Part 1: CSRD - The Directive of the Moment  

What is the CSRD and Why Was It Created?

"Sustainability reporting will now be on an equal footing with financial reporting. The CSRD will help drive the transition to a sustainable economic system built on innovation and investment opportunities."

_{Mairead McGuinness,}  

_{European Commissioner for Financial Services, Financial Stability and Capital Markets Union}  

_{June 22, 2022}

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The CSRD, Corporate Sustainability Reporting Directive, is the most recent European Union directive applied to the sustainability of organizations and its main objective is to put the reporting of non-financial information on an equal footing with the reporting of companies' financial information.  

Its founding principle is very clear: together with the SFDR(Sustainable Finance Disclosure Regulation) and the EU Taxonomy, it aims to support the European Union's sustainable financing strategy by promoting structured and responsible businesses based on the pillars of sustainability: environmental, social and governance criteria .

This conduct was first addressed in 2014 with the NFRD(Non-Financial Reporting Directive, predecessor of the CSRD) which, when transposed into legislation for member states, initially affected around 11,600 companies. However, the growing need to activate more demanding measures to curb the numerous effects of the climate crisis led to the creation of the CS RD, which consolidates the existing requirements and extends the scope of its predecessor from 11,600 to approximately 50,000 affected companies.

This translates into a broad business fabric that impacts companies in a phased and gradual manner, starting with large companies as early as 2025 (with a data report for 2024) and reaching SMEs in 2028 (with a data report for 2027).

This new regulation guarantees transparency in the analysis of impact - risks and opportunities - by investors, the banking sector and other stakeholders in the corporate world. Companies, more than ever, will be scrutinized with the aim of filtering out businesses whose strategy deviates from the criteria of the new Directive.

For more details:

The CSRD was published on December 14, 2022 and comes in the context of the European Green Deal

Main CSRD Reporting Criteria

When applying the CSRD, companies must take into account its guiding principles, of which the following stand out:

• Dual Materiality - This means that companies now report on the impact of their activity on the environment and society, as well as the impact that the planet and society have on their business.

• Mandatory Standards: ESRS Standards (European Sustainability Reporting Standards) - These new standards apply to all companies covered by the Directive, regardless of the sector in which they operate. They promote standardization and facilitate the comparison of data disclosed by organizations.

• Mandatory Aud iting - Auditing has become a mandatory requirement at European Union level, i.e. all information disclosed must be auditable and audited by an independent entity, with the aim of guaranteeing its transparency and reliability.  

• Reporting in the XBRL Digital Format (eXtensible Business Reporting Language) - Information must be disclosed in the XBRL format, which is suitable for this type of reporting and complies with the ESEF - European Single Electronic Format.

• Integration into the Management Report - The organization's non-financial information must be included in the organization's management report and must be easily accessible.

The Deconstruction of the ESRS (European Sustainability Reporting Standards)

The ESRS standards were developed by EFRAG - an independent advisory body, mostly funded by the European Union. EFRAG's standards projects are developed on the basis of a close relationship with investors, companies, auditors, civil society, trade unions, academia and regulatory bodies.

Main objectives of ESRS standards:

• standardize and facilitate the comparison of information;
• support companies in managing their sustainability performance and communicating it;
• thus simplifying access to financing.

As mandatory common standards, and contrary to what you might think, ESRS standards facilitate the reporting process for organizations.  

If, until now, the multiplicity of standards and frameworks gave rise to some uncertainty when it came to defining what to report, with the CSRD standards this discomfort is mitigated.  

The entities responsible were clearly careful to align reporting with existing standards - such as the GRI, ISSB or TCFD - and thus facilitate the articulation and harmony of information, avoiding cumulative processes.  

There are 12 ESRS standards and they fall into two groups:

• 2 in general;
• 10 of specific scope, associated with the acronym ESG, namely:  

• 5 for 'Environment';
• 4 for 'Social';
• and 1 for 'Governance'.  

