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What is the CSRD? Definition and explanations.

Adopted in 2023* and applicable since the 1st January 2024, the European CSRD Directive aims to harmonise and strengthen companies' mandatory ESG reporting. Since 2024, it has applied to listed companies and progressively to others, imposing rigorous standards and independent auditing. Goals: improve comparability of ESG** data, encouraging companies to adopt sustainable practices and steer financial flows towards the most virtuous by putting the transition at the heart of their business models.

*  For listed companies, then progressively for other companies. For DECATHLON, for example, CSRD is applicable from the financial year 2025.
**  = Environmental, Social and Governance (ESG) criteria, three pillars of non-financial reporting.

This still little-known acronym by the general public heralds a small revolution for thousands of European companies."CSRD", stands for Corporate Sustainability Reporting Directive (and came into force on the 1st of January 2024 and replaces NFRD (Non-financial Reporting Directive).

The text will eventually apply to some 55,000 companies and promises real progress, in particular, in line with Europe achieving net zero emissions of greenhouse gases by 2050. But it also raises fears and questions. That is why it is vital without further delay to take an interest, to grasp what is a stake, ... and the opportunities.

The NFRD, or Non-Financial Reporting Directive, , has been a mandatory report for some companies since 2017. It is part of non-financial reporting aimed at informing stakeholders (investors, customers, teams, etc.) of a company's performance in environmental, social and governance (ESG) terms.

NFRD includes the three pillars of ESG:
- Environment: a company's impact on the environment (greenhouse gas emissions, water consumption, waste management, etc.).
- Social: employees' working conditions, health and safety, respect for human rights and the fight against discrimination, etc. .
- Governance: the company's governance structure, directors' pay, the fight against corruption, etc.

What is the CSRD? Definition and explanations.

What can you find out in ESG data?

ESG data, or non-financial data, now has to be analysed through the lens of double materiality, are as follows:
- environmental factors, in other words, biodiversity,  climate change, use of resources, GHG emissions, water, air and soil pollution, and the circular economy, etc.
-  social factors, including working conditions, respect for human rights and fundamental freedoms, equal opportunities, non-discrimination, etc.
- governance factors, in other words, lobbying activities, relations with commercial partners, the role of management bodies, etc.

What is the difference between a CSR report and an NRFD?

The CSR (Corporate Social Responsibility) and NFRD are two documents, reporting on a company's sustainable development performance, but with significant differences between them.

The CSR report is a more general document presenting actions and initiatives taken by a company concerning CSR.It is voluntary, and its content is not regulated.

The NFRD has been a mandatory document for certain companies since 2017. It forms part of non-financial reporting and complies with specific legal requirements in content and format terms. 

The objective is to provide transparent and comparable ESG (Environment, Social, Governance) information about the company. Companies have the freedom to report, in terms of structure and content, on their CSR efforts without the report being subject to external audit. Its publication is generally voluntary, but may be a requirement by some stakeholders or CSR standards. The NFRD, on the other hand, must be audited by an independent organisation.

What is the difference between CSRD and NFRD?

In the CSRD European Directive line of sight is the European Green Deal that aims to deliver net zero carbon emissions in the EU by 2050.
So, CRSD's main objective is to therefore harmonise companies' sustainability reporting and improve the comparability and quality of environmental, social and governance (ESG) data published by companies.

If non-financial reporting already existed - it was structured until now by the framework set out in the 2014 NFRD directive -, with the idea, this time, being to perfect and amplify it.
Beyond this organisational objective, CSRD is obviously part of an overall project: that of a more virtuous European Union in the face of the climate crisis and its social challenges.

Here are the main noteworthy principles:
- A broader scope: CSRD applies to many more companies than NFRD. Eventually, all companies (except micro-enterprises) listed in regulated European markets will be subject to it. It also applies to large companies (which fulfil at least two of the three following criteria: an average number of 250 employees during the financial year, Net turnover of €50 million and Balance sheet assets greater than €25 million.

Meaning over 50,000 companies in 2028 compared to 11,000 today. Foreign subsidiaries will be added according to certain factors.

-  More rigorous standardisation and reporting: to standardise non-financial reporting, CSRD introduces, in addition to the directive text, new harmonised European standards. These are the "ESRS" that stands for European Sustainability Reporting Standards.  

