CSRD reporting for corporates will begin from 2025 on a phased basis, JONATHAN MCKEOWN, Director of ESG, Davy Horizons, sets out the steps contractors should be taking to ensure the data they are collecting and correlating is CSRD compliant.
As the effects of climate change have become more apparent around the world, sustainability is a major talking point in every industry. In construction, the processes and materials used matter to the natural environment in terms of Greenhouse Gas (GHG) emissions, waste, biodiversity, and our health. Many common construction materials have high embedded carbon, use resources and generate waste. On the opportunities side, low carbon technologies, such as heat pumps, solar PV and other renewables, enable energy efficiency and high energy ratings that legislation like nZEB is driving for new developments. Innovations in recycled materials are also enabling the shift to the circular economy in the construction sector.
Following the climate targets set in the 2015 Paris Agreement, the European Union (EU) aims to make Europe the first climate-neutral continent by 2050, striving for a temperature increase of no more than 1.5 degrees Celsius above pre-industrial levels. The EU is leading the charge in global climate policy with a comprehensive framework designed to drive sustainability across all sectors, including real estate.
At the heart of this strategy is the European Green Deal, which comprises a series of regulations and directives reshaping how commercial properties are built, operated, and renovated.
One of the key EU policies is the Corporate Sustainability Reporting Directive (CSRD), which is being phased in starting in 2024. It significantly expands the number of companies required to publish sustainability disclosures to over 50,000 (including listed companies, large private companies, and listed SMEs).
The CSRD integrates non-financial environmental, social and governance (ESG) information into management reporting through a sustainability statement with detailed disclosure and data point requirements. This includes mandatory and material ESG and financial information to ensure that company impacts, risks and opportunities are appropriately managed over the short, medium, and long term. CSRD requires assurance of data, initially to a limited assurance level, to improve quality and comparability and prevent greenwashing.
The CSRD ensures financial stakeholders, including investors, consumers, lenders, insurers and other stakeholders, will have access to the necessary information to evaluate financial risks that may result from climate change and other sustainability concerns.
Companies in scope for FY 2025 are EU entities (including EU subsidiaries of non-EU parent companies) for whom two or more of the following criteria apply:
– Total balance sheet of >€25m
– Net turnover of >€50m
– 250 employees.
The CSRD applies to fiscal years starting on or after 01 January 2024, with reporting starting from 2025 on a phased basis as per the criteria below.
– FY 2025 on 2024 data: Companies previously subject to the Non-Financial Reporting Directive (NFRD) (large, listed companies, large banks and large insurance undertakings – if they have more than 500 employees), as well as large non-EU listed companies with more than 500 employees
– FY 2026 on 2025 data: Other large companies, including other large non-EU listed companies
– FY 2027 on 2026 data: Listed SMEs, including non-EU-listed SMEs. (However, listed SMEs may opt out of the reporting requirements for a further two years).
The CSRD comprises 12 European Sustainability Reporting Standards (ESRS) covering ‘Environment’, ‘Social’, and ‘Governance’.
Reporting entities must publish a set of disclosures in line with CSRD standards, which should be included in the annual integrated report and must align with ESRS standards for all mandatory disclosures and data points and double materiality-relevant impacts.
To prepare for the first CSRD-compliant report, the following steps should be followed:
- Conduct a double materiality assessment, which is mandatory under the CSRD
- Engage with stakeholders to get input and feedback on material non-financial risks
- Undertake a CSRD reporting gap analysis for the material issues identified in the double materiality assessment and recommend actions to fill the identified gaps
- Gather the required data for the mandatory and materiality-based disclosure requirements identified
- Prepare for digital data tagging
- Prepare for third-party assurance of data.
Double Materiality Assessment
One of the key concepts within CSRD is double materiality.
Double materiality relates to how business activities affect or depend on the environment and people, as well as how the environment and people impact the company’s financial performance across short, medium and long-term timeframes.
The Directive requires the company to conduct a double materiality assessment to determine its impacts on the environment and society (impact materiality) and financial-related environmental and societal risks and opportunities (financial materiality).
Some common environmental impacts for the construction sector include climate change, air and water pollution, biodiversity and circular economy. Common social impacts include modern slavery, wellbeing, health and safety and rights of various stakeholders, such as workers, communities, customers and suppliers.
Double Materiality – Key Steps
There are several key steps in undertaking a double materiality assessment. Impacts must be determined by reviewing ESG policies, procedures, data, tools and any previous materiality assessments. Following this, key stakeholders should then be engaged, including those in the value chain and financial stakeholders.
After ranking the impacts based on importance to the business, society, and the environment, it’s important to identify which impacts are material. This assessment should be verified by internal subject matter experts. The business needs to investigate the level of financial impact on its performance, profitability, growth, and reputation for material environmental and social impacts. This can be achieved through workshops, surveys with internal subject matter experts, financial teams, and, if relevant, the company’s sustainability executive committee. Financial impacts that are material for reporting should be determined based on the likelihood and severity of the financial impact.
Stakeholder engagement
Stakeholder engagement is imperative when preparing for CSRD reporting and involves gathering input and feedback to understand the potential impacts of the company on people and the environment. The ESRS defines stakeholders as those who can affect or be affected by the company’s decisions and actions. They can be broken down into key stakeholder groups:
– Affected stakeholders – Individuals or groups whose interests are, or could be, affected by the company’s activities and direct or indirect value chain relationships. This includes employees, customers and suppliers.
– Users of sustainability statements – Primary users of financial reporting, such as investors, lenders, creditors, insurers, asset managers, business partners, regulators, ratings agencies, suppliers, NGOs, trade unions, industry groups and civil society.
CSRD Reporting Gap Analysis
The CSRD gap analysis evaluates the business’s readiness to meet the requirements for mandatory disclosure and the material impacts reporting from the double materiality assessment. A gap analysis should include the following five elements.
- Existing data across all mandatory data points defined in ESRS and additional ones identified by the double materiality assessment covering ESG-related governance, strategy, policies, processes, targets, actions, and metrics.
- Assurance of data and disclosure: CSRD assurance and competency requirements require ISO 14064-3 and ISO 14065 for GHG Accounting.
- Alignment with the CSRD requirement for Climate Transition Plans and Task Force on Climate-related Financial Disclosures (TCFD) to strengthen risk assessment and reporting on climate-related physical and transition risks.
- Alignment with the CSRD requirement for EU Taxonomy alignment in future and growth of tracking and disclosure on sustainable market activities, including turnover, capital expenditure (CAPEX), operating expenditure (OPEX), mergers & acquisitions (M&A) and investments.
- Preparedness for digital data submission.
In Conclusion
Preparing for CSRD reporting is a major undertaking even for large plcs that have financial and headcount resources available. Those corporates in the second wave are most exposed and lack the resources, knowledge base and bandwidth to carry out such a resource-intensive project.
The CSRD represents a fundamental shift towards transparency and accountability across industries, especially within construction. As the construction industry navigates these regulatory landscapes, CSRD compliance emerges as a legal requirement and a strategic opportunity.
Even corporates not captured by the CSRD will see an increase in non-financial data requests from their value chain and procurement processes. Those corporates able to provide the required data, policies and procedures will find themselves at an advantage.
About Davy Horizons
Davy Horizons is a team of sustainability consultants with world-class expertise across the environmental, social and governance (ESG) verticals. The team has supported the sustainability programmes of leading Irish, UK and international businesses, both public and private, across many sectors.
To learn more about CSRD Reporting requirements, visit www.davy.ie/capital-markets/esg-advisory