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Over time, our understanding of business impact has evolved significantly. Primarily, a company's success is measured by its financial performance. However, in recent years, the importance of non-financial impact has become increasingly important, with sustainability taking center stage. Regulators, investors, and consumers are now paying close attention to the Environmental, Social, and Governance (ESG) impacts of companies worldwide, recognizing that business cooperation is needed to combat climate change, human rights abuses, fraud and illegal finance.
To establish a clear process for sustainability reporting, the EU introduced the Corporate Sustainability Reporting Directive (CSRD) to establish a robust framework for sustainability reporting, surpassing previous standards. This directive requires companies to embrace 'double materiality,' demonstrating both how key sustainability metrics impact them and how their activities affect the environment. This dual approach, known as 'inside-out' and 'outside-in,' encompasses critical reporting elements such as climate change mitigation, biodiversity protection, social and employee issues, respect for human rights, and anti-corruption efforts. Building on the Non-Financial Reporting Directive (NFRD), which mandated large public-interest companies to disclose non-financial information, the CSRD expands the scope to a broader range of companies and introduces more detailed and standardized ESG reporting requirements.
The Corporate Sustainability Reporting Directive (CSRD) received formal approval from the European Council on 28 November 2022. Following this, it was published in the Official Journal on 16 December 2022 and officially came into effect on 5 January 2023 [5]. The EU's move from “non-financial disclosures” to “sustainability” disclosures shows a big change in how businesses report their impact on the environment and society. This shift means that companies now need to treat financial and sustainability reporting as equally important. It’s a step towards making businesses more accountable and ensuring that their operations support a sustainable future. These initiatives allow investors and stakeholders to easily evaluate a company's impact on people and the environment while also assessing financial risks and opportunities related to climate change and other sustainability challenges.
CSRD is set to roll out in phases
The first phase begins from 1st January 2024. This includes companies with 500 or more employees that are already subject to the Non Financial Reporting Directive. These companies have to start reporting in line with the CSRD in 2025 for the 2024 financial year. This is applicable for both non-listed and listed companies [11].
The second phase begins from 1st January 2025. The EU defines large companies as companies that have a balance sheet of more than €25M, net turnover of more than €40M and number of employees more than 250. Large companies that meet at least two of the three requirements, previously not subject to the NFRD, have to start reporting in 2026 for the 2025 financial year. Both unlisted and listed companies fall under this second tranche [4,11].
The third phase begins from 1st January 2026. This phase brings listed small and medium-sized enterprises (SMEs) under the CSRD umbrella for the first time. Starting from this date, these businesses will be required to report on their sustainability practices, with the first report due in 2027, covering the 2026 financial year. As per the EU, medium companies have a balance sheet of €5M-€25M, net turnover of €10M-€50M and number of employees up to 250. On the other hand, small companies have a balance sheet of €450,000-€5M with a net turnover of €900,000 - €10M and total number of employees up to 50 [4,11].
The fourth phase begins from 1st January 2028. This stage sees the full implementation of the CSRD, including all remaining companies within its scope. This includes third-country companies with net turnover exceeding €150M within the EU and at least one subsidiary or branch meeting specific thresholds. These companies must begin reporting for financial years starting on or after this date, with the first reports due in 2029 [4].
Key Reporting Requirements
Sustainability information must be clearly presented in the management report, covering the company’s business model, strategy, and resilience to risks. It should outline plans to align with sustainability goals, limit global warming to 1.5°C, and achieve climate neutrality by 2050 [5]. The report must also address management roles, key sustainability risks, and how these are managed, including details on the company’s operations, value chain, and supply chain. Small and medium-sized companies may simplify their reporting if certain standards are met.
Standards
Companies will need to report on sustainability using standards developed by the European Financial Reporting Advisory Group (EFRAG). The topical standards cover [5]:
Environmental: Climate change, pollution, water resources, biodiversity, and resource use.
Social: Workforce use, diversity, inclusion, and community impact.
Governance: Internal conduct, diversity, anti-corruption, and bribery.
Sector-specific standards will address industries such as agriculture, mining, oil and gas, energy, transport, food and beverages, and textiles. Separate standards will also be developed for small and medium-sized enterprises and third-country companies. The standards must be adopted by EU companies by June 2026, and by 2028 for third-country companies with at least €150 million in EU revenue and at least one subsidiary or branch in the EU [7].
Audit and Assurance
Companies must have their disclosures reviewed and assured by a statutory auditor or independent provider to ensure there are no significant errors. Until proper standards for reasonable assurance are established (expected by October 2028), the assurance will be limited, with a negative conclusion stating no major issues were found [5]. Once the new standards are in place, assurance will involve more extensive testing and provide a positive conclusion based on specific criteria.
