Fundamentals of CSRD and ESRS

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If you are interested in sustainable business, you will have heard a lot about the European Union’s Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS) over the past months. In short, the CSRD is the EU Directive stating which certain businesses have to report on their sustainability efforts and it refers to the ESRS to describe in detail how these businesses need to do their reporting. Social media platforms such as LinkedIn are full of breakdowns for businesses on how to implement ESRS-based reporting in line with the CSRD. With this article, we want to instead focus on discussing the origins of some crucial terminology that will strengthen your understanding of CSRD and ESRS as well as the need to become active. 

The CSRD is essentially a thorough update and replacement of the EU’s 2014 Non-Financial Reporting Directive (NFRD), which is itself an update of an earlier piece of legislation. The NFRD established corporate reporting requirements on non-financial matters for the EU’s largest companies. The term “non-financial” is shorthand for environmental, social, and governance matters, a combination of topics that has become prominent under its abbreviation ESG. Financial reporting is something that companies have always had to do, in their own interest but of course also to satisfy various legal requirements. What we are now seeing is the great expansion of such legally required reporting through new legislation such as the CSRD – more topics to report on and more entities that are required to do the reporting. 

Origins

For a more complete understanding, however, it is interesting to consider reporting requirements in their proper context and see how they came to be. In the 2000s, Corporate Social Responsibility (CSR) reigned supreme. The term was as ubiquitous in business communications as ESG is today. Well-known frameworks from that time such as the UN Global Compact initiated in 1999 and launched in 2000 called on major corporations to voluntarily embrace it. The Compact also only gradually introduced optional reporting provisions. It is a telling illustration that the UN Global Compact in its core consists of only ten sentences. That does not compare to the detailed pieces of legislation of today. With no universally recognised standards to speak of, CSR effectively was what any business implementing it decided that it was. Accordingly, voluntarism was the dominant philosophy connected to CSR. Nowadays, CSR has all but disappeared from the communications of major corporations. ESG is what you are likely to find in its stead. 

The early 2000s also saw the development of a treaty in international law to strengthen business respect for human rights. The so-called Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with regard to Human Rights failed to gain sufficient support and were never adopted. Another process started in their aftermath that resulted in the 2011 UN Guiding Principles on Business and Human Rights (UNGPs). The UNGPs introduced the concept of human rights due diligence into the sphere of non-financial corporate responsibilities. Human rights due diligence describes a range of actions that businesses should take to safeguard human rights in their operations and value chain. The UNGPs define due diligence as assessing actual and potential human rights impacts, integrating and acting upon the findings, tracking responses, and communicating how impacts are addressed. This shows that due diligence explicitly reaches beyond mere reporting on action or, in some regrettable cases, inaction. In fact, reporting is only one step to be taken as part of proper due diligence (“communicating how impacts are addressed”). Instead, due diligence describes the action itself that businesses should take. 

Pickup of implementing the UNGPs at national levels was slow. This eventually triggered a process to develop another international treaty, initiated by Ecuador and South Africa in 2014. Development of the international legally binding instrument to regulate, in international human rights law, the activities of transnational corporations and other business enterprises has been underway since but we are still years away from any treaty ready for adoption. As a more immediate consequence, this process added to the overall growing attention for corporate human rights responsibilities. Some national governments, mostly in the EU, eventually introduced legislation that in a few cases took first steps beyond reporting requirements. France’s Duty of Vigilance law introduced in 2017 is a standout here, requiring major French companies to carry out human rights and environmental due diligence. Overall though, at a global scale strong due diligence did not yet materialise. In early 2020, a research project commissioned by the European Commission in the context of calls for greater activity at the EU level identified four distinct options on how to go forward: no policy action, more voluntary guidelines, mandatory due diligence reporting, and mandatory due diligence as a legal duty of care. 

The CSRD represents the third of these options in that due diligence – renamed and expanded to “sustainability due diligence” plays a vital role in its reporting requirements. The EU is currently also working on a Corporate Sustainability Due Diligence Directive (CSDDD), representing the fourth option. The CSDDD, however, is still a several years away from adoption and entry into force. One can expect its provisions to likewise reach beyond a narrower focus on human rights due diligence and address broader sustainability due diligence instead. In that sense, one can interpret the CSRD, and the ESRS with it, as one step in preparation of even more thorough corporate sustainability requirements due a few years from now. This really is just one more reason for business entities to take both seriously. 

To be continued…

Now that you’ve gained insights into ESRS and CSRD, it’s time to take the next step towards a sustainable future. At MorrowX, we’re passionate about simplifying sustainability for you. Whether you’re a business organisation looking to enhance your environmental and social impact or an SME eager to begin your sustainability journey, we’re here to guide you.

 

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