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Home » Blog » ESG Fundamentals » Understanding the Corporate Sustainability Reporting Directive (CSRD) and Its Impact on U.S. Companies

Understanding the Corporate Sustainability Reporting Directive (CSRD) and Its Impact on U.S. Companies

Corporate Sustainability Reporting Directive (CSRD)

The Corporate Sustainability Reporting Directive (CSRD) is an ESG regulatory framework in the European Union (EU). Though it is a euro-centric regulation, it has far-reaching implications for U.S. companies operating in the EU. This blog explores CSRD from an American perspective and discusses its implications for American companies. We will also compare and contrast it with the Securities and Exchange Commission’s  (SEC) regulations in the United States.

Background of the Corporate Sustainability Reporting Directive CSRD

CSRD has its roots in the Non-Financial Reporting Directive (NFRD). NFRD was conceived as a way to help various stakeholders, such as investors, civil society, consumers, policymakers, and others, comprehensively evaluate the non-financial performance of large companies. The aim was to nudge these companies to develop a responsible approach to business. CSRD aims to take this framework and integrate it into companies’ financial reporting. 

Who is Affected?

CSRD applies to any organization operating in the EU and having more than 250 employees. This definition also applies to subsidiaries of non-EU-based companies. This definition means that several US companies will be required to comply with these requirements.

Required Disclosures Under the CSRD

1. Emphasis on Double Materiality

One significant change from previous directives is the inclusion of double materiality in CSRD. This requires companies to not only take an outside-in view of how sustainability issues affect their business but also have an inside-out view of how their operations affect the environment and societies in which they operate. Double materiality, in effect, broadens the scope of reporting to include both the outside-in and the inside-out views. 

2. Specific Disclosures that are mandated

Companies are required to disclose information on:

  • Greenhouse Gas (GHG) Emissions: Detailed reporting on the company’s carbon footprint.
  • Climate Risks: Assessment of risks posed by climate change to the company’s operations.
  • Sustainability Goals: Information on the company’s sustainability objectives and progress.
  • Supply Chain Impacts: Insight into how the company’s supply chain affects and is affected by sustainability issues.

CSRD vs. SEC Disclosure Rules

CSRD is the European Union’s ESG regulation; a similar exercise is being undertaken by the SEC in the United States. Though both are ESG regulations, there are notable differences between them.

1. Scope of Reporting:  The primary focus of the SEC is on financial reporting. Environmental and social governance issues are secondary.

2. Materiality Concept: This is a crucial point of differentiation. At the same time, the SEC is only concerned with the financial impact on the company’s investors. CSRD take a more holistic approach by requiring that companies also take into account the impact of their business activities on society and the environment.

3. Detail of Sustainability Reporting: In terms of the depth of information that is to be disclosed or reported, CSRD is more stringent than SEC.

What does CSRD mean for US businesses? 

US businesses operating in the EU should be prepared for submissions and reporting under the CSRD regulations. The quality of these submissions is expected to be on par with the financial reporting requirements. This may require changes to the data collection and reporting processes

1. Increased Reporting Obligations: A robust data collection, analysis, and reporting process may be required given the detailed nature of CSRD regulation. This may require investments in specialized tools and software akin to financial planning and reporting software.

2. Potential Operational Changes: Given how ESG initiatives cut across organizational silos, we foresee multiple alignment issues. An added layer of operational complexity is the companies’ suppliers and vendors, who will be required to align with ESG initiatives.

3. Investor Relations: Communicating with the investors will be done with the same level of diligence as financial reporting. Hence, the ability to audit, track changes & get data vetted by external audit partners will be key. This, again, may require investments in specialized tools and software.

Leveraging the Lythouse Platform for CSRD Compliance

As with any regulatory reporting, CSRD will also require a certain amount of rigour, especially when it is expected to have the same quality and diligence as financial reporting. CSRD reporting will require companies to collect data from across the organizational silo and also from external vendors, partners and suppliers. Perhaps many companies will institute new processes to ensure alignment between the various stakeholders. This is where a software platform like Lythouse can streamline and simplify ESG reporting for CSRD and other reporting standards.

Key Features of Lythouse for CSRD Compliance

1. Data Aggregation and Management:  A fundamental challenge with ESG reporting is the sheer volume of data and the diversity of the sources from where this data is compiled. Lythouse simplifies this process by providing connectivity to most popular CRMs and other data sources.

2. Double Materiality Analysis: Double materiality is one of the key differences between SEC and CSRD. Lyhouse captures the impact of external environmental factors on the company as well as the company’s activities on the environment.

3. Customizable Reporting Templates: ESG regulations are not only very detailed and data-intensive but also varied. CSRD’s reporting requirements are different from the SEC’s upcoming reporting format. In addition, countries like the UK and Australia have their own ESG reporting framework. Lythouse provides out of the box support for most of the existing reporting formats. 

4. Supply Chain Assessment: ESG is a team sport requiring coordination with suppliers and vendors. Lythouse provides a dedicated Green supplier network module to enable these interactions. 

Advantages for U.S. Companies

By leveraging Lythouse, U.S. companies can:

  • Financial grade reporting and compliance: Create auditable reports and ensure compliance with CSRD and other regulations.
  • Improve Efficiency: Reduce the workload and complexity involved in collecting and processing sustainability data.
  • Enhance Sustainability Performance: Get ahead of the game and build a suitable brand that resonates with investors and customers

Conclusion

CSRD is a key regulatory framework in the EU that will have a significant impact on US businesses. Changes will be required across your supplier network, vendors and internal processes. Collecting, processing, and storing ESG data across internal departments, suppliers, and vendors will be a challenge that may require investments in specialized software tools.

While CSRD brings with it additional overheads, it can also be seen as an opportunity for American companies to establish their brands as sustainable and eco-friendly. Building such a brand image will certainly benefit them as more and more consumers and investors are becoming more cognizant of environmental issues.

CSRD and SEC Compliance

Lythouse is here to help you prepare for CSRD and SEC compliance. Start now and get the support you need!

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