Applicable since January 1, 2024, the European Corporate Sustainability Reporting Directive (CSRD) sets new standards and obligations for extra-financial reporting on your company's ESG (Environmental, Social and Governance) data. What is this directive? Is your business affected? How to prepare for it? Our expert, Julien BRIOT-HADAR, gives you the keys to understanding and acting.
Published in the Official Journal of December 7, the transposition of the European directive Corporate Sustainability Reporting Directive (CSRD) in French law aims to standardize and strengthen the extra-financial reporting obligations of companies. It requires them to publish very detailed information on their environmental, social and governance (ESG) policy in order to inform stakeholders.
Applicable gradually from January 1, 2024, it replaces the current Non-Financial Reporting Directive (NFRD) whose French transposition is the extra-financial performance declaration (DPEF). It expands the scope of companies concerned from 11,700 to nearly 50,000 companies.
When we analyze the reasons, this directive seems driven by the need to lead European companies to act to prevent certain major risks, mainly climate risk. With this in mind, companies, and especially the largest ones, are now expected to make a climate commitment, through which they must reduce their impact on climate change, or at least attempt to do so.
Three major developments characterize the transition from the DPEF to the CSRD: the scope of application, the integration of the company's value chain beyond its strict activities, and the need to formalize progress plans with regard to of its most significant financial impacts.
1. Fields of application: companies concerned by the CSRD directive
The vigilance measures emanating from the directive are attributable from the 2024 financial year to listed companies with more than 500 employees and having achieved a turnover of more than 40 million euros worldwide. These thresholds are lowered – 250 employees and turnover greater than 40 million euros for companies whose turnover is more than half generated in a sector with high impact or considered at high environmental risk such as the sector mining.
The requirements are less important than those set in particular by French law, which are in this case at least 5,000 employees in the parent company and its French subsidiaries, or at least 10,000 employees in the parent company and its French subsidiaries or foreign.
It should be noted that the CSRD rules have an extraterritorial scope, meaning that companies established in a third country are also subject to them as long as they carry out activities on European territory generating more than 150 million euros. For the latter, only the criterion of turnover achieved in the internal market is taken into account to determine the applicability of the rules of the directive. A South Korean company wishing to create a subsidiary in France would be from facto affected by the CSRD directive.
From the 2025 financial year, for reporting in 2026, smaller unlisted companies will be concerned: more than 250 employees and turnover greater than €40 million.
And from the 2026 financial year for reporting in 2027, all SMEs and micro-enterprises with more than 10 employees and €700k in turnover.
In addition, the CSRD provides for the exercise of due diligence measures within the framework of the commercial relationship established with suppliers and subcontractors of the subject company. However, the monitoring scope is extended to the entire value chain of the company. The value chain brings together all activities related to the production of goods or the provision of services, including related activities, upstream and downstream, resulting from established commercial relationships, direct and indirect. This simply amounts to extending vigilance measures to any lasting commercial relationship maintained with an operator, regardless of where it is located in a value chain. However, this choice can be criticized because it results in forcing companies to monitor the activity of stakeholders over whom they have little, if any, influence. This criticism is all the more relevant as the causes of responsibility have been multiplied in the text.
2. Carrying out a double materiality analysis
Dual materiality is defined using two different approaches to taking into account extra-financial information in accounting:
- Financial materiality or simple materiality corresponds to the “Outside-In” vision: this materiality only takes into account the positive (opportunities) and negative (risks) impacts generated by the economic, social and natural environment on the development, performance and results of the business. This first dimension therefore concerns the financial aspects: revenues, profits, cash flow, etc.
- Impact materiality or socio-environmental extra-financial materiality corresponds to the “Inside-Out” vision. This materiality takes into account the negative or positive impacts of the company on its economic, social and natural environment and therefore includes ESG impacts.
