The CSRD and ESG

The CSRD (Corporate Sustainability Reporting Directive) and ESG (Environmental, Social, Governance) are closely interconnected.

The CSRD is an EU regulation that obliges larger companies to prepare transparent and detailed reports on their sustainability performance, which essentially means reporting according to ESG criteria.

This not only increases the credibility of ESG data, but the goal is also to make it easier for investors and other stakeholders to compare companies. Thus, the CSRD is a framework that supports the practical application of ESG and makes it mandatory for ESG topics to go beyond superficial promises.

The key connection between the CSRD (Corporate Sustainability Reporting Directive) and ESG (Environmental, Social, Governance) is that the CSRD mandates sustainability reporting based on the ESG criteria framework.

The official text of the Corporate Sustainability Reporting Directive (CSRD) is available in the European Union’s legal database, the EUR-Lex system. The full text of the directive in Hungarian can be found at the following link:

EUR-Lex: Directive 2022/2464

This directive amends, among others, Directive 2013/34/EU and aims to improve the quality and comparability of corporate sustainability reporting within the European Union.

In practice, this means:

• Data Collection: Companies must collect accurate and reliable data on their ESG performance, including environmental impacts, social projects, and governance mechanisms.
• Standardized Reporting: The CSRD requires reports to be prepared in accordance with the ESRS (European Sustainability Reporting Standards).
• Auditing: The credibility of ESG data must be verified by a third party, increasing transparency and reliability.
• Decision-Making Considerations: ESG performance reports help investors make sustainable investment decisions.

Implementation of the CSRD in Practice

The CSRD (Corporate Sustainability Reporting Directive) aims to ensure that companies provide detailed and reliable information about their sustainability performance to investors, regulators, and other stakeholders. In practice, the CSRD is implemented through the following elements:

1. Mandatory Reporting Requirements:
   • Affected companies must prepare annual sustainability reports that include performance according to ESG (Environmental, Social, and Governance) criteria.
   • Reports must be comparable, auditable, and prepared in a standardized format.
2. Scope of Affected Companies:
   • The CSRD significantly expands the scope of affected companies, including large companies and certain medium-sized enterprises.
   • In addition to EU-based companies, international companies operating in the EU and meeting certain revenue thresholds are also affected.
3. Connection to ESRS:
   • The ESRS (European Sustainability Reporting Standards) provide the framework and standards for meeting CSRD requirements. These define specific data points, indicators, and reporting formats, offering detailed guidance.The European Sustainability Reporting Standards (ESRS) can be downloaded from the official website of the European Financial Reporting Advisory Group (EFRAG). EFRAG is responsible for developing and publishing these standards. To access the latest ESRS documents, visit the following page:EFRAG – First Set of draft ESRSOn this page, you can find the first set of draft standards, which can be downloaded and reviewed. Additionally, the European Commission‘s official website provides information and documents related to the standards:European sustainability reporting standards – first set
4. Digital Reporting:
   • Under the new requirements, companies must submit reports in digital format, for example, according to the ESEF (European Single Electronic Format) standard, which supports easier data analysis and transparency.
     The European Single Electronic Format (ESEF) standard is available on the official website of the European Securities and Markets Authority (ESMA). The ESEF Reporting Manual, which provides detailed guidance on applying ESEF, can be downloaded at the following link:ESEF Reporting ManualFor further information and the latest updates, visit ESMA’s ESEF-related page:ESMA – European Single Electronic Format (ESEF)Through these sources, you can access the necessary documents and guidelines for applying the ESEF standard.

The Role and Implementation of ESRS

The ESRS are the EU’s sustainability reporting standards, providing a framework for corporate sustainability data reporting. In practice, the implementation of ESRS involves the following steps:

1. Data Collection and Analysis:
   • Companies must assess the most important ESG aspects related to their operations and ensure accurate collection of relevant data.
   • For example, from an environmental perspective, data on carbon footprint, energy consumption, water usage, and waste management are of particular importance.
2. Materiality Analysis:
   • The ESRS requires reports to focus on topics most relevant to stakeholders and the company’s operations (dual materiality approach: financial and sustainability impacts).
3. Establishing Internal Processes:
   • Companies must set up internal systems and processes that enable continuous tracking and reporting of data.
   • This may include implementing new software, data analysis systems, and internal control mechanisms.
4. External Auditing:
   • The ESRS requires the credibility of sustainability reports to be ensured, necessitating external verification.
   • Audited reports provide a more reliable picture of a company’s sustainability performance.
5. Training and Awareness Building:
   • Training internal stakeholders – managers, employees – is crucial to ensure they understand regulatory requirements and the importance of sustainability aspects.
   • Additionally, it is worth involving supply chain partners, as their ESG performance can impact the results of the reports.

Example in Practice

Suppose an EU-based food industry company is subject to CSRD and ESRS requirements. During implementation, the company:

1. Reviews its entire operations (e.g., agricultural sourcing, production, transportation) based on ESG criteria.
2. Implements an energy efficiency project to reduce its carbon footprint.
3. Prepares a report on annual water usage, waste management, and employee well-being in accordance with ESRS requirements.
4. Submits the report in digital format, which is verified by an independent auditor.

Challenges and Opportunities

• Challenges: The new regulations may impose significant administrative and financial burdens on companies, especially smaller ones. Establishing data collection and reporting processes can be time-consuming.
• Opportunities: Through the CSRD and ESRS, companies not only comply with regulatory requirements but can also improve their market position and sustainability reputation.