CSRD – What is in store for companies?  

Our analyst Kathrine Link interviewed Philippe Diaz, member of the European Lab PFT-ESRS of the European Financial Reporting Advisory Group (EFRAG) and Senior Manager in the department Sustainable Finance at WWF Germany, regarding the next steps in the creation of the standards for the Corporate Sustainability Reporting Directive (CSRD). Mr. Diaz contributed to the creation of the European Sustainability Reporting Standards (ESRS) on the CSRD.

Mr. Diaz, what innovations does the CSRD bring compared to the NFRD? 

With the Non-Financial Reporting Directive (NFRD), there are no mandatory standards for companies to use that require companies to disclose their data transparently. The CSRD will replace the NFRD from January 2024 and will bring new standards, the so-called European Sustainability Reporting Standards (ESRS). In addition, the ESRS take into account other international frameworks and standards such as the TCFD (Task Force on Climate-related Financial Disclosures) and the IFRS Sustainability Disclosure Standards (IFRS SDS), which were developed by the International Sustainability Standards Board (ISSB), and thus lead to standardization of reporting for companies.

What changes can be expected for the ESRS before EU approval in June 2023?  

We hope from the EU Commission that the ESRS will be accepted without major changes and that no "Taxonomy 2.0" will be created by making cuts. The first signals from the EU Commission's Directorate-General for Financial Stability, Financial Services and Capital Markets Union (FISMA) are positive. So far, FISMA has stated that it intends to change as few standards as necessary. This bodes well given the tight timetable companies have to adhere to in preparation for the CSRD.

Why is it important that small and medium-sized companies also deal with the topic of sustainability reporting?

Capital market-oriented small and medium-sized enterprises (SMEs) will also be subject to the reporting obligation from the 2026 financial year. There will probably then be two standards for SMEs: a standard for listed and a voluntary standard for non-listed SMEs. The EFRAG standards consist of different disclosure requirements (DRs). EFRAG is currently discussing whether it is necessary for the listed SMEs to report on all or only some DRs. If reporting is only mandatory for some DRs, a materiality analysis should be carried out for all other non-mandatory DRs. This would then be followed by a report on the key sustainability issues.

Is a report on all disclosure requirements of the sector specific standards required for the relevant sector? 

The sector-specific standards, which are to be applied to various sectors in addition to the ESRS already submitted, are currently being drawn up. EFRAG is currently discussing whether all companies in a sector should be required to report on all or only individual sub-sectors on specific DRs. However, the latter is favoured by WWF Germany. As a basis for which DRs companies in a sector must report to, WWF Germany proposes an assignment to the NACE codes of the EU. A materiality assessment of the sustainability topic for the companies that are not named in the NACE codes of the DRs follows. Furthermore, the "rebuttable assumptions", which were removed from the ESRS after the public consultation, could be included in the sector-specific standards. 

What is the biggest progress you see in implementing the ESRS? 

According to the CSRD, companies should set themselves science-based environmental goals. This is based on the principle of context-based materiality: if, for example, a beverage manufacturer reduces its water consumption by 80 % at its own locations in Sweden, where there is no water shortage, but does not do so in Morocco, where there is a water shortage, the impact is low. The application of context-based materiality is a major step forward compared to self-imposed targets and provides comparability across companies. In order to be able to define science-based environmental goals, ecological threshold values and their allocation are currently being developed by various initiatives – such as the Science Based Targets for Nature (SBTN).

Do you see room for improvement in the standards? 

If a sustainability issue is material, it must report on the relevant disclosure requirements of the standard. We see two gaps that should be closed in the future. First, a company can indicate that no processes can be submitted with the DRs. Secondly, that there is no obligation to report on the data points of the DRs and no statement is required as to why data points are not available. In our view, an explanation as to why data is not available would be desirable in the management report. 

Mr. Diaz, thank you very much for the interview.

About Mr. Diaz: As a member of the European Lab PTF-ESRS of the European Financial Reporting Advisory Group (EFRAG), Philippe Diaz worked on the creation of the European Sustainability Reporting Standards (ESRS) for the CSRD. He works as a Senior Manager in the Sustainable Finance department at WWF Germany. His expertise lies, among other things, in the area of corporate reporting with a particular focus on biodiversity and forestry. 

About WWF: WWF Germany is part of the international environmental protection organization World Wide Fund For Nature (WWF). For more than 50 years, the WWF network has been working around the world to stop environmental destruction and create a future in which people and nature live in harmony. In more than 100 national and international projects, WWF Germany is currently committed to preserving biological diversity and our natural foundations of life. More than 800,000 sponsors support the organization.