Here’s another corporate sustainability regulation to get your head around, complete with an oh-so-catchy acronym: enter the CSRD.

We get it, it can be exhausting keeping up with these things - let alone corralling internal and external stakeholders to achieve compliance. But trust us, the Corporate Sustainability Reporting Directive (CSRD) is way more than just another reporting tick box.

It represents a new era for sustainability reporting.

What is the CSRD?

The CSRD is an EU regulation that strengthens and harmonises how companies report on sustainability. The directive requires companies to report in line with the European Sustainability Reporting Standards (ESRS) - a comprehensive set of guidelines for reporting across environmental sustainability, social issues and governance. The aim is to improve the quality and comparability of reporting. This all fits into the broader policy agenda around the European Green Deal.

To strengthen accountability, the CSRD requires ‘limited assurance’ from the first year of eligibility, i.e. for an independent auditor to assess your sustainability reports. From 2028 this may be upgraded to ‘reasonable assurance’ which will be much more comprehensive - but this is subject to a feasibility study.

Who does CSRD apply to?

The CSRD affects large and listed companies based in the EU and those based elsewhere if they have a net turnover of over 150 million euros per year in the European market. See the graphic below for a more detailed overview of the eligibility criteria.

So, what’s so different about the CSRD?

One of the most important things is the concept of ‘double materiality’.

What does double materiality mean?

Simply put, double materiality means that you need to consider what is material (i.e. relevant) to your business from two perspectives:

1. Financial materiality: How do sustainability issues affect your business?

2. Impact materiality: How does your business affect society and the environment?

Financial materiality covers risks and opportunities that could reasonably be expected to affect your company’s financial performance. For example, a new carbon tax increasing your costs, a consumer boycott harming your reputation, or a line of sustainable products attracting new climate-conscious customers. This is crucial information for your investors.

Impact materiality considers how your business activities have a positive or negative impact on the world. For example, your carbon emissions contributing to global heating, waste going to landfill, and human rights abuses in your supply chain. Positive impacts like providing secure, well-paying jobs and diversity initiatives can also count.

How double materiality helps future-proof strategy

While it increases your reporting requirements in the short term, double materiality and CSRD have significant business benefits:

• Better awareness of future risks and opportunities: Impacts generally have corresponding risks or opportunities - if not today, then tomorrow. For example, if your products contain microplastics that end up in the ocean, this might not be impacting your balance sheet right now, but it leaves you vulnerable to changes in legislation and market trends. This might come up in the ‘impact’ side of the materiality assessment and make you aware of potential future risks that otherwise could have slipped under the radar. This 360 view allows you to future-proof your strategy.
• Stronger stakeholder relations: To conduct your materiality assessment, you need to gather input from a wide range of internal stakeholders (e.g. colleagues in your finance, legal, HR and procurement teams) and external stakeholders (like your suppliers, customers, local communities, and investors). Listening to their priorities and concerns and updating them on your progress helps strengthen these relationships.
• Embedding sustainability throughout your business: Given its regulatory weight and the need to incorporate non-financial sustainability data into financial reports, achieving CSRD compliance can help you embed the sustainability agenda more deeply throughout your organisation. For example, some CSOs have seen increased engagement from their board, which raises the strategic importance of sustainability.
• Unlocking innovation: Through a comprehensive understanding of where your environmental and social impacts and risks lie, you can pinpoint areas for improvement in your products and processes. Input from stakeholders across your business and value chain can also lead to solutions that you wouldn’t have thought of otherwise.
• Making your sustainability function more impactful: By embedding the results of your materiality assessment into your sustainability strategy, you can ensure your team spends their time working on the things that will make the biggest difference. That’s more bang for your (sustainability) buck.

In the longer term, the idea is for CSRD to lead to more streamlined reporting for companies due to materiality assessments and harmonisation.

Need help with your double materiality assessment?

The CSRD is now in force for large and listed businesses in the EU, and SMEs will also need to start reporting over the next few years. A double materiality assessment is an essential first step toward CSRD compliance. And we can help. Our expert team can support you with any or all of the following:

• Roadmap and applicability evaluation
• Double materiality assessment
• Strategy stress test and future-proofing

Our team has supported a wide range of companies to upgrade their sustainability reporting for CSRD, including Kingfisher group (B&Q and ScrewFix). Learn more and get in touch.