A Guide to The Corporate Sustainability Reporting Directive (CSRD) for the Aviation Sector

The Corporate Sustainability Reporting Directive (CSRD) marks a significant milestone in pursuing a more sustainable global economy. Introduced by the European Commission (EC), its primary objective is to elevate transparency and accountability in sustainability reporting practices across industries, including the aviation sector. As CSRD requires some mandatory reporting, it holds companies accountable for their Environmental, Social, and Governance (ESG) actions and policies.

This guide will cover:

• What is CSRD?
• Who does CSRD apply to?
• Why is CSRD important?
• What is reported under CSRD
• How to report on CSRD
• CSRD Timeline
• How to prepare for CSRD
• Consequences for CSRD non-compliance
• Conclusion
• FAQs

What is CSRD?

CSRD stands for Corporate Sustainability Reporting Directive. It is an EU regulatory framework introduced by the European Commission in November 2022 as part of the Europe’s Green Deal commitment.

The framework is focused on Environmental, Social, and Governance (ESG) and non-financial reporting. CSRD replaces and builds upon the Non-Financial Reporting Directive (NFRD).

Its main objective is to standardize and harmonize sustainability reporting practices. Unlike its predecessor NFRD, CSRD applies to a broader range of businesses, encompassing a larger number of companies under its reporting obligations.

Who does CSRD apply to?

CSRD represents a substantial increase in the number of entities obligated to report on it.

While its predecessor NFRD, applied to around 12,000 companies, the CSRD is projected to cover approximately 50,000 companies.

CSRD applies to the following categories of entities:

• Listed Companies in EU market: All companies listed on the EU regulated market, including listed SMEs (excluding micro-enterprises), are subject to the CSRD.
• Large Companies: The CSRD also applies to large companies that meet at least two of the following criteria based on the Accounting Directive 2013/ 34/EU:
  • Employed 250 or more employees during the financial year.
  • Had a balance sheet total of EUR 20 million or more.
  • Generated a net turnover of EUR 40 million or more.
• Non-EU Companies: Non-EU companies are subject to the CSRD if they meet the following conditions:
  • Generate a net turnover of more than EUR 150 million.
  • Have a subsidiary in the EU that follows the criteria applicable to EU companies (listed on the European market, excluding micro-enterprises or within the large company threshold).
  • Have a branch in the EU that generates more than EUR 40 million net turnover.
• Small and Non-Complex Financial Institutions: Large undertakings or listed SMEs (excluding micro-enterprises) defined in Regulation (EU) No 575/ 2013, Article 4(1), point (145), as well as captive insurance and reinsurance undertakings as per Directive 2009/ 138/ EC, fall under the CSRD.

Why is CSRD important?

The CSRD is important for several reason:

• Investor and Stakeholder Confidence: Compliance with the CSRD fosters trust and confidence among investors and stakeholders. By disclosing comprehensive sustainability information, companies demonstrate their commitment to transparency and responsible practices, attracting socially conscious investors.
• Regulatory Compliance: The CSRD mandates sustainability reporting, making it a legal requirement for companies operating within the EU, including the aviation sector. Adherence to the directive ensures avoidance of potential penalties and reputational risks associated with non-compliance.
• Reputation and Brand Image: Embracing sustainability practices through CSRD compliance enhances an aviation company’s reputation and brand image. Environmentally and socially responsible practices appeal to customers and partners seeking to align themselves with socially conscious organizations.
• Industry Leadership: By adhering to the CSRD’s rigorous reporting standards, aviation companies can demonstrate leadership in sustainability practices within the industry. Such commitment sets positive examples, inspiring other entities to adopt responsible practices.

