies, additional data may be requested from corporates to their suppliers to facilitate Scope 3 calculation efforts. Companies subject to the rule may consider revisiting supplier questionnaires to improve data accuracy.
- Monitor Regulatory Developments: Stay informed about updates to the CSRD, release of updated and sector specific versions of the ESRS, and related sustainability regulations to adapt your compliance strategy accordingly.
How can Cleartrace help with CSRD compliance?
By understanding the requirements of the CSRD, assessing its impact on business operations, and proactively preparing for compliance, companies can demonstrate their commitment to sustainability, enhance stakeholder trust, and position themselves for long-term success in a rapidly evolving global marketplace. Cleartrace is here to help with our solution offerings for quantifying and reporting of GHG emissions, environmental attribute tracking, and more advanced initiatives like tracking 24/7 carbon free energy (CFE) and emissionality solutions. Audit ready data, enabled by the Cleartrace platform, is essential for corporates subject to the initial 2025 reporting deadline and the subsequent phased in reporting deadlines.
Cleartace’s platform will simplify your company’s process for reporting, which can enable your teams to focus on what’s critical. Please visit our website to learn more.
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