Sustainability Reporting. What, why and how?

Why did the sustainability reporting emerge? Why do we need it?

Sustainability reporting goes beyond traditional financial disclosures by providing detailed insights and holistic view of an undertaking’s environmental, social, and governance (ESG) impact and performance. It equips organizations with the necessary information to identify risks, seize opportunities, and build resilience – delivering significant strategic advantages for long-term success.

Sustainability reporting mainly functions as:

On the other side of the coin, sustainability reporting reveals some challenges:

What actually is CSRD?

New European Sustainability Reporting Directive is introduced by the European Union in order to design to elevate and amplify the scope and quality of corporate sustainability reporting, which is mandating the detailed disclosure of sustainability-related information that the undertaking has an impact on the society and the environment. Hence, the Corporate Sustainability Reporting (CSRD) came into effect on the 5th of January 2023.

The CSRD evolved from the Non-Financial Reporting Directive (NFRD) to address its shortcomings and better align corporate reporting practices with enhanced transparency and accountability.

Let’s briefly explore the key changes:

The NFRD covered approximately 11,000 undertakings, whereas the CSRD expands this scope to include around 50,000 undertakings, including SMEs—excluding microenterprises—listed on regulated markets within the EU, thereby enhancing transparency on a larger scale.

Non-financial information of the companies was reported in a flexible framework under the NFRD, however, undertakings subject to the CSRD have to report as per European Sustainability Reporting Standards (ESRS), that is developed by the European Financial Reporting Advisory Group, EFRAG[1]

in order to ensure standardized, detailed (including data on climate risks, transition plans, and value chain impacts), and comparable reporting.

CSRD reporting must undergo evaluation and approval by EU auditors, mirroring the process used for financial data auditing.

CSRD is set up to support achieve the targets set out in the EU Green Deal[2]. For this reason, EU Taxonomy[3], Sustainable Finance Disclosure Regulation (SFDR)[4] and CSRD, under the EU Green Deal, form a comprehensive and complementary sustainability reporting approach in the European Union.

As aforementioned, the CSRD will be submitted as an undertaking’s annual mandatory report, prepared using the European Single Electronic Format (ESEF). This technology-driven approach, known as tagging, simplifies the process for investors, regulators, and the public to access and analyze sustainability information.

This cornerstone concept recognizes that not only in terms of their effect on the financial performance of an entity, but also their impact on the environment society. Impact and financial materiality are not mutually exclusive.

Therefore;

Outside-in” perspective focuses on how sustainability matters can cause impending material risk and opportunity that could impact company’s financial performance in short, medium and long-term.

Inside-out” view stresses the actual or potential impact of the undertaking’s on people and environment which can be demonstrated positive or negative within the entire value chain, including operations, services and business relationships.

Who is Subject to CSRD?

CSRD applies to the wide range of entities within the European Union, providing gradual inclusion to reporting disclosure mechanism, significantly expanding the scope beyond its predecessor, the NFRD. With the breakdown of the subjected undertakings:

If they comply at least 2 out of the following criteria;

*First reports due 2025, covering the financial year 2024.

If they comply at least 2 out of the following criteria;

*First reports due 2026, covering the financial year 2025.

*First reports due 2027, covering the financial year 2026.[5]

*First reports due 2029, covering the financial year 2028.


[1] EFRAG, the European Financial Reporting Advisory Group, advises the EU on financial reporting standards and develops the ESRS under the CSRD. It ensures that corporate sustainability disclosures are standardized, detailed, and comparable to enhance transparency and accountability.

[2] The EU Green Deal is a comprehensive policy initiative aimed at reaching the European Union climate-neutral by 2050. It includes measures to reduce GHG emissions, promote renewable energy, increase energy efficiency, and protect biodiversity, with the goal of transitioning traditional finance to a sustainable and circular economy.

[3] The EU Taxonomy is a comprehensive classification system developed by the European Union to define what constitutes environmentally sustainable economic activities. EU Taxonomy is structured to direct both private and public sector investments into impactful activities that contribute to climate action and environmental protection, assisting investors make informed decisions.

[4] The Sustainable Finance Disclosure Regulation (SFDR) is a European Union regulation aimed at increasing transparency in the financial services which requiring market participants and advisors to disclose how they integrate ESG criteria into their investment decisions and the sustainability risks associated with their financial products.

[5] Listed SMEs can differ reporting based on the CSRD for initial 2 years (until covering 2028 financial year) which providing additional time for preparation and alignment.