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The European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD) represents a pivotal development for all listed companies on the EU regulated market, including financial market participants. With over 1100 indicators to report on, the organizations covered by it face heightened complexity and data requirements. But how does the CSRD apply to the finance sector? Here’s what you need to know.
What are the core requirements of the CSRD?
The Corporate Sustainability Reporting Directive (CSRD) builds on the Non Financial Reporting Directive (NFRD). Its more detailed requirements include reporting on all three scopes of emissions to address wider sustainability issues, improving data availability on environmental risks, labor practices, supply chain management, and business conduct. One of the CSRD’s major proposals is to “require all companies within the scope to seek limited assurance for reported sustainability information while including an option to move toward a reasonable assurance requirement at a later stage.”
The European Sustainability Reporting Standards (ESRS) set guidelines for reporting under this framework. Developed by the European Financial Reporting Advisory Group (EFRAG), the ESRS ensures consistency and comparability in sustainability reporting, fostering transparency and informed decision-making among stakeholders. All organizations covered by the CSRD will need to prepare their management report in the electronic reporting format and upload it to the European Single Access Point (ESAP).
To read more about the requirements of CSRD reporting, see our dedicated resource on the subject.
What CSRD compliance challenges and opportunities do financial institutions face?
Financial institutions face a key challenge with CSRD reporting requirements primarily designed for large companies. Although standards specific to financial organizations were initially expected by the end of 2024, EFRAG has made the decision to delay these. While current standards interpretation may remain largely unchanged, it’s important to begin preparing as early as possible.
Transitioning targets: Embracing ESG factors
The transition from a predominant focus on climate-related targets to a broader spectrum of Environmental, Social, and Governance (ESG) factors presents a critical challenge. This shift encompasses considerations such as biodiversity, pollution, and social and governance issues, requiring the establishment of new ESG targets aligned with existing initiatives such as carbon accounting.
Adapting to the Climate-Neutral Economy
As the global movement towards a climate-neutral economy gains momentum, financial institutions must grapple with sustainability matters and assess sustainability risks inherent in their business models. This entails not only compliance with regulatory obligations but also proactive measures to fortify the business model against sustainability-related risks.
Establishing governance structures: Ensuring compliance
Establishing robust governance structures is important for institutionalizing ESG reporting across various organizational departments. Such structures ensure compliance with evolving regulations and enable effective management of ESG data. Collaboration between different divisions, investment in operational IT infrastructure, and engagement with internal and external auditors are essential components of this governance framework.
Portfolio perspective: Reporting across the value chain
Adopting a portfolio perspective requires extending reporting obligations beyond climate-related issues to encompass your entire portfolio, as mandated by European Sustainability Reporting Standards (ESRS). This entails comprehensive reporting on activities within the value chain and diligent assessment of sustainability targets such as biodiversity and pollution. Note that during the materiality assessment, financial institutions could include the materiality of each portfolio component, making this a challenging exercise without the right tools.
