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The Corporate Sustainability Reporting Directive (CSRD) is being progressively implemented, with more companies coming under its scope each year until 2026. Starting in 2025, large non-listed companies will also be required to report under the CSRD. Integrated within the discussions and requirements of the CSRD are the European Sustainability Reporting Standards (ESRS). Given the complexity and interconnectedness of EU regulations, this blog aims to clarify the differences and commonalities between the CSRD and the ESRS.
What is CSRD?
The CSRD represents a significant step forward in the EU's efforts to enhance corporate transparency on environmental, social, and governance (ESG) issues. Introduced on January 5, 2023, the CSRD builds upon and replaces the Non-Financial Reporting Directive (NFRD). Its primary objective is to ensure that companies provide comprehensive and reliable information on their sustainability practices, risks, and impacts.
The CSRD applies to all large companies and all listed companies within the EU, except micro-enterprises. This broad scope means that a substantial number of organizations, including non-EU companies generating over EUR 150 million in the EU market, must comply. The directive aims to improve the quality and comparability of sustainability information, making it easier for investors and other stakeholders to assess corporate performance against sustainability criteria.
What is ESRS?
The ESRS are the specific guidelines that operationalize the CSRD's requirements. Developed by the European Financial Reporting Advisory Group (EFRAG) and adopted by the European Commission, the ESRS provide detailed instructions on how companies should report on various ESG topics.
The ESRS are designed to be comprehensive, covering a wide range of issues such as climate change, biodiversity, and human rights. They ensure that companies' sustainability reports are consistent, comparable, and aligned with the EU's broader sustainability goals. Importantly, the ESRS also aim to harmonize with international standards, reducing the reporting burden on companies operating globally and preventing unnecessary double reporting.
Key Differences Between CSRD and ESRS
Understanding the distinction between the CSRD and ESRS is crucial for businesses aiming to achieve effective compliance and reporting. In this blog post, we break down how the CSRD sets the broad legal framework for sustainability reporting and how the ESRS translate these mandates into actionable standards. Learn about the legal obligations, detailed reporting guidelines, and practical methodologies these regulations offer. For a comprehensive comparison, see the detailed table below.
Implications for Businesses
Navigating the requirements of both the CSRD and the ESRS can seem overwhelming, but understanding their distinct roles simplifies compliance.
Compliance Requirements: Businesses need to familiarize themselves with the CSRD to understand the overarching obligations and then dive into the ESRS for specific reporting guidance. This dual approach ensures that companies meet both the legal and practical aspects of sustainability reporting.
Operational Impact: Implementing the CSRD and ESRS may require significant changes to existing reporting processes. Companies might need to invest in new systems, hire sustainability experts, or train existing staff to meet the new requirements.
Benefits and Challenges: While compliance can be challenging, the benefits include improved transparency, better risk management, and enhanced investor confidence. By adhering to these standards, companies can also position themselves as leaders in sustainability, potentially gaining a competitive edge.
Conclusion
In summary, the CSRD and ESRS are essential in the EU's drive towards greater corporate transparency and sustainability. While the CSRD sets the broad legal framework, the ESRS provide the detailed standards necessary for effective compliance. Understanding and implementing these requirements will not only ensure compliance but also enhance your company’s reputation and performance in the long term.
Today many companies in Germany face increasing pressure to comply with multiple environmental, social, and governance (ESG) reporting standards. Among these, the German Supply Chain Due Diligence Act (LkSG) and the EU Corporate Sustainability Reporting Directive (CSRD) stand out for their comprehensive requirements.
Companies subject to both laws can streamline their compliance efforts by adopting a unified approach to due diligence and reporting. Here’s how companies can prepare to meet the obligations of both LkSG and CSRD without duplicating work:
1. Human Rights Risk Assessment
Both LkSG and CSRD require robust human rights risk assessments. For example, a manufacturing company can use our LkSG risk management software to identify and assess risks of child labor in its supply chain. By integrating this process with the CSRD’s requirements, the company can document the preventive measures taken and the positive outcomes achieved.
2. Environmental Risk Management
Environmental due diligence is a critical component of both laws. For instance, a textile company might face risks related to water pollution from dyeing processes. Our software can help monitor these risks and implement corrective actions, which can then be reported under CSRD.
3. Preventive and Corrective Actions
To avoid redundancy, companies should establish a unified process for implementing preventive and corrective actions. For example, a food processing company might discover forced labor in its supply chain. Using our software, they can implement corrective measures and track their effectiveness, fulfilling both LkSG and CSRD requirements.
4. Transparency and Public Reporting
Transparency is a cornerstone of both LkSG and CSRD. A technology company can use our software to consolidate its due diligence activities into a single, comprehensive sustainability report. This report can include data on carbon emissions, labor practices, and corrective actions taken, ensuring compliance with both laws.
5. Training and Capacity Building
Training is essential for effective compliance. For instance, a logistics company can provide training on human rights and environmental standards to its employees and suppliers and create a record on our software as evidence. This ensures you are appropriately providing necessary training, documenting including acceptance of your supplier code of conduct by the suppliers.
6. Integration into Business Processes
Integrating ESG considerations into core business processes is vital for streamlined compliance. For example, an Automotive company can consider the outcome of the due diligence process in its procurement system such as sourcing, ensuring that human rights and environmental impacts are considered when selecting suppliers.
7. Reporting
Effective reporting to regulators is required by both laws. The user of our ESG Suite can prepare their draft report using our software. This helps a company to standardize their ESG reporting practices in a centralized software solution.
To discover more about our ESG Suite and LkSG Risk Management Software, contact us here.