They are based on 3 traditional ESG pillars, divided into 12 themes:
2 general themes: general requirements (ESRS 1) and general information (ESRS 2),
5 environmental themes: Climate change (ESRS E1), Pollution (ESRS E2), Water and marine resources (ESRS E3), Biodiversity and ecosystems​​ (ESRS E4); and Resource use and Circular economy (ESRS E5),
4 social themes: Own workforce (ESRS S1), Workers in the value chain (ESRS S2),  Affected Communities (ESRS S3), and Consumers and end users (ESRS S4),
1 governance topics: Business conduct (ESRS G1).

- One single place: the sustainability report should be published in a dedicated section of the management report.
- A compulsory digital format: the management report will have to be published in a unique digital reporting format -XBRL- (then uploaded to a single European access point: ESAP).
- A mandatory audit of the information by an external auditor or by an independent third-party organisation.

What is the CSRD? Definition and explanations.

To sum up, what is in the CSRD?

CSRD relies on a cardinal concept, the cornerstone of future sustainability reports: double-materiality. It consists of going over ESG with a fine-tooth comb through a dual lens:
- financial materiality, meaning the risks and opportunities of sustainability issues on the company's financial and economic performance.
- and impact materiality, meaning the company's impacts (positives and negatives) on its economic, social and environmental context.

The double-materiality approach is more comprehensive than simple financial materiality because it helps to better understand the risks and opportunities linked to ESG issues. It is also more transparent and responsible because it forces companies to report their impacts on society and the environment.

CSRD: timeframe

Initiated by the European Commission in 2021, the sustainability reports Directive was adopted by the European Parliament in November 2022 and published on the following 16th December in the EU's Official Journal. The Directive (which is a text) has been supplemented by 12 applicable standards (the ESRS), adopted on the 31st July 2023.
CSRD is -progressively- applicable since the 1st of January 2024, based on the timeframe below:
- 1st January 2024 for companies already subject to NFRD (European companies with listed on an EU-regulated market),
- 1st January 2025 for large companies that are not currently subject to NFRD,
- 1st January 2026 for listed SMEs, small and non-complex credit institutions and insurance companies,
- 1st January 2028 for non-EU companies subject to mandatory CSRD reporting.

How much will CSRD cost?

CSRD will mechanically increase companies' reporting costs. European Commission has by the way recognised this. Based on the European Commission's official impact analysis, the annual cost would be €3,600 EU-wide, to which should be added 1,200 million on-off costs.
The lawmakers consider however that not making non-financial reporting evolve today will cost companies and the EU more in the long term.

What opportunities are provided by CSRD?

By urging companies to work on sustainability, CSRD can have the effect of changing the entire continent's direction of travel and help to achieve the EU's objectives of combating climate change.

- A significant step towards sustainable finance
There is a need for sustainable finance to gain momentum, given it is a fundamental cog of the transition to sustainability. Among the obstacles: is ESG information that is still too incomplete and non-comparable, preventing financial markets from correctly conducting their arbitrations.With CSRD, non-financial information should be more complete and readable. Double materiality, as companies' new ESG management yardstick, must enable investors, banks and insurers to discern better those adopting a sustainable balanced trajectory and, therefore, back the most virtuous actors.
In essence, the goal is to put the financial and the non-financial on the same footing.

- Renewed transparency and confidence
Beyond financial markets, CSRD increases the overall transparency of companies' ESG commitments.If investors benefit, so will civil society and citizens, who are also consumers, by getting: sustainability reports informing them of the detailed impacts of goods and services they consume. It should, for example, be easier to detect greenwashing, given we will have factual evidence to assess how consistent a company's actions are with its claims.

- A strategic tool for companies
And what if CSRD, beyond the framework it imposes, was actually an opportunity for companies in Europe?Which is what is a majority of experts think. The measures, which require solidifying these prospects of sustainability, are in actual fact a means of anticipating the future. There is also the option to use it as a management tool that ensures the company's resources are correctly allocated to deal with the most material impacts of CSR risks and opportunities.

The transparency required by the CSRD subsequently encourages companies to strategically think in depth about their environmental, social and societal impacts.This approach helps to identify and manage the risks, find the drivers of innovation and tap into new markets.
CSRD subsequently becomes a key tool to measure and communicate the company's overall performance, taking into account its financial and non-financial aspects. It plays an essential role in companies' legitimacy in the eyes of their stakeholders, who today expect them to be firmly committed to sustainable development.

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DECATHLON Annual sustainable development reports

Non-financial reporting statements since 2013, Due diligence plans since 2017 and Modern slavery statements.

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