Addressing the implementation of CSRD standards

1. The legal environment for CSRD :

Since January 2024, the Non Financial Reporting Directive(NFRD) has introduced the European Corporate Sustainability Reporting Directive(CSRD). The introduction of this standard is accompanied by a standardized reference framework called the European Sustainability Reporting Standards (ESRS).

With this new directive, the European Union aims to ensure that companies provide reliable and comparable information on their environmental, social and governance impacts, in line with the work carried out by theEuropean Financial Reporting Advisory Group(EFRAG). In addition, the introduction of ESRS standards aims to harmonize the extra-financial reporting that the companies concerned will have to publish.

Today, CSRD meets four major objectives that complement each other in detailing the environmental, societal and governance impact of companies. The CSRD is in line with the 2050 goal of carbon neutrality set by the Paris Agreement. In this way, the CSRD makes it possible to standardize European climate-related standards, thereby increasing the transparency and comparability of corporate reporting. Last but not least, this reporting obliges companies to integrate ESG criteria into their decision-making processes.

The aim of these elements is to improve the collection, accuracy and reliability of the information provided by the companies concerned.

1.1 A gradual implementation schedule

Now transposed into French law, the phased implementation of the CSRD and related standards began in January 2024 and will end in 2029. It will apply to European listed companies, listed SMEs and non-European companies with at least one branch in the euro zone.

Implementation schedule 2024-2029 :

1.2 The concept of double materiality, the cornerstone of the CSRD directive

With the introduction of the CSRD directive, companies will have to carry out a double analysis of all ESG criteria, known as double materiality. The aim is to identify the impact of company decisions on all stakeholders. Double materiality is presented as follows:

• Financial materiality – sustainability issues that can have an impact on the company’s financial company’s financial performance;
• Materiality impact – this refers tohe impacts of the company’s activity on its economic, social and natural environment.

Che principle of double materiality has become essential to avoid exclusively financial relationships. Thus, compared with the simple materiality analysis of yesteryear, which only questioned sustainability in terms of the company’s finances and business activity, favoritesant the interests of investors, double-materiality broadens what is deemed important for sustainable development, and includes the interests of stakeholders such as employees, customers, the environment, etc., beyond those of investors alone.

1.3 ESRS standards for standardized reporting

The ESRS standards enhance the CSRD directive. The aim of this set of rules is toimprove corporate sustainabilityreporting at European level, and above all to harmonize data production, quality and reliability. Several types of standards will be adopted and implemented:

• From all-sector ESRS standards
• From ESRS standards for SMEs listed on regulated markets
• From sector-specific ESRS standards
• From ESRS standards specific to certain non-European companies

1.4 Focus on the 12 ESRS standards already published – All-sector standards

Please notehe remaining standards will be published progressively.

1.5 Disclosure requirements with different scopes and impacts

Each ESRS is composed of disclorure requirements to designate the specific information that companies must publish to ensure full transparency of their sustainability practices. However, their segmentation and the granularity of their impact must be taken into consideration. Indeed, in the context of ESRS relating to the environmental perimeter, greenhouse gas emissions must be accounted for according to scope 1, 2 or 3.

• Scope 1: covers all direct emissions direct emissions produced by the company’s activities. This includes all emissions generated on sites and by assets under the company’s control.
• Scope 2: Emissions from this scope are linked to the consumption of energy purchased by the company, such as electricity, heat or steam, needed to power its operations. In addition, all these emissions are produced outside the company’s sitessites, but are directly attributable to its energy consumption.
• Scope 3: Scope 3 emissions are the most complex to define. These are all the other indirect emissions generated by the company’s activities throughout its value chain, both upstream and downstream.

The CSRD now requires companies to provide a detailed report on these three scopes.. Although there is no defined regulatory framework, solutions are emerging, including the Kaya equation to calculate carbon emissions. Lcompanies will have to invest in analytical processes and recruit resources resources to avoid penaltiess regulatorys or being accused of greenwashing…

2. From strategy to operationalization of the CSRD directive and CSRS standards

2.1 How to prepare for reporting obligations

This new regulatory requirement can be a key success factor in the implementation and management of reporting systems. To achieve this, each company will need to :

• Analyzing the texts: The European directive provides a framework, but also raises a number of questions for companies. As the requirements are new, complex and dense, companies must now analyze the texts in order to meet the publication requirements.
• Questioning company functions: From employees will be impacteds by the issues raised by the CSRD directive, both l‘identification of risksimpacts and opportunities, as well as the definition, implementation and monitoring sustainability strategy.

2.2 Collecting and centralizing data

Depending on the maturity of organizations in terms of ESG reporting topics and the information to be provided, the need may be new and will require data to be constructed (e.g.: data on indirect environmental impact; data on climate and sustainability risks…). For others, existing data will need to be supplemented.

Data collection and relevance are important points to consider. Problems linked to data and its processing may require adaptation of existing tools, or even a total change.

For these reasons, relying on a relevant internal control system to implement controls, and a management control system to process data and build reporting systems, will be an asset in the process of applying the CSRD directive and ESRS standards.

2.3 Practical application

From this analysis, we can see that beyond the regulatory framework, operational reflection is required for all companies having to meet regulatory requirements.
Data processing will also be a key stage in the company’s compliance process. Studies will need to be carried out to determine how to collect, process and publish the data collected.
With this in mind, it’s worth taking a look at one of the organization’s key functions: management control.

2.4 Management control is at the heart of the organization

Controlling has become an integral part of the conceptualization and management of data relating to CSRD. But its impact at the heart of the company tends towards two scenarios. The first shows that it is a financial analysis center for corporate strategy, within which management control has a central role and is a driver of corporate strategy. It controls the performance of the strategy. The second scenario tends to reveal that management control maintains a role as a data collector within organizations. In other words, it centralizes data from all departments and reprocesses them to provide reports. As a financial data collector, Controlling has the expertise to absorb and process massive amounts of data.
Finally, from a day-to-day role focused on producing reports to monitor the proper execution of corporate strategy, Controlling is now moving towards a data management function and an internal advisory role.
Data management will then encourage management controllers to contribute to the acceleration of data processing and its reliability, in order to offer ever more accurate and therefore more reliable reporting to stakeholders.
On the other hand, its function will become that of internal consultant, i.e. a pure and simple reporting function where the management controller becomes an internal interlocutor consulted for the operational implementation of global corporate strategies. His expertise in data management and his position as a functional service are essential to the management and operational success of large-scale projects.

Implementation of CSRD standards: conclusion

Strategic thinking and operational implementation of the CSRD directive and ESRS standards are challenges for all companies subject to non-financial reporting obligations. These challenges need to be mastered in order to transform this regulatory directive into an opportunity. Once the texts have been analyzed, each company will have to determine the scope of application, collect the data and produce the reports. Gathering and surrounding oneself with collaborators who master the application texts and mass data processing seems unavoidable.

Finally, at PALMER we believe that to succeed in this transformation, it is essential to draw on the experience and analysis of the management control department, the central support department of every organization. Contact our experts to find out more.