The European Commission has released a comprehensive FAQ document to help companies implement the new Corporate Sustainability Reporting Directive (CSRD), effective from 2024. This guidance clarifies rules and requirements, providing guidance for businesses to be well-prepared for their upcoming sustainability reporting under CSRD following the European Sustainability Reporting Standards (ESRS). Access the FAQs here.

Key Takeaways

• Use the flow chart and timeline to understand when your business, clients, or customers may fall within the scope of reporting under CSRD. If any fall within these groups to report under CSRD, they will need to report on their Scope 1, 2, and 3 GHG emissions.

• If you’re a supplier to a customer required to report, they will beasking their suppliers (that’s you) for emissions data in order to comply.

• It's best to start on your GHG accounting journey now.

Who is required to report and when?

The CSRD applies to large public-interest entities in the EU, as well as non-EU companies with securities listed on EU regulated markets or significant EU-based subsidiaries or branches. Approximately 50,000 companies are expected to fall within the scope of CSRD's requirements.

To help with the decision-making process for determining which entities or undertakings fall within the scope, the FAQ provides a detailed flow chart on page 12 for guidance. Page 13 also offers a handy table summarising the expected reporting timeline for each group of undertakings.

The timing of reporting is outlined in para 39 of FAQ, where undertakings are required to publish within 12 months of the financial year end date, and for undertakings that are listed companies it’s within 4 months of the financial year end date.

Source: Page 12 of CSRD FAQ

Source: Page 13 of CSRD FAQ

What are the GHG Emissions reporting requirements?

The European Sustainability Reporting Standards (ESRS) comprises of 12 standards, containing 2 general (ESRS 1 & 2), 5 environmental (ESRS E1–E5), 4 social (ESRS S1–S4) and 1 governance (ESRS G1) topics.

GHG figures are specifically reported under ESRS E1-6, where companies are required to disclose their Scope 1, 2, and 3 emissions, total GHG emissions, as well as emission intensities.

In recognition of the challenges with measuring Scope 3 emissions and collecting data from suppliers or businesses within the value chain, ESRS 1 (General Requirements) provides provisions to address this, para 69 states:

“There are circumstances where the undertaking cannot collect the information about its upstream and downstream value chain as required by paragraph 63 after making reasonable efforts to do so. In these circumstances, the undertaking shall estimate the information to be reported about its upstream and downstream value chain, by using all reasonable and supportable information, such as sector-average data and other proxies.”

What constitutes “reasonable effort” for Scope 3 and value chain emissions?

We turn to para 29 of the FAQ for guidance as to what constitutes “reasonable effort”?

The FAQ acknowledges there's no clear-cut definition of "reasonable effort," as it's likely to vary between undertakings. What constitutes reasonable effort should be determined by considering the specific circumstances of the undertaking and its external operating environment. To guide this assessment, the FAQ document provides several criteria to consider:

1. The size and resources of the reporting undertaking in relation the scale and complexity of its value chain

2. The technical readiness of the reporting undertaking to collect value chain information.

3. The availability of tools to access and share value-chain information.

4. The size and resources of the actor in the value chain.

5. The technical readiness of the actor in the value chain.

6. Level of influence and buying power.

7. Connected to the level of influence, the ‘proximity’ of the actor in the value chain.

A common theme across these criteria is the expectation of low readiness levels for sharing value-chain information in the first few years, both for the reporting undertaking and its actor in the value chain (i.e. suppliers or portfolio companies). During this transitional period, which is defined as the first 3 years from mandatory reporting (Para 31 of FAQ), it’s expected reporting undertakings are likely to rely more heavily on the use of estimates and proxy data. However, as the ability of undertakings and their value chain actors to share sustainability information improves overtime, the use of proxy data is expected to decrease. In all cases, the reporting undertaking should be considering the data quality of proxy data used and it’s impact on the quality of the reported information.

Para 30 of FAQ clarifies “SMEs should expect undertakings that fall under the scope of CSRD to apply “reasonable effort” to collect from actors in their value chains the information they need in order to comply with ESRS.”

There are considerations regarding the readiness and maturity a SMEs, referencing the criteria listed above, it is expected SMEs that are 1st tier suppliers or customers of undertakings that are required to report under CSRD are more exposed to higher expectations to be asked to share sustainability information, as compared to smaller SMEs that that aren’t.

Two sustainability reporting standards for SMEs are currently in development as well - a mandatory one for listed SMEs (LSME ESRS) and a voluntary one for non-listed SMEs (VSME). The VSME standard is being designed as a reference point for all businesses, to ensure that the reporting effort of CSRD and non-CSRD undertakings is proportionate.

💡So what does this all mean?

These provisions are here to strike the balance between comprehensive reporting and practical data availability and collection considerations, hence the 3 year transition periods, but it is clear the directive expects undertakings to engage with their value chain to share sustainability information.

With approximately 50,000 companies falling within the scope of CSRD set to begin reporting from 2025 - and the final group starting in 2029 - the cascading effect on other businesses is imminent.

What are the Assurance expectations?

The CSRD mandates limited assurance from the first year of application, starting in 2025 for companies reporting on the 2024 financial year. The assurance opinion will be based on a limited assurance engagement regarding the sustainability statement's compliance with the following requirements as clarified under para 70:

• the sustainability reporting requirements provided for in the Accounting Directive (including the compliance of the sustainability reporting with the ESRS adopted pursuant to Articles 29b/29c of the Accounting Directive, the process carried out by the undertaking to identify the information reported pursuant to those ESRS - i.e., the double materiality assessment process, and the compliance with the requirement to mark-up sustainability reporting in accordance with Article 29d of the Accounting Directive); and*

• the reporting requirements provided for in Article 8 of the Taxonomy Regulation.

The CSRD has required the EU Commission to adopt sustainability assurance standards for limited assurance by October 2026 and for reasonable assurance by October 2028, following an assessment to determine if reasonable assurance is feasible for auditors and for undertakings. In the meantime, para 75 clarifies assurance providers can apply national auditing standards, procedures or requirements as long as the Commission has not adopted an international auditing standard covering the same subject matter.

Section V of FAQ outlines the eligibility criteria and approval requirements for assurance providers conducting sustainability assurance. Statutory auditors, Independent Assurance Services Providers (IASPs), and accredited independent third parties are eligible to apply for approval to conduct sustainability reporting assurance.

💡So what does this all mean?

As GHG emission figures are reported under ESRS E1, therefore, limited assurance will be required over these figures, and there is an expectation to work towards reasonable assurance in the near future. 

It’s also clear the CSRD recognises financial assurance professionals as one of the key players in the implementation and verification of sustainability reporting.

Final takeaway?

If you’re a business that supplies to undertakings in scope of CSRD get ready to be asked for your emissions data as part of their value chain information collection. Start upskilling your teams to understand what is required for report on your business’ GHG emissions

If you’re a business that needs to make a reasonable effort to collect value chain information, check out our Scope 3 engagement best practice guide.

With an estimated 50,000 businesses caught under CSRD, you are not alone on your sustainability journey! The phased implementation is really designed to make the transition more manageable, so don’t wait until the last minute to get started! If you're not sure where to start, just reach out, we'd be happy to help.