CSR-D: 5 tips for SMEs to prepare for the reporting obligation

The EU reporting obligation on sustainability issues – known as the Corporate Sustainability Reporting Directive (CSRD) – has cleared the next hurdle. The draft by the legislative institutions of the European Union (EU) was adopted in the European Parliament on November 10, 2022. All that is now missing is the approval of the Council. After that, the directive must be transposed into national law within 18 months.

In Germany’s SME sector, around 15,000 companies will be subject to reporting requirements in the future. In addition, all non-capital market-oriented companies are covered by the CSRD if they meet two of the following three criteria: Balance sheet total > 20 million euros, net sales > 40 million euros, number of employees > 250. The first reporting year will be 2025. For many SMEs, this means that 2026 must be published for the first time.

Particularly relevant from a content perspective: The CSR Directive follows a double materiality perspective. This means that companies must record the effect of sustainability aspects on the company’s economic situation, business results and business performance (“outside-in perspective”). This includes, for example, the expectations of other market participants, investors, stakeholders or shareholders, as well as the framework conditions in which a company operates (political regulations, availability of raw materials, environmental risks) and social developments (demographic development, diversity, migration and equality).

At the same time, SMEs must present the impact of operations on sustainability aspects (“inside-out perspective”). This approach deals with the impact of the company on environmental and sustainability aspects and thus with its impact. Relevant topics here can be the influence of the SME or company on environmental pollution and biodiversity as well as the question of the extent to which the strategy prevents and counteracts corruption.

The principle of dual materiality can be implemented using very different tools:

• Classic impact assessment: The entire value chain of a company is analyzed. Services, material flows as well as asset structures are considered with regard to their impact.
• In the context of the new supply chain law: risk analyses on suppliers or analysis of supplier ratings (under sustainability aspects).
• Quantitative impact analysis: Quantitative impact analysis focuses on the collection and evaluation of quantitative data with regard to sustainability aspects and their impacts (i.e. from the areas of environment, emissions, HR).
• In-house workshops
• Media analysis (incl. online monitoring or reports)

What steps should companies take now in order to prepare for CSR-D in an optimized and targeted way?

1. Start with double materiality

Those who deal with double materiality in a structured way create the basis for convincing CSR reporting according to future requirements. Engel & Zimmermann brings you together with the right experts.

2. Use sustainability software

The annual reporting rhythm makes the acquisition of a suitable sustainability software economical. Engel&Zimmermann has market insights. Talk to us.

3. Get busy with the six environmental goals of the EU

Take the six environmental objectives from article 9 of the Taxonomy Regulation. Article 9 Taxonomy Regulation – environmental objectives (lexparency.de) in the perspective. Because they are an essential part of the so-called taxonomy. The taxonomy aims to establish an EU-wide classification system for the assessment of environmental sustainability of economic activities. The six environmental objectives according to the taxonomy ((EU) 2020/852) are:

• Climate Change Mitigation (CCM)
• Adaptation to climate change (Climate Change Adaptation)
• Sustainable use and protection of water and marine resources
• Transition to a circular economy
• Pollution prevention and control
• Protection and restoration of biodiversity and ecosystems.

Collect data on these topics, establish a reference year, and describe status quo and their goals.

4. Sustainability reporting: respecting the framework

(https://www.europarl.europa.eu/doceo/document/TA-9-2022-0380_DE.html)

This draft guideline sets the direction for future mandatory sustainability reporting. It states, “According to the sustainability reporting standards referred to in paragraph 1, the information to be reported must be understandable, relevant, representative, verifiable, reliable and comparable, and presented in a truthful manner. Sustainability reporting standards shall ensure simplicity and shall be implemented in a manner that provides stakeholders with relevant and material information.”

A new sentence has been added: “Where possible, this information should be scientifically based.

These passages give a foretaste of the future requirements for the content to be communicated. You can therefore already check your existing sustainability data for these parameters today. We will support you in this with our know-how.

5. Sustainability reporting: On the way to an “appropriate” standard

We often hear statements that the long-established GRI reporting standard will become mandatory for future reporting. Even though GRI experts are involved in the CSRD, this is not the case.

Rather, the current draft of the directive states:

“(18a) SMEs should be given the opportunity to base their reporting on standards that are proportionate to the capacities and resources of the SMEs concerned. Listed and unlisted SMEs may choose to apply appropriate standards voluntarily. The SME standards should serve as a reference for companies falling within the scope of the directive on the scope of sustainability information they can reasonably require from small and medium-sized suppliers and buyers along their value chains.”

Engel & Zimmermann recommends that companies take a look at the GRI indicators and compare them with existing company data. Engel & Zimmermann can support you with this check.