The new Corporate Sustainability Reporting Directive (CSRD) of the European Union (EU) is in the making and due to go live soon. Companies will have to submit their CSRD compliant sustainability reports in 2024, covering financial year 2023. As such, the CSRD adds yet another layer to the already vast universe of sustainability/ESG assessment and reporting standards.
What should companies expect from this new Directive? How will the new EU sustainability reporting standards compare to other major reporting standards? The working papers released by the European Financial Reporting Advisory Group (EFRAG) – the technical body advising the European Commission on the standards – offer us some additional clues in these regards.
We hereby map out key similarities and differences across the new EU and two other major reporting standards used at the global scale: the Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB). The GRI is today the most commonly used sustainability reporting framework. The SASB is currently used in more than 170 countries. Its relevance will increase as it provides a starting point for the consolidated standards prepared by the International Sustainability Standards Board (ISSB).
Key Sustainability Reporting Standards
The CSRD, GRI and SASB are complementary standards. They fulfill different purposes, apply to different entities and target different audiences. While there is more overlap between the GRI and CSRD, there are also some important differences.
The GRI standards help businesses and other organizations to communicate their ESG impact to a diverse set of stakeholders. The GRI standards apply to all organizations, regardless of ownership form, size or geography. The SASB standards, on other hand, seek to inform providers of capital about how sustainability issues might influence business performance.
The CSRD aims to strengthen the EU’s existing efforts to enable the investment community, consumers and stakeholders to evaluate the sustainability performance of companies. While the CSRD will incorporate essential elements of globally accepted standards, it is likely to go further, to meet the EU’s ambitious sustainability objectives and be consistent with its legal framework. Moreover, the EU’s CSRD will be mandatory for all large companies and for most publicly listed SMEs in the EU, including the subsidiaries of global companies. SMEs will, however, be able to report according to simpler standards and will have a longer phase-in.
The remaining part of the article discusses some additional distinctions and similarities, summarized in the figure below.
The three reporting frameworks differ in the sectoral focus of disclosure requirements.
The EU’s CSRD follows a cascading approach that includes both sector-agnostic and sector-specific standards. Reporting requirements that apply to all companies are essential to allow comparability across sectors and entities. Sector specific standards, on other hand, address the challenges that entities from a particular economic area are confronted with.
The GRI framework has consisted primarily of universal – sector-agnostic – standards that apply to all organizations. More recently, however, the GRI has also recognized the need for developing sector-specific standards. The GRI released its first sector standard for the oil and gas sector and plans to develop standards for an additional 39 sectors. The SASB, on other hand, has thus far focused explicitly on encouraging global comparisons at the industry level. As such, it includes a unique set of standards across 77 industries from 11 sectors.
In the interest of clarity, the CSRD will structure disclosures around i) strategy, ii) implementation, and iii) performance assessment. Strategy disclosures will focus on the incorporation of sustainability in the company’s overall strategy and value proposition model, as well as the specific governance and management responsibilities to address and monitor sustainability issues. Implementation will refer to the policies, targets, action plans and dedicated resources mobilized by the entity to translate its strategy into results. Finally, performance assessment will capture how the reporting entity delivers against its policies, targets and past performance.
This layered approach is relatively similar with the GRI reporting approach. SASB also encourages some disclosures on governance, strategy and processes of addressing risks and opportunities associated with an issue. These, however, are primarily to provide context for the performance assessments that SASB standards focus on. SASB industry standards provide a specific set of metrics for each sub-topic to ensure accuracy and standardization.
All three sustainability standards require reporting across social, environmental and governance categories. There are, however, some differences. The GRI and CSRD follow a more comprehensive approach across these three areas. The SASB standards, in contrast, focus on a narrow subset of issues across five sustainability dimensions. In addition to ESG, SASB also includes human capital, business model and innovation, as sustainability dimensions.
The CSRD approach aligns relatively well with that of the GRI, with only minor differences. The social standards included in the EU standards, for example, will require information regarding own workforce; working conditions; equal opportunities; other work-related rights; workers in the value chain; affected communities; and consumers/end-users with their corresponding sub-topics. The 18 social standards of the GRI also address the main social groups related to a company’s activities: workers, including workers of suppliers; customers and local communities.
The SASB standards on other hand, consist, on average, of only six sub-topics and 13 metrics across all the ESG+ dimensions that are unique for each industry. The SASB standards for electronic manufacturing services and original design manufacturing, for example, include water management, waste management, labor practices, labor conditions, product lifecycle management, and materials sourcing.
The most significant difference across the three reporting approaches lies in the realm of materiality. Materiality refers to the principle used to identify the relevant sub-topics that an entity should report on.
Since SASB is more investor driven, the materiality principle underpinning its reporting standards is that of financial materiality. SASB standards identify the issues that influence the financial performance of a typical company in that industry. The GRI reporting framework, on other hand, focuses on impact materiality, that requires reporting on issues that are relevant in terms of the impact of the reporting entity’s own operations and its value chain, identified in consultation with stakeholders.
By contrast, the CSRD adheres to the principle of double materiality. Double materiality requires that both impact and financial materiality perspectives are applied in their own right, without ignoring their interactions. The EU thus encourages companies to identify sustainability matters based on: 1) the severity and likelihood of actual or potential negative impacts on people and environment; 2) the scale, scope and likelihood of positive impacts, and 3) the urgency derived from social and environmental public policy goals. Additionally, it also encourages reporting entities to focus on those sustainability matters that are financially material.
Reliability of Reporting
Another essential difference across the three reporting standards relates to assurances regarding the accuracy and reliability of the reported data.
The CSRD will, for the first time, introduce a general EU-wide assurance mechanism to ensure that these conditions are met. The GRI or SASB reports require no external verification. Rather, they rely primarily on guidelines and technical protocols to encourage accuracy and reliability. The CSRD, in contrast, aims to have a comparable level of assurance for financial and sustainability data reported. It allows EU Member States to open up the market for sustainability assurance services to provide independent audits. This would go a long-way to address the widespread criticism regarding the low quality of the data reported in corporate sustainability reports.
Beyond Sustainability Reporting
It is important to remember, however, that assessment and reporting by no means guarantee sustainability improvements on their own. Rather, reporting efforts need to be accompanied by additional measures for continuous improvement. These often require bolder efforts, such as new purchasing practices and collaborative efforts, to improve the financial and technical capacity of suppliers to meet sustainability standards. Advanced ESG analytics can also shed further light on the conditions under which major challenges can be addressed effectively.
Contact us if are interested in advancing the assessment and reporting process of your company towards improving the sustainability performance of your organization and its supply chain.