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25 Jan 2024 | Industry Insights

Understanding the EU Corporate Sustainability Reporting Directive (CSRD): A Simple Guide

Understanding the EU Corporate Sustainability Reporting Directive (CSRD): A Simple Guide

The European Union has recently adopted a new mandatory environmental, social, and governance (ESG) reporting framework known as the European Sustainability Reporting Standards (ESRS).

What is the CSRD?

The EU Corporate Sustainability Reporting Directive (CSRD) was created on July 31, 2023 as a result of the ESRS adoption. This directive applies to companies operating within the EU and aims to promote transparency to all stakeholders, including investors and society at large. The CSRD seeks to achieve this by improving the comparability and reliability of sustainability information reported throughout the EU.

Who does the CSRD affect?

At present, the CSRD focuses on regulating companies that conduct business within the EU. However, the enforcement of this directive will be implemented in phases based on specific criteria. Large public companies, including non-EU listed companies that were previously subjected to the Non-Financial Reporting Directive, will need to comply by 2024.

Starting in 2025, all large corporations that meet specific criteria related to employees, total assets, and sales will be required to report. This includes both listed and non-listed enterprises. However, the standards for Small and Medium-sized Enterprises (SMEs) are yet to be defined, and they may only be required to report starting in 2027.

What does the CSRD entail?

Firms will need to provide detailed sustainability information about their direct operations and supply chains. The directive includes a dozen standards, with two cross-cutting and ten topical standards covering a variety of sustainability issues. All companies must adhere to these cross-cutting ones, while the topical standards are subject to a materiality assessment.

Companies falling under the Corporate Sustainability Reporting Directive (CSRD) are required to disclose the risks they face due to climate change and the potential impact on climate and society. The data should be submitted in a standardized digital format to ensure easy understanding and comparison between businesses.

The directive obligates companies to disclose sustainability information, including data subject to limited third-party assurance, within their management reports. Companies are also expected to consider double materiality and report scope 3 emissions using the ESRS.

When does CSRD come into play?

The timeline for compliance begins with large public corporations in 2024, with all other large corporations following in 2025. SMEs can expect to come under this directive starting potentially from 2027.

Remember, non-EU firms that fall under the CSRD can use sustainability standards equivalent to the ESRS. Still, the precise definition of "equivalent" remains vague. The ESRS will officially come into force once published in the Official Journal of the EU, and more sector-specific standards and ones for SMEs are expected in the future.

How can you get prepared for the directive?

With the CSRD requiring data in a standardized digital format, digital twins provide an innovative solution by simulating the behaviour of physical objects or systems in a virtual environment.

By integrating with digital twin technology, companies can create exact digital replicas of their assets, enabling them to monitor emissions and energy usage accurately. With a digital twin, companies can gain insights into the performance of their assets, identify inefficiencies, and make data-driven decisions to improve their sustainability strategy.

By using digital twins, companies can accurately measure their total carbon footprint, including scope 3 emissions. This means that they can determine the amount of emissions produced in both upstream and downstream activities.

Furthermore, digital twins help companies develop a shared language that promotes clarity and consistency, making it easier for them to benchmark their performance against industry standards.

Therefore, with the use of digital twins, your company can stay ahead of the game by meeting the CSRD requirements efficiently and accurately.

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