Preparing for the CSRD’s Impact on US Companies

Big changes are coming to corporate sustainability reporting in the European
Union and soon in the rest of the world. Starting in fiscal year 2024, the
first wave of in-scope companies will be required to disclose ESG impacts under
the EU’s Corporate Sustainability Reporting
Directive
(CSRD). The CSRD overhauls the 2014 Non-Financial Reporting
Directive
— the EU’s current sustainability framework — and aims to improve the quality of
data for investors while helping the EU meet its policy goals under the
European Green
Deal.

In addition to requiring more robust reporting on environmental and human
rights
impacts
and sustainability-related risks, the CSRD drastically increases the number of
in-scope companies from around 12,000 to over 50,000.

And that’s not just EU companies. Like many recent rulings coming out of the EU,
the CSRD is designed to drive the rest of the global economy towards meaningful
action and ESG disclosure. Over 10,000 non-EU companies, including around 3,000
US companies, will be subject to the CSRD in the coming years.

Read on to learn how the CSRD will impact US companies, what they’ll need to
disclose, and what steps they should take to prepare.

Decoding the jargon: CSRD & the ESRS

If you’re familiar with the CSRD, you may have heard of the European
Sustainability Reporting Standards (ESRS). The 12
standards lay out the
reporting requirements of the CSRD — covering topics including Climate
Change, Biodiversity, Own Workforce and Value Chain Workers.

The European Commission recently proposed some changes to the ESRS, allowing
companies with less than 700 employees to omit Scope 3 and Own Workforce
disclosures during the first year. Another key change is that, except for ESRS
2 (General Disclosures), all standards are subject to double materiality
assessments. In other words, you only need to report on topics you deem material
to your business. Read about the other changes
here.

Don’t forget about the EU taxonomy

Is your business in scope under the CSRD? That means you’ll also have to
disclose your company’s percentage of turnover, revenue and capital expenditures
aligned with the six EU taxonomy
objectives.

Steps to prepare

Non-EU companies subject to the CSRD will submit their first disclosures in 2029
for the FY 2028 reporting year. That may seem far away; but many of the steps
you’ll need to take to comply with the standards require years of planning and
implementation.

Create a cross-functional working group

To gather the information needed
for CSRD compliance, ESG needs to be integrated into your standard business
functions – at a minimum risk, legal, procurement and finance. You simply won’t
be able to make it happen as a siloed ESG department. This is especially true
when it comes to nuanced ESRS topics such as Biodiversity, Circularity and
Value Chain Workers.

Conduct a double materiality assessment

Double
materiality is a
defining feature of compliant CSRD reporting. Using the 12 ESRSs as a guide,
conduct a double materiality assessment to determine which ESG topics
financially impact your business and how your business impacts those issues.

Note: Even though the ESRSs are subject to double materiality, don’t just write
off the hard topics — Biodiversity, Value Chain Workers, Affected
Communities and others — as these issues impact nearly all companies. Just
because it might be more challenging to gather data on these topics (compared
to, say, Climate Change — which has a quantifiable, agreed-upon set of KPIs),
that doesn’t mean you can ignore them.

Create a climate-transition plan

As part of your Climate Change disclosure,
you’ll need to create a 1.5C°-aligned climate-transition plan. How will you
reduce your biggest Scope 1 and 2 emissions
sources
(including fuel and energy use)? Does your business model (or part of it) need
to change to support a net-zero economy? Developing a plan means engaging
business leaders from your cross-departmental working group and getting tactical
about the possibilities — it’ll be an all-hands-on-deck effort!

Build a strategy for Scope 3 emissions

Although it remains to be seen
whether the SEC will mandate Scope 3
reporting,
the CSRD is crystal clear. Scope 3 disclosure is required for all in-scope
companies. Establishing effective reporting processes with your suppliers can
take years, let alone implementing a Scope 3 reduction plan. Don’t put this step
off — remember that by FY 2028, your 2030 GHG emissions goals will only be 1-2
years away.

If you don’t have a Scope 3
strategy,
your first task will be opening lines of communication with your suppliers — all
the way down to the source. Be sure to clearly communicate expectations and data
reporting requirements. We strongly recommend using a supplier management
platform such as CDP Supply Chain or EcoVadis to collect data, engage
your
suppliers
and monitor progress.

Educate your Board on sustainability

Part of your General Disclosures
include Board oversight of sustainability
issues
and their involvement in managing risks and opportunities. For many companies,
education is the first step. Consider screening new Board members for competence
on ESG topics and work towards adopting a governance structure that meaningfully
incorporates Board and Executive oversight.

Engage an assurance provider

As a US company, your disclosures will be
subject to reasonable assurance right off the bat. If you don’t have an
assurance provider, engage one now to get their advice upfront. Ensure you
understand the expectations, so you can develop your programs and disclosures
with these in mind. At a minimum, you’ll need a clear audit trail and
documentation of processes and controls to support your disclosures.

As with many recent ESG policies in the EU, the CSRD has far-reaching
implications. Even if you’re not officially in scope under the CSRD, it pays to
stay ahead of the curve. Frameworks and regulations coming out of the EU have
always been indicative of where the world is headed on ESG and corporate
accountability.

Regulation aside, investor expectations will only continue to rise. Your ability
to produce auditable ESG reports with investor-ready information is crucial for
survival in the decades ahead.