The CSRD directive is expected to have significant impacts on the aviation industry in several ways:

• Increased reporting requirements: The CSRD will require airlines and aviation companies to disclose more information about their environmental and social impacts, including emissions data, energy consumption, and waste management. This increased reporting will provide stakeholders with greater insight into a company’s sustainability practices and help to promote greater accountability.
• Improved sustainability practices: As a result of the increased reporting requirements, aviation companies will be incentivized to improve their sustainability practices. This could involve investing in more fuel-efficient planes, adopting sustainable aviation fuels, or implementing waste reduction programs. Ultimately, this could help to reduce the industry’s environmental footprint.
• Improved stakeholder engagement: The CSRD will require companies to engage with stakeholders on sustainability issues. This could involve consulting with customers, suppliers, and other stakeholders on sustainability practices, or collaborating with non-governmental organizations (NGOs) to improve sustainability reporting and practices.
• Increased costs: Compliance with the CSRD will likely involve additional costs for aviation companies, such as the implementation of new reporting systems and the hiring of sustainability professionals. These costs may be passed on to customers in the form of higher ticket prices.
• Competitive advantage: Companies that are able to demonstrate strong sustainability practices and reporting may gain a competitive advantage over their peers. This could help to attract environmentally conscious customers, investors, and other stakeholders

What is reported under CSRD?

Under the Corporate Sustainability Reporting Directive (CSRD), companies are required to report comprehensively on sustainability-related information, as well as disclosing information related to their environmental impact, social impact, and governance practices.

The following information should be reported under CSRD:

• Double Materiality Concept: Companies need to disclose how climate change and other sustainability issues may impact their business, as well as how their business activities affect the environment and society.
• Environmental Impact: Companies must report on their use of natural resources, greenhouse gas emissions, energy consumption, waste management practices, and efforts to mitigate climate change.
• Social Impact: Reporting should cover human rights practices, labour conditions, diversity and inclusion initiatives, community engagement, and other social factors related to the company’s operations and supply chain.
• Governance Practices: Companies are required to disclose information about their board composition, executive remuneration, risk management practices, and measures taken to prevent corruption.
• Sustainability Strategy and Targets: Companies must disclose their sustainability strategies and set measurable targets to track their progress towards achieving sustainable goals.
• Main Adverse Impacts: Reporting should include information on the main adverse impacts related to the company’s activities and value chain, including environmental and social impacts.
• Intangible Assets: Companies are required to report on intangible assets such as social, human, and intellectual capital that contribute to their overall sustainability performance.
• Supply Chain Information: Companies should provide upstream and downstream information related to their supply chain, including Scope 3 emissions.
• Sustainability Due Diligence: The CSRD will also require reporting on sustainability due diligence practices, relating to the upcoming Corporate Sustainability Due Diligence Directive (CSDD).

How to report on CSRD?

Reporting under CSRD will be phased in over time for different kinds of companies, as outlined in the timeline below. To comply with the CSRD, companies must determine their in-scope entities, obtain limited assurance from a third-party verifier in their first reporting year, and follow the guidelines set out in the ESRS.

The EU Sustainability Reporting Standards (ESRS) developed by the European Financial Reporting Advisory Group (EFRAG) has a set of 12 draft ESRS that companies must follow. It outlines how and what information companies need to report to European regulators in order to comply with CSRD.

The 12 draft ESRS are as follows:

• ESRS 1 – General requirements
• ESRS 2 – General disclosures
• ESRS E1 – Climate
• ESRS E2 – Pollution
• ESRS E3 – Water and marine resources
• ESRS E4 – Biodiversity and ecosystems
• ESRS E5 – Resource use and circular economy
• ESRS S1 – Own workforce
• ESRS S2 – Workers in the value chain
• ESRS S3 – Affected communities
• ESRS S4 – Consumers and end-users
• ESRS G1 – Business conduct

ESRS 1 sets general principles to be applied when reporting according to ESRS, while ESRS 2 specifies essential information to be disclosed irrespective of which sustainability matter is being considered.

ESRS Overview:

All the other standards and the individual disclosure requirements and datapoints within them are subject to a materiality assessment. This means that the company will report only relevant information and may omit the information in question that is not relevant (“material”) for its business model and activity.

Disclosure requirements subject to materiality are not voluntary. The information in question must be disclosed if it is material, and the undertaking’s materiality assessment process is subject to external assurance in accordance with the provisions of the Accounting Directive. The standards require undertakings to perform a robust materiality assessment to ensure that all sustainability information necessary to meet the objectives and requirements of the Accounting Directive will be disclosed.

