Complying with the EU's Corporate Sustainability Reporting Directive (CSRD)

What is the CSRD?

The Corporate Sustainability Reporting Directive (CSRD), which came into force on 5 January 2023, modernises and strengthens the rules concerning the social and environmental information that companies must report. This directive significantly expands the scope of entities required to report, encompassing a broad array of large companies and listed SMEs. Same as the EU Taxonomy, the CSRD is part of the EU Sustainable Finance Framework. Moreover, certain non-EU companies will also need to comply if they generate over EUR 150 million in revenue within the EU market.

Companies subject to the CSRD will use the European Sustainability Reporting Standards (ESRS) to meet the requirements of the CSRD. Whilst the CSRD sets out reporting requirements and obligations, the ESRS specify and clarify the sustainability information companies will need to report on in accordance with the CSRD.

The new rules aim to ensure that investors and other stakeholders have access to the necessary information to assess companies' impacts on people and the environment. This transparency is essential for evaluating financial risks and opportunities linked to climate change and other sustainability areas. By harmonising the information to be reported, the CSRD is expected to ultimately reduce reporting costs for companies over the medium to long term.

Companies of different sizes will be phased into CSRD in different years. While large listed companies with staff over 500 are phased into CSRD in the fiscal year of 2024, mid-sized companies (staff over 250) and large companies that are not yet subject to the NFRD will follow in the fiscal year 2025. Finally, Listed SMEs will be phased into the CSRD in 2026.

Double materiality approach:

Specifically, companies required to report under the CSRD must conduct a ‘double materiality assessment’ to identify the sustainability issues that are most significant to both the organisation and its stakeholders. This assessment not only defines the scope of the organisation’s sustainability reporting but also facilitates the efficient allocation of resources necessary for achieving CSRD compliance. Additionally, it offers crucial insights for shaping the company’s strategy.

1. Financial materiality

This "outside in" perspective looks at how sustainability matters pose risks or opportunities that could affect a company’s financial performance and position over the short, medium, and long term. Sustainability issues are considered financially material if their omission or misstatement could influence the decisions of users of the company’s financial reports.

2. Impact materiality

This "inside out" view assesses the actual or potential impacts a company’s operations and value chain have on people or the environment. These impacts can be both positive and negative and are evaluated over the short, medium, and long term.

By applying this dual perspective, companies can provide a comprehensive account of their sustainability performance. A sustainability issue needs to be disclosed if it is material from either a financial or an impact perspective, or both.

Implementing double materiality:

• Identify ESG risks and opportunities: Evaluate environmental, social, and governance factors that could affect your operations, reputation, and financial stability.
• Conduct a double materiality assessment: Assess and manage both the financial impacts of sustainability issues and the broader impacts of your company on society and the environment.
• Understand your value chain: Gain a deeper understanding of sustainability matters throughout your value chain to accurately measure and assess materiality.

By preparing for CSRD compliance and adopting the double materiality approach, listed Macedonian SMEs can ensure they meet the new reporting standards, enhance transparency, and leverage the benefits of increased accountability to stakeholders.