SMEs should prepare for upcoming sustainability reporting requirement CSRD

The latest IPCC report has made clear what many of us already knew - there is no time to lose. In April 2021, the EU Commission published its proposal for a new Corporate Sustainability Reporting Directive (CSRD) to revise the existing reporting rules that were introduced by NFRD (Non-Financial Reporting Directive (Directive 2014/95/EU)), guidelines for companies on how to report climate-related information.

The new CSRD is intended to ensure a consistent flow of sustainability information from companies which will be available to banks, insurance companies, asset managers, end investors, non-governmental organizations, and others that wish to scrutinize their social and environmental impact.

The Corporate Sustainability Reporting Directive (CSRD) amends the existing reporting requirements of the NFRD. Covering more than 75% of total EU companies’ turnover. The scope of the reporting obligations will be widened to apply to all non-SMEs (with more than 250 employees or turnover greater than €40M or total assets greater than €20M) and listed companies on any EU regulated markets, while listed SMEs get an extra 3 years to comply(estimated as capturing approximately 49,000 companies in the EU, up from approximately 11,600 reporting under NFRD). Under the proposed CSRD, EU subsidiaries of non-EU companies would be included as well.

Reporting obligations under the Taxonomy Regulation and the recently proposed Corporate Sustainability Reporting Directive (“CSRD”), as well as other EU legislative initiatives, will fundamentally change the nature of mandatory periodic reporting for many companies and are intended to – over the next few years – elevate the status of sustainability reporting to that of financial reporting.

Companies that fall under the scope of the Corporate Sustainability Reporting Directive (CSRD) will be disclosed to the financial markets whether or not they have Taxonomy-aligned activities. Investors will have access to this information and can make investment decisions accordingly. Companies with Taxonomy-aligned activities will benefit from institutional investors, retail investors, and banks interested in green investments, as they will be looking to finance Taxonomy-aligned economic activities. For non-financial companies, that will involve reporting against certain key performance indicators, namely the proportion of their turnover, capital expenditure, or operating expenditure that is taxonomy-aligned.

CSRD disclosure information will be required in the Management Report since 2023 and 2024 for the second set of Sustainability Reporting Standards.

Under the CSRD proposal, EU subsidiaries of non-EU companies would be included as well. Any exempt subsidiary company would be required to publish the consolidated management group report and include a reference in its individual report that it is exempt from the CSRD. Although companies may be exempt from consolidated financial reporting requirements, the consolidated sustainability reporting regime will be separate, so they would not necessarily be exempt from reporting on sustainability information.

As Taxonomy moves forward, exposures to Green Assets or Green Revenues are more attractive to investors. And as corporates getting ready for disclosing CSRD, data availability will increase. Interestingly, first movers are already utilizing green revenue breakdown and advancing ESG revenue breakdown to assess their positions.

GC Insights is analyzing these KPIs and formed comprehensive ESG assessment metrics for ESG revenues assessment, we are ready to support asset managers and Institutions for their KPI alignments of revenues, capital expenditure, and operational expenditure for compliance purposes. In addition, we are keen on building upon supports for drafting and reviewing your current disclosures, and advancing your strategies with fund-level or asset-level ESG Assessments.

CSRD Challenges — Internal communications

Internal communication presents a huge challenge for corporates to align their internal strategies against CSRD among other climate and reporting goals.

Successful reporting internally is key to ensure external reporting strategies. As your team knows where to focus on your businesses and the ESG focuses you shall disclosure to the public. For International Corporations, the development of ESG compliance is no surprise these days, it is time to get serious preparation for ESG disclosures and create values beyond mere branding.

Board members shall study its company-specific ESG issues closely and consider in greater detail of how ESG disclosures could impact the risks to the company as no one knows the business better than its internal stakeholders. As part of their fiduciary duties and oversight responsibilities, directors should not only identify a company’s material ESG risks, which could involve conducting a formal ESG assessment or engagement with key investors, customers, and employees on ESG risks, but also the process by which such risks will be addressed and disclosed.

Communicate the results with internal and external stakeholders takes work, proper disclosure and active engagement go a long way. Start educating your business and managing ESG and climate-related risks to prepare for long-term ESG disclosures as SFDR and global scrutiny associated with these statements.

CSRD Challenges — Reporting Accuracy

Recent findings from Universität Hamburg by Professor Frank Schiemann show clear indications that most corporate sustainability reporting is lacking accuracy, especially in carbon emissions breakdowns (in Scope 1&2, as these are the most disclosed scopes). Even in s stringent, transparent reporting scheme, a considerable proportion of firms cannot provide accurate carbon emissions breakdowns.

Mistakes are easy to find and do not seem to decrease over time (not even experience, public pressure could help), as companies do not feel pressured to accurately report breakdowns.

Quality controls are necessary - especially if companies report only aggregated figures rather than the specific breakdowns! Suitable software, excel tools, applying the principle of double-entry bookkeeping are advised to eliminate discrepancies in breakdowns. Voluntary disclosure schemes have boundaries in promoting accurate reporting.

(Written by Yitong Yuan)

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