Why CSRD is a game changer for sustainability reporting

Explore how the CSRD revolutionizes EU sustainability reporting, setting new standards for transparency and driving corporate change.

In brief:

• The EU Green Deal's new Corporate Sustainability Reporting Directive (CSRD) has been introduced for enhanced ESG reporting.
• High-quality sustainability reporting can lead to better funding opportunities and potentially lower capital costs.
• Even though Norwegian listed companies are ahead in sustainability reporting, the new CSRD standards provide opportunity for further improvement.

The regulative landscape

The EU Green Deal, alongside nations’ aspirations and companies’ actions, has accelerated the shift toward net-zero transformation in Europe. Within the framework of the EU Green Deal, the Corporate Reporting Directive (CSRD) emerges as a pivotal EU legislation aimed at improving the quality and consistency of sustainable development reporting for companies operating in the EU. The CSRD is set to replace the Non-Financial Reporting Directive (NFRD), and it has introduced new standards and requirements for companies to disclose information on their environmental, social and governance (ESG) impacts and risks.

Historically, the NFRD mandated large companies to disclose information on their social and environmental impacts and risks. The CSRD introduces significant changes to these reporting practices. Some of the main differences between the NFRD and the CSRD are:

• The CSRD applies to all large EU enterprises, all listed entities (except for smaller listed entities) and some non-EU entities with principal activities in the EU.
• The CSRD requires more detailed and deliberate disclosures than the NFRD. The NFRD allows companies to choose from different reporting systems, while the CSRD mandates the adoption of European sustainability reporting standards, which are being developed by the European Financial Reporting Advisory Group (EFRAG).
• The CSRD also expands on topics such as climate change mitigation and adaptation, biodiversity, circular economy, water and marine resources, pollution prevention and control, and land and forest management.
• In addition, the CSRD mandates that an external auditor or a competent certifier provide assurance of reported sustainability issues. This enhancement will increase trust and comparability among investors and other stakeholders.

Figure 1: CSRD overview

The regulation will be introduced in three parts, as follows:

• Companies already reporting under the NFRD will transition in the financial year beginning in 2024. Large companies that exceed the large company requirement set by the EU and that do not currently report under the NFRD will comply starting in the fiscal year 2025. Listed small- and medium-sized enterprises, as well as simple credit institutions and captive insurance companies, will begin reporting for the financial year beginning in 2026.

Figure 2: CSRD timeline

The impact on companies financing opportunities and transactions

A structured and business-specific process for sustainability reporting can help companies comply with regulatory requirements and improve their reputation by demonstrating their commitment to sustainable business operations. Increased sustainability information and data-gathering processes also provide opportunities for organizations to plan and allocate the resources more efficiently.

High-quality sustainability reporting can help companies access funding from investors who prioritize ESG performance, increasingly becoming a market standard. The demand for broader and more specific sustainability information from sustainability and stakeholders is leading organizations to intensify their efforts in sustainability disclosures, impacting corporate valuations. Thus, robust sustainability reporting and business operations can help companies increase companies’ market values and reduce the cost of capital for debt financing. The questions that companies need to address regarding sustainability include:

• How do we fund our transitions and transactions?
• How can we optimize the cost of capital?
• How can we manage and address the requirements of our investor community?

In summary, companies that focus on sustainability reporting can benefit from better access to funding, address investors’ sustainability requirements and improve their reputation by demonstrating their commitment to sustainable business practices. With enhanced and more accurate sustainable data, companies are also able to incorporate ESG factors into decision-making process. The four sustainability dimensions that CFOs need to address are presented in Figure 3.

Figure 4: Benefit from leading practice