Once the CSRD sustainability data has been reported on, the data must be submitted in a standardized digital format, facilitating easy verification and comparison within the European single access point database. The submitted data will undergo “limited third-party assurance,” in order to independently verify and validate the sustainability information disclosed by companies.

CSRD Timeline

The CSRD implementation will be phased, begin with large public entities already subject to NFRD in 2024.

The proposed CSRD timeline:

• January 1, 2024: The first phase of CSRD implementation begins. Large companies with over 500 employees that are already subject to the Non-Financial Reporting Directive will have to comply with the CSRD for their 2024 fiscal year’s reporting
• January 1, 2025: The second phase of CSRD implementation begins. Large companies that fall under the new criteria will have to comply with the CSRD for their 2025 fiscal year’s reporting
• January 1, 2026: Small and medium enterprises (SMEs) listed on EU regulated markets will be subject to the CSRD from 2026. Their first reports will be due in 2027. However, they will have the option to opt out during the transitional period until 2028

It’s important to note that these timelines are subject to change and may be influenced by ongoing negotiations between the European Commission, Parliament, and Council.

Nonetheless, companies should anticipate the enactment of the CSRD in the coming years and start preparing for compliance with the new requirements.

How to Prepare for CSRD?

To prepare for CSRD compliance, aviation companies can take the following steps:

• Assess Current Practices: Evaluate existing sustainability reporting practices and identify gaps compared to the new CSRD requirements. This assessment will help determine the necessary adjustments and improvements needed.
• Understand ESRS: Familiarize yourself with the European Sustainability Reporting Standards (ESRS), which will serve as the foundation for reporting under the CSRD. Gain a comprehensive understanding of the guidelines and requirements set forth by the ESRS.
• Enhance Data Collection and Monitoring: Establish robust systems for collecting, managing, and monitoring sustainability data. This includes measuring baseline environmental and greenhouse gas (GHG) performance across scope 1, 2, and 3 emissions. Ensure data accuracy, reliability, and consistency to comply with CSRD reporting obligations.
• Consider Social Considerations: Assess the social aspects of your value chain, including labor practices, human rights, and social impact. Understand the impacts of your operations and activities on communities, employees, and other stakeholders.
• Set Impact Reduction Targets: Establish meaningful impact reduction targets aligned with the CSRD objectives. These targets should address environmental, social, and governance (ESG) factors relevant to your business. Monitor progress towards these targets and adjust strategies as needed.
• Monitor Key Performance Indicators (KPIs): Define and monitor relevant sustainability KPIs to track and measure progress. Regularly assess and report on these KPIs to demonstrate transparency and accountability.
• Collaborate and Seek Expertise: Engage with stakeholders, including investors, customers, and employees, to gather feedback and insights. Leverage existing sustainability reporting frameworks and seek external expertise to navigate the complexities of the CSRD effectively.

Consequences for CSRD non-compliance

While the specific penalties for CSRD non-compliance are yet to be formalized, it is expected that national supervisory authorities will enforce the directive. Penalties may include fines, reputational damage, and potential legal action. To avoid such consequences, companies must prioritize adherence to the CSRD and ensure accurate and timely reporting.

Conclusion

In conclusion, the Corporate Sustainability Reporting Directive (CSRD) marks a pivotal development for the aviation industry in its pursuit of sustainability. Mandating comprehensive reporting, CSRD holds aviation companies accountable for their Environmental, Social, and Governance (ESG) practices. The directive requires disclosing crucial information, such as emissions data, energy consumption, and waste management, enabling greater transparency and stakeholder engagement.

For aviation companies, compliance with the CSRD is essential as failure to meet the reporting requirements may result in severe penalties. The specific sanctions are yet to be formalized, but non-compliance could lead to significant fines, reputational damage, and even legal action.

Embracing the CSRD guidelines presents an opportunity for the aviation sector to showcase leadership in sustainability, strengthen stakeholder trust, and contribute to a more environmentally and socially responsible future. It also plays a crucial part in the access to money markets for aviation companies.  By prioritizing adherence to CSRD and reporting accurately, aviation businesses can play a vital role in advancing the industry’s sustainability agenda and promoting a greener and more accountable aviation sector in Europe and beyond.