The table below illustrates how the 12 standards are structured:

Naturally, under each of the 12 standards there are various requirements and datapoints to guide and structure the reporting of information.  

The 2 general standards - ESRS 1 and ESRS 2 - are mandatory and apply equally to any organization.  

The remaining 10 are directly associated with the material topics (core areas, therefore the most relevant topics for the organization) identified by the company and which must therefore be reported.  

However, it is important to highlight one aspect on the subject of climate change:  

If a company considers that Climate Change is not a material issue for itself and therefore decides not to present data associated with this standard, it must present evidence of this conclusion, based on its materiality analysis.  

This is because climate change will have extremely damaging effects on the environment and society.  

For a better understanding of these standards, we recommend a more careful consultation of the official EFRAG website, where you can find official information, namely:

• The first draft EFRAG implementation documents
• Educational videos on the first set of draft ESRS 
• First Set of draft ESRS & Basis for conclusions

This is ongoing work on the part of EFRAG and the European Union, always with the aim of making this process simpler and more effective for companies and the various stakeholders involved.

"Without such information, money cannot be channeled towards environmentally friendly activities." - EU  

Who Is Obliged to Comply with the CSRD?

The CSRD reporting criteria begin to be applied in 2024, impacting companies already affected by the NFRD, and will be extended to other companies gradually until 2028, as illustrated in this timetable:

Regardless of the timetable for implementation of the CSRD, it is important to bear in mind, particularly in the case of SMEs, that voluntary reporting of non-financial information will always be a differentiating factor in the market. This is because, when selecting a supplier, large companies will certainly take into account those that already integrate ESG criteria into their business strategy.

Part 2: The Importance of a Responsible Business Model for Companies

Business As Usual VS Responsible Business

The basis of any sustainable business is a long-term livelihood strategy and this requires an ambitious but responsible action plan. And this is where the big difference lies between the models known as Business As Usual and Responsible Business: where the former has a clear focus on profit and shareholders and, in contrast, the latter involves and bets on all its stakeholders.

We are facing a scenario in which the 'giants', as entities that dictate the rules, demand structured and responsible activities, capable of guaranteeing (us) prosperous and sustainable development.

And in this sense, Business As Usual naturally becomes an outdated business model with no future.  

Benefits of a Responsible Business Model

The benefits of a Responsible Business model, which is legally compliant, are numerous and boost the growth and positioning of the business:

• Visibility and credibility with investors and the banking sector;
• Competitiveness in the market and in procurement processes;
• Cost reduction, since the integration of ESG criteria leads to the optimization of natural and operational resources;
• Productivity associated with greater employee motivation and consequent retention and attraction of talent;
• Resilience and long-term business sustainability.

Punishments of an Unresponsible Business Model

On the other hand, the punishments resulting from a non-sustainable strategy, which is not in line with legislation, are severe and can even lead to the slow death of the business. This conduct is directly associated with the Business As Usual model.  

In addition to legal sanctions, the likelihood of a domino effect in terms of situations that are difficult to control is quite high:  

• Discredit with investors and banks;
• Loss of market share;
• Falling productivity;
• Talent drain.

Part 3: Conclusion

Market expectations and regulatory requirements are constantly evolving, which means that having a responsible business model is not an option, but an imperative, capable of determining the success or failure of companies in the medium to long term.  

The contrast between Business As Usual and Responsible Business clearly illustrates the risks and benefits associated with each approach. While focusing exclusively on shareholders can provide short-term gains, this strategy is unsustainable in the long term and potentially disastrous. CSRD is here to stay and everyone who embraces it will be ensuring a more sustainable future.

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_{Sources for consultation:}

_{Sustainability Reporting Standards: https://www.efrag.org/lab6}

_{Questions and Answers on the Adoption of European Sustainability Reporting Standards: https://ec.europa.eu/commission/presscorner/detail/en/qanda_23_4043~}

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