Scope and Applicability
The CSRD applies to a broader range of companies, including all large companies (whether listed or not) and listed small and medium-sized enterprises (SMEs). Starting in 2024, the new directive will gradually affect 40,000 EU companies and 10,000 non-EU companies, expanding the reach of the EU taxonomy and mandating disclosures across various environmental, social, and governance (ESG) metrics [10]. Compared to the 11,000 previously covered under the NFRD.
Digital Reporting
The directive encourages digital reporting through machine-readable formats, which will allow for easier access and analysis of sustainability data by stakeholders. Companies are required to prepare their annual financial reports in XHTML format and digitally tag sustainability information in financial statements and management reports. This ensures that the data is machine-readable and easily accessible.
What companies have to take in account from now on
Enhanced Transparency: Companies will need to be more transparent about their environmental and social impacts, requiring robust data collection and reporting systems.
Increased Accountability: The requirement for external assurance means companies must ensure their sustainability data is accurate and verifiable, leading to greater accountability.
Strategic Integration: Sustainability reporting will need to be integrated into the overall corporate strategy, as it will influence stakeholder decisions and regulatory compliance.
Overall, the CSRD represents a significant shift towards more rigorous and transparent sustainability reporting, aiming to drive corporate responsibility and contribute to the EU’s broader sustainability goals.
DPP adoption for CSRD compliance
Adopting a Digital Product Passport (DPP) solution can be a great way for companies to meet CSRD compliance requirements. With everything in one platform, DPP solutions help streamline the entire reporting process. They make it easier to track, verify, and report on a product's lifecycle, ensuring that all CSRD requirements are met without the hassle of juggling multiple tools. Plus, having all this information in one place makes audits and compliance checks smoother and less stressful.
Peer Ledger has its own Digital Product Passport (DPP) solution designed to help companies achieve CSRD compliance. The Peer Ledger DPP offers key features such as comprehensive traceability, real-time data integration, and detailed ESG reporting capabilities, ensuring that companies can easily meet the stringent requirements of the CSRD. With this tool, businesses can confidently manage their sustainability data and reporting, all while staying ahead of regulatory demands.
Core Features of Peer Ledger's Solutions for CSRD Compliance
1. Unified Platform: Leverages a single platform to manage traceability and transparency across all sustainability efforts.
2. Digital Product Passports: Labeling tailored for micro, small, mid-sized, and large companies, ensuring comprehensive ESG reporting.
3. Targeted Stakeholder Communication: Utilize one QR code and passport to deliver customized information to different stakeholders.
4. Near Real-Time Data Collection: Implement continuous, near real-time, and scalable data collection processes that avoid supplier survey fatigue and minimize risks of AI-related supplier misidentification.
5. Advanced Control Mechanisms: The quality of trace data benefits from extended Four Eyes, GPS and Geo-fencing, and other rigorous accounting controls.
6. Robust Security: Ensures data integrity and security with ISO 27001 certification and immutable blockchain controls.
7. Multiple Interfaces: Operates as a standalone mobile and portal SaaS solution that can integrate effortlessly with ERPs, PLMs, SCMs, and other systems when required.
8. Adaptive Supply Chain Management: Supports elastic supply chains with comprehensive tracking capabilities.
9. Granular Visibility: Gain item-level, SKU-level, lot-level, and bulk-level visibility across your supply chain.
Our suite of services includes advanced tracking and tracing capabilities, utilizing cloud and blockchain technologies to create an immutable, near real-time record of transactions across the supply chain. With Peer Ledger's traceability, transparency, and labeling systems, companies can transform their sustainability reporting practices. Additionally, Peer Ledger's Digital Product Passport/ Digital Product Identifier offers a complete record of all information relevant to a product's ESG impact. Companies can ensure that legitimate and immutable data is made transparent, enhancing sustainability reporting and building user trust.
Peer Ledger's comprehensive suite of features aligns seamlessly with the stringent requirements of the Corporate Sustainability Reporting Directive (CSRD), providing companies with the tools needed to achieve full compliance. By offering a unified platform for traceability and transparency, Peer Ledger enables businesses to maintain detailed, verifiable records of their sustainability efforts across elastic supply chains. Its Digital Product Passports which integrate aspects of scalable data collection, advanced control mechanisms, and robust security ensures that all relevant ESG data is accurately tracked, traced, reported accurately, and instantly auditable.
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