Sustainability reporting takes sustainability to a new level - more companies to be covered as a result of a new EU directive

The EU’s new Corporate Sustainability Reporting Directive (CSRD) was adopted by the European Parliament in January 2023. The directive establishes a framework for corporate sustainability reporting, i.e. how companies should manage and report environmental, social and economic sustainability.

The goal is to harmonise corporate sustainability reporting. In addition to financial reporting, the aim is to introduce indicators for companies’ non-financial performance, thereby giving investors, customers and other stakeholders access to comparable information. Soon, more and more companies will be affected by the directive’s requirements.

In November 2022, the European Financial Reporting Advisory Group (EFRAG) published draft European Sustainability Reporting Standards (ESRS), which served as the basis for the Directive. The standards are based on several international frameworks such as the GRI standard and the reporting principles of the Task Force on Climate-Related Financial Disclosures (TCFD). Even though the standards are still in the draft stage, no significant changes to them are expected. The ESRS standards are slated for entry into force in the late summer of 2023 after they have been approved by the European Commission.

The regulation brought about by the Sustainability Reporting Directive will enter into force gradually.

The reporting obligation will first pertain to listed companies, which must begin reporting in 2025 based on the figures for 2024. Companies that meet at least two of the following conditions must submit reports on the figures for 2025:

• a balance sheet total of at least EUR 20 million
• a turnover of at least EUR 40 million, or
• an average of at least 250 employees over the financial year.

Subsequently, the reporting requirement will be extended to listed SMEs, which will submit their first reports based on the information for 2026.

Regarding the figures for 2028, the reporting obligation will extend to companies outside the EU that have a turnover of at least EUR 150 million from the EU, and a subsidiary or a permanent place of business in the EU.

The reporting obligation does not yet apply directly to smaller companies, but through subcontracting chains, it is likely that an increasing number of companies, regardless of their size, will have to produce information for their customers. It is therefore worthwhile for even smaller companies to start preparing for the requirements, regardless of the industry in which they operate.

The reporting standards divide corporate responsibility into four areas: standards that cover all industries; environmental responsibility (E); social responsibility (S); and governance and management (G).

Each of these includes 1–5 sub-sections, which consist of different requirements. While most of the requirements are mandatory, there are also voluntary indicators. Standards pertaining to all sectors consist of general principles and requirements for strategy, governance and materiality analysis.

The environmental sustainability section includes the following standards:

• Climate Change (E1)
• Pollution (E2)
• Water and Marine Natural Resources (E3)
• Biodiversity and Ecosystems (E4); and
• Resource Use and Circular Economy (E5).

In the review of social responsibility, attention must be paid to workforce, employees in the value chain, communities affected by operations, and consumers and end users. The administration and management section includes risk management and internal control, as well as business conduct.

In addition to traditional ESG elements, sustainability reporting must take into account two-way information on impacts: both the impacts of the company on the environment and the impacts of environmental changes on the company.

The mandatory ESRS E1 standard on climate change contains nine numbered reporting requirements and three unnumbered indicators. The most important of these are E1-6 and E1-4.

Of these, E1-6 is the most important in terms of emissions calculations. Companies are required to calculate and report their Scope 1-3 greenhouse gas emissions and greenhouse gas emissions at the company level on a location and market basis. In addition, the total carbon footprint is proportional to net sales, and the potential growth or contraction of the company’s business must therefore be factored in.

The E1-4 indicator is strongly related to E1-6, as it requires companies to report their climate targets. For example, emission reduction targets should be expressed either as an absolute number (t CO2e) or as a percentage reduction in relation to the chosen base year. These targets must be planned at least until 2030, and they must be broken down separately for Scope 1, 2 and 3 emissions. In addition, companies must indicate whether the targets are in line with the 1.5 °C objective of the Paris Climate Agreement.

Nordic Offset calculates an organisation’s carbon footprint based on the most widely used and well-known Greenhouse Gas Protocol guidelines. The results are therefore compliant with the reporting obligations of the Sustainability Directive (E1-6), as these obligations do not differ from the requirements specified in the GHG protocol.

Nordic Offset’s carbon footprint calculation service includes the identification of emissions reduction measures and related proposals for reducing emissions. We also carry out the planning of emission reduction targets in accordance with the Science Based Targets Initiative (SBTi) and the Paris Climate Agreement, ensuring that the company’s climate responsibility work is in line with the E1-4 requirements.

In addition, our experts have experience in ESG analyses across the board, so we can tailor our services to support the requirements of standards related to social responsibility and sustainable governance if necessary.