The Role of CSRD in Measuring and Ultimately Reducing the Carbon Footprint



The new sustainability reporting requirements for the Corporate Sustainability Reporting Directive (CSRD) are now in effect. This phase will impact primarily larger EU and non-EU companies listed in the EU as they will need to invest in robust due diligence systems, enhance traceability in their supply chains, and establish mechanisms to address potential risks effectively. The EU CSRD introduces penalties and enforcement mechanisms to ensure compliance. Companies that fail to meet their due diligence obligations may face significant financial penalties, legal consequences, or be subject to public disclosure.

However, the timeline is set to pull in all EU businesses, as well as non-EU businesses doing a substantial amount of business within the EU, by 2028. Given the significant increase in the details that must be reported, those companies that are not caught up in the first wave would do well to start their preparation now so that they are not scrambling to comply when their time does arrive.

Before we dive into the discussion about the impact that we expect the CSRD will have, let’s run through a quick review for anyone who may be new to the directive and its implementation.


The Objectives of the CSRD

The CSRD is a central component of the European Green Deal and the Sustainable Finance Agenda. It represents a crucial first step in the EU’s goal of compelling companies to conduct operations in a manner that is both sustainable and that respects human rights.

Realising the potential benefits of the European Green Deal will require the direction of capital toward companies that are operating in a sustainable manner consistent with Green Deal goals.

The CSRD will aid in the redirection of capital to sustainable companies by implementing a standardised reporting framework that ensures that consumers and investors have the data they need, in a format that is easy to reference and compare with other companies.

“Reports often omit information that investors and other stakeholders think is important. Reported information can be hard to compare from company to company, and users of the information are often unsure whether they can trust it.” The European Commission

This standardised format combined with enhanced mandatory reporting obligations is intended to close the “accountability gap” that currently exists in the NFRD reporting.


Who Is Required to Report?

The CSRD significantly expands the number of businesses required to submit reports on the impact their operations have on the environment and the risk that climate change poses to the business. As the precursor to the CSRD, the Non-Financial Reporting Directive (NFRD) obligated roughly 11,000 EU businesses to file reports. The CSRD is expected to increase the number of EU businesses obligated to report to roughly 50,000. It will also, create obligations for non-EU companies with certain connections to EU business or EU markets.

The CSRD reporting requirements will be implemented in phases. The first phase will be applicable for the fiscal beginning in January 2024 and requires the first reports to be submitted in 2025.

The first phase of reporting obligations will apply to:

For the purposes of determining CSRD reporting obligations, large EU companies are defined as those meeting two of the following three conditions:

  • Net sales of more than €50 million
  • Assets totalling €25 million or more in value
  • 250 or more employees

Non-EU companies with net sales of more than €150 million in the EU market will be required to submit reports as well.


What Will Need to be Reported?

The enhanced reporting standards implemented through the CSRD obligate companies to report the following greenhouse gas (GHG) emissions measured in metric tons of CO2 equivalents.

  • Gross Scope 1 GHG Emissions: Direct emissions generated by sources owned or directly controlled by the company.
  • Gross Scope 2 GHG Emissions: Indirect emissions from sources generating energy purchased by the company.
  • Significant Scope 3 GHG Emissions: Other indirect emissions sources including those found in the business supply chain.

Essentially, this means that companies must report all direct GHG emissions under the direct control of the company, indirect GHG emissions generated by the producers of the energy consumed by the company, and significant indirect emissions produced by companies in their supply chain. Scope 3 sources must be inventoried at least every 3 years, and significant Scope 3 sources must be identified based on levels of GHG emissions.

The CSRD also obligates companies to provide mandatory assurances substantiating all reported data. This means that companies must use an independent third-party auditor to verify the accuracy of their measurements and reported information. The auditor’s report must be contained in the Corporate Management Report.

In addition to the GHG reporting obligations, companies are also subject to double materiality reporting across ten core environmental, social, and governance (ESG) categories.

  • Environmental Standards
    • Climate change: GHG, energy, financial impact of climate risk
    • Pollution: Pollution of water, air, soil, and living organisms
    • Water and marine resources: withdrawals, use, discharges, habitat degradation
    • Biodiversity and ecosystems: direct impact on biodiversity loss
    • Resource use and the circular economy: depletion or regeneration of non-renewable resources, waste, circular business models, etc.
  • Social Standards
    • Own workforce: Working conditions, equal opportunities, fundamental human rights.
    • Workers in the value chain: Working conditions, equal opportunities, fundamental human rights.
    • Affected communities: Economic, social, cultural, civic, political, & indigenous rights
    • Consumers and end users: information, personal safety, inclusion
  • Governance Standards
    • Business conduct: Whistle-blower protections, corruption/bribery mitigation, corporate culture, lobbying activities, supplier relations, animal welfare.

Double materiality requires companies to report on how their business is affected by any of the standards listed above. It also requires them to report on how activities related to their business operations impact others across any of these same standard areas.


Implications of the CSRD on Carbon Footprint Reduction

At the heart of the CSRD is the EU’s overarching goal of encouraging a significant change in the way that corporations operate on a global scale. The intention is to make sustainability reporting requirements much more comprehensive and enforceable therefore making it easier for stakeholders to access a company’s sustainability data and compare one company to another.

Having this information readily available, it follows that stakeholders would be inclined to favour companies that are less likely to cause environmental or societal harm, and less likely to be impacted by climate change risk. As stakeholder investments shift toward companies who are taking positive steps to mitigate climate risk today and presenting a plausible plan for a better future, even the most recalcitrant corporations will be incentivised to take the reduction of their carbon footprint seriously.

“While the letter of the CSRD calls for extensive reporting, the intent of the CSRD is to drive change in business conduct. The directive obliges executives to analyse sustainability issues such as climate change, biodiversity loss and human rights; relate them to the company’s financial opportunities and risks as well as its impacts on society and the environment; and disclose strategies and plans for managing sustainability performance and financial performance in tandem.” PricewaterhouseCoopers(PwC)

PwC is a well-respected network of consulting firms providing professional tax, legal, accounting, and assurance services to companies around the world. Their work with corporations on a global scale makes them uniquely situated to see the bigger picture of CSRD’s potential impact on carbon footprint reduction. The experts at PwC see several ways that the CSRD is likely to have a transformative impact on corporate responsibility, which will in turn have a profound effect on society at large.


A Shift in Corporate Values

PwC’s Global Investor Survey 2023 reported that a full 94% of investors feel that current corporate sustainability disclosures contain some level of unsupported claims or greenwashing. Of those many asserted that independent assurance would help them feel more confident in the accuracy of reported data. As investors and consumers begin to receive that high-quality, comprehensive data PwC experts see many using that knowledge to place a higher value on those companies that can offer a compelling narrative on how they intend to pivot and embrace the sustainability standards, turning them into an opportunity for growth rather than a liability.

As a result, experts believe that companies will begin to assess and compensate their top executives based on their ability to drive positive, innovative sustainability performance rather than the long-standing revenue-driven model.


Seeing The Bigger Picture

Corporations are accustomed to reporting climate change and environmental risk in terms of how it may impact business operations and the potential cost to the business and its stakeholders that may result from a disruption. The CSRD’s double materiality reporting requirement will obligate companies to assess both the impact on the company itself, and the impact that the company’s operations have on the environment, and society.

What’s more, it provides a strict framework that dictates the factors that must be considered and reported keeping companies from downplaying or redefining harms. These reporting requirements make the CSRD the most comprehensive sustainability reporting regulations created to date and present the opportunity for it to create actual progress toward reducing the corporate carbon footprint.

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