Corporate sustainability: what is CSRD

In the article Corporate Sustainability Reporting Directive (CSRD), you could read what CSRD entails. The goal of CSRD is to publicize how sustainable the value chain of an organization is and to give you as a potential customer the opportunity to choose whether you want to choose that organization for that reason. In this article, I will tell you about the first two sets of standards that an organization must maintain for sustainability reporting – and what an auditor must be aware of when preparing the annual accounts.

The first set of sustainability reporting standards

This first set of standards will be published on 31 October 2022. The set provides guidance on two important conceptual guidelines:

1 double materiality
2 the quality of information

1. Double materiality

Dual materiality has been introduced as a concept by the European Commission as part of the Non-Financial Reporting Update (NFRD) guidelines. The definition of dual materiality is:‘identify all possible negative and positive effects on people and the environment that are linked to own business operations and the value chain’ (Alexvangroningen BV, 2022).

Double materiality means that a negative or positive effect of a company can also be material if this does not affect the value in use. The companies must therefore also map and report on these negative effects. Introducing double materiality in reporting will ensure that more emphasis is placed on non-financial topics. (Caspar Snijders, Actiam).

What exactly is materiality?

Materiality is a measure in auditing and accounting that determines the size of a misstatement (error) in the financial statements. We call this measure (accounting) materiality. A material misstatement (in amount or information) exists when the nature and extent of the misstatement is such that it is likely to affect a user’s judgment. When auditing the annual accounts, the auditor often uses a materiality of 2% of the turnover.

Effects on people and the environment in companies

When we refer to dual materiality as ‘effects of the company’s activities’, we mean ecological and social materiality. Climate information must be reported if it is necessary for a good understanding of the company’s external impact. It is typically the perspective that matters most to citizens, consumers, employees, business partners, local communities and civil society organisations. However, an increasing number of investors also want to know the climate impact of companies in which they invest, in order to better understand the climate impact of their investment portfolio and to be able to better measure that impact.

Materiality of impact (environment):

All environmental issues affecting an organization. For example, aspects such as:

  • Greenhouse Gas Emissions (GHG or Greenhouse Gas Protocol, GHG Protocol; better known to some as the Kyoto Protocol)
  • Energy efficiency
  • Results of the ecological footprint and dependencies.

Efficiency (social)

All considerations organizations must consider from value chain to culture, including the approach to business ethics. For example, consider:

  • Working conditions
  • human rights
  • Equal opportunities

Economic significance

Disclosure of any sustainability/ESG issues that are likely to have a significant impact on the financial health and operational performance of the organization. An organization should rely on non-monetary quantitative data (cash, accounts receivable, bonds and financial liabilities), monetary data (currency (currency units)), and/or qualitative data.

2. Quality of information

The first set of standards also includes guidelines for the quality of information. These guidelines determine how an organization must ensure that the sustainability information is of high quality. Think truthful representation, comparability and verifiability.

Practical example

With this first set of standards, an organization will therefore disclose other types of environmental impact than just the climate in its annual accounts. These are the most difficult tasks. An example is the determination of greenhouse gas emissions from the aforementioned greenhouse gas protocol. This one has 3 scopes and the 3rd scope is the hardest. It concerns the organization’s suppliers (upstream supply) and the customers’ use (downstream supply). An organization eligible for CSRD will therefore need to ask its suppliers how their waste transport is organised, investments, business travel etc. This will be 80% of the total footprint. Read also: The annual accounts, just a single press of a button.

Example of fleet

Another example is a fleet of vehicles that an organization manages. Not only the leasing costs must be recorded, but also the number of kilometers driven (KM) and the amount of petrol (L) filled per employee in order to determine the ecological footprint per employee in this way. In the case of electric cars, it is therefore about the amount of kilometers, the amount of electricity consumed (kWh) for charging and the supplier of this power: how is the electricity produced?

Non-financial data in Twinfield Accounting

Twinfield Accounting is currently developing non-financial accounts. This data can be budgeted in a new budget module. In addition, Twinfield has the ambition to also record this data on a transaction via the user interface and/or Basecone, so that users can compare Reality vs Budget. These results can be accessed via APIs for reports and thus advice.

Energy savings more transparent with module for tangible fixed assets

Energy conservation is also a current topic, where companies are asked to contribute more quickly. Twinfield Accounting supports this with the Tangible Fixed Assets module. The depreciation of solar panels, heat pumps and other energy-saving means can be made transparent to CSRD with this module.

The second set of sustainability reporting standards

The second set of standards is also a set and will be released on 31 October 2023. This set will help organizations prepare their reporting in the right way. The conceptual guidelines include:

  • Connection
    Connection points to help organizations link their financial reporting to sustainability reporting and vice versa.
  • Levels and limits of reporting
    Assessment that emphasizes the importance of the value chain in social and environmental measurement and reporting.
  • Retrospective and forward-looking information
    An organization should set goals for how they want to improve themselves and in which areas. These goals should be assessed and progress should be measured through KPIs to achieve these goals.

The two sets have not yet been released, but the considerations surrounding this proposal give us a good idea of ​​the key environmental impact results required for companies. We also want to let you know that Twinfield develops the right things to help users automate and provide good advice.

The auditor’s role

In the next and final article in this series, I discuss the auditor’s role in sustainability reporting.

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