In both cases, the materiality assessment is based on due diligence, monitoring, prevention and correction procedures – which vary depending on the nature of the subject to be assessed. It is up to the company to define a procedure that it deems relevant based on its activities and scope. When a subject is submitted to study, its materiality then depends on several criteria: its scale, its extent, its probability and its irremediable nature. Players already experienced in risk analysis will find similarities here with their existing practices.
The analysis takes place in five steps:
Step 1 – Prequalification of issues
This preliminary step allows you to frame the exercise and start from what already exists in order to get to the essentials. This involves mapping the company's different value chains, consolidating existing CSR documents and correlating the company's CSR activities with CSRD issues.
Step 2 – Qualification of stakeholders
The quality of the analysis is based on the solicitation of the various stakeholders: prior work is necessary to identify the right actors (general management, employees, customers, suppliers, institutions, external social or environmental experts, etc.), but also to ensure that they are requested at a good level of granularity so as not to make the exercise too tedious.
The following steps can be:
- Identify all stakeholders. It should be noted that EFRAG, the European advisory group on financial information mandated by the European Commission, distinguishes two categories of stakeholders:
- Affected stakeholders (stakeholders), that is to say those which can be affected positively or negatively by the activities of the company or its value chain
- Information users (users): these are the stakeholders who may be interested in the company's sustainability report (public authorities, investors, partners, etc.)
- Evaluate the strategic nature of each stakeholder by asking yourself two questions: “What is the impact of my activity on the stakeholder? and “How does the stakeholder influence the organization?” »
- Connect each part concerned with the ESG issues to which it relates
- Collect data using channels adapted to each category of stakeholders (conferences, interviews, HR data, etc.), while respecting the GDPR
- Explain the objectives to stakeholders and challenges of developing materiality and communicating results
Step 3 – Use the EFRAG methodology to assess the materiality of an issue
In January 2022, EFRAG published a methodology for assessing the degree of materiality of an issue, in the form of an analysis grid.
According to EFRAG, the issue must be analyzed with regard to its impact and financial materiality, each containing several criteria:
Impact materiality assesses:
- The quality of the impact: whether it is positive or negative
- The type of effect: proven or potential
- The severity of the impact, which is calculated by 3 criteria: the importance (scale) of the impact, the scope (scope : the extent of the impact, on territories and populations), and the remediability [ER1] of the impact
- The probability of occurrence
Financial materiality is divided into 3 criteria:
- The quality of the issue: positive or negative
- The importance (scale)
- The probability of occurrence
Added to this is the analysis, for each issue, of its impacts, risks and opportunities over 3 time horizons:
- Short term (less than a year)
- Medium term (between 1 and 5 years)
- Long term (greater than 5 years)
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Today, the company can use a personalized rating system (from 1 to 5 for example) to measure the degree of importance, extent and possibility of remediation. Beyond a certain threshold, the issue is considered material from the point of view of its impact. The choice of the materiality threshold must be justified.
Once this is done, the company must consolidate its results, i.e. verify that the data has been weighted according to the number of stakeholders interviewed and according to the size of the group and its subsidiaries, based on the figure or full-time equivalents (FTE).
Step 4 – Carrying out the two materiality analyzes
The analysis to be provided is based in particular on the collection of key sector data, alignment with the analysis criteria presented previously and documentation of the evaluation process.
Step 5 – Convergence of materiality analyzes
Once the two materialities have been carried out, the results can be analyzed to highlight the key interdependencies between the issues, then synthesize the different lessons in a dual materiality matrix to finally determine the subjects considered material.
In conclusion, assessing the materiality of ESG issues is a complex and strategic process. The EFRAG methodology and the CSRD requirements guide companies in this process.
This approach begins with a thorough stakeholder census, followed by a precise assessment of the strategic impact of each party on the organization and vice versa. It is essential to link each stakeholder to relevant ESG issues and collect data through appropriate channels, while respecting current regulations such as GDPR.
ORSYS guides you in understanding this complex process thanks to its targeted training in both the CSR and financial fields.
