The Corporate Sustainability Reporting Directive (CSRD) is coming: how to prepare your company? In episode 4 of the Dutch podcast "De Klimaat Veranderaars", Clara and Max ask CSRD expert Emma Kallen for an explanation. Read the most important key-take-aways in this article.
In this episode: How do you make sustainability measurable and transparent? And how do you prepare a solid sustainability strategy? Together with Emma we walked through all the steps.
Emma Kallen is a CSRD expert and founder of the consulting firm Factor Delta in Amsterdam. Four years ago, she started advising companies on sustainable business practices. Nowadays, the CSRD forms the core of her work.
Read the key takeaways from the interview here
The CSRD is being implemented step by step. This does not mean that every company needs to meet all the requirements at the same time. Emma outlines a clear timeline for us when the CSRD will apply and to which companies:
Emma: "The first group that must comply with this directive are publicly traded companies within the EU. They need to report on the fiscal year 2024 and will prepare their reports in 2025."
The second group are large companies that meet two out of the following three criteria: 50 million in revenue, 25 million in total assets, and more than 250 employees. This group must report on the fiscal year 2025 and prepare their reports in 2026.
Then, there are publicly traded SMEs that will report on the fiscal year 2026 and prepare their reports in 2027.
Finally, we expect non-publicly traded SMEs to submit a light version of the CSRD report around 2028-2029."
What about non-EU companies?
The CSRD pertains to the European market, and therefore also affects companies that bring their products to market here, but are based outside the European Union. Companies from outside the EU must report if they generate more than 150 million euros in revenue in the EU. This obligation will be implemented starting in 2027.
"The goal is to ensure that European companies are not disadvantaged compared to international competitors who would not have to follow the same rules. Ultimately, the EU hopes to promote global sustainability and fair competition," Kallen explains.
The CSRD affects the entire supply chain
Companies that are not (yet) subject to the reporting obligation, but collaborate with or supply products to CSRD-regulated companies, will indirectly have to deal with CSRD reporting requirements as well. This is because the CSRD also requires companies to report on the impact within their supply chains.
Here's how it works. Besides reporting on the energy consumption of its own production activities, companies also need to report on the impact of its suppliers. In fact it's quite logical, as the production of supplied goods also has a climate impact. Emissions are categorized into three scopes (scope 1, 2, and 3). Scope 3 covers indirect emissions in the value chain.
Kallen illustrates this with a practical example: "A large Dutch company, that originally managed its own logistics with its own fleet of trucks, has now outsourced this logistics to an external party. The emissions from this logistics now fall under scope 3 and are part of the chain emissions, no longer within the organisation itself."
Not just sustainability
As you can see, the CSRD has consequences throughout the entire chain. Smaller suppliers will be asked about sustainability, such as their energy consumption, safety regulations, and how they treat their employees. CSRD-regulated companies must also report on employees in the supply chain. So if you are part of that chain, as a small company, you will be asked about your policies, evidence, certifications, and data on things like employee satisfaction, absenteeism, and accidents.
In short, even smaller companies that work with CSRD-regulated companies need to prepare for these reporting obligations and sustainability questions to maintain their position in the chain.
The CSRD focuses on ESG criteria, an abbreviation for environmental, social, and governance. These are three important criteria, by which companies are evaluated on their impact on the world and how they are governed.
So this regulation impacts a much broader area than just the companies that have to report. It leads companies to make decisions about who they buy from or do business with. Choices will be more based on how transparent or sustainable companies are because otherwise, they will have a lot of work to do
Moreover, ESG criteria are becoming increasingly important for investors, customers, and other stakeholders who want companies to be not only profitable but also responsible and sustainable in their operations.
A roadmap for the CSRD
Start early, is Emma's advice. This way, you have more time to spread out the tasks and reduce the burden on your team. Assuming a fairly straightforward, average Dutch company, you can complete the process within nine months. The company can then proceed independently without the need for a consultant.
But where do you start? Emma explains the process in five clear steps:
Step 1 - Team and knowledge
The first step is to assemble a suitable team and ensure the necessary knowledge. This team is essential because the CSRD report must be prepared annually and affects all aspects of the company, such as energy consumption and personnel matters. A project leader, often a CFO, quality manager, or facility manager, should dedicate about one day per week to this task. The supporting team, consisting of three to seven people, should contribute an average of one to two hours per week.
Besides a strong team, it’s crucial to acquire the right knowledge. Rather than starting haphazardly, it’s recommended to engage in training, masterclasses, or consult external experts. This ensures the complex CSRD requirements are well understood and effectively implemented. While implementation can be completed in a few months, a longer period is often preferable for thorough preparation and sustainable implementation.
Step 2: Drafting the table of contents
Start with a double materiality assessment, which is a risk analysis of the company’s activities and their impact on people and the environment. Essentially, this involves an overview of activities that impact people and the environment. But you also consider sustainability issues that can significantly affect the company's financial performance, such as the effects of climate change, new regulations, or changing market conditions.
For instance, a company operates trucks, and these trucks emit CO2, thus impacting the environment. This is an element that should appear in your materiality analysis. If you then electrify your fleet, it not only reduces emissions but also affects the company’s financial risks. You become less dependent on fluctuating oil prices or might need to consider new regulations.
The double materiality assessment helps determine which topics are important and need to be reported on, both in terms of environmental and social impact and financial matters. Use this analysis to determine your table of contents. You now know which topics are important to report on and which are not. To create a comprehensive table of contents, you can use clear methods available online.
Step 3: Conduct a Gap Analysis
Compare the table of contents with the existing data and reports within your organisation. Identify what information is already available and what is still missing. For instance, if you already have data on your energy consumption, you can use that; missing data will need to be collected. The gap analysis helps you list the missing data.
Step 4: Create an Action Plan
Based on the gap analysis, develop an action plan to collect missing information and complete reports. This could involve, for example, creating a CO2 footprint for scope 1, 2, and 3 emissions.
Step 5: Execute the Action Plan
Execute the action plan, which may include: collecting data, drafting policies and procedures, and assigning responsibilities. Ensure that all actions are fully and timely completed to meet the CSRD requirements.
Don't be caught off guard by the CSRD; start preparing your team early. And work together to make your company and supply chain more sustainable!
In short, if you're ready for a quick CSRD course or want to refresh your knowledge, listen to this episode in the Apple podcast app or on Spotify.
And here are a few useful links for more in-depth information:
EFRAG, The Handbook for the CSRD: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=OJ:L_202302772
Tools and support for conducting the Double Materiality Assessment: https://www.nba.nl/tools-en-ondersteuning/publicaties/2023/stappenplan-dubbele-materialiteitsanalyse-csrd/
