Navigating the Corporate Sustainability Reporting Directive (CSRD): A Guide for Japanese Headquartered Companies

In an era where sustainability and responsible corporate practices are gaining prominence, we have another acronym to add to the growing concerns sustainability places on companies: CSRD. Welcome the newest regulatory framework the Corporate Sustainability Reporting Directive (CSRD) adopted by the European Union (EU). It is not too much to say that the new wave of disclosure frameworks are reshaping the business landscape.  For Japanese headquartered companies with operations or subsidiaries in the EU or engaged in trade with EU nations, conforming to the CSRD is imperative. Although the start date of disclosure for covered companies varies depending on the size of their European operations, disclosure will be required between 2026-2029 depending on the size of the business. Therefore, it is a good time to begin your planning.

This article serves as an initial guide to understanding the key points of the CSRD and navigating the process of compliance for Japanese firms.

Understanding the CSRD:

The CSRD is a pivotal regulation aimed at enhancing transparency and comparability of sustainability-related disclosures among EU-listed companies. It expands upon the existing Non-Financial Reporting Directive (NFRD) by introducing mandatory reporting requirements for a broader range of sustainability factors, including environmental, social, and governance (ESG) aspects. Key points of the CSRD include:

• Expanded Scope: The CSRD broadens the scope of reporting obligations to include not only large public-interest entities (PIEs) but also certain medium-sized PIEs, thereby encompassing a larger segment of companies.
• Harmonized Reporting Standards: The directive aims to standardize sustainability reporting practices across the EU, fostering consistency and comparability among disclosures. This facilitates better decision-making by stakeholders and investors.
• Materiality Assessment: Companies are required to conduct a materiality assessment to identify and prioritize ESG factors relevant to their business operations and stakeholder interests. This ensures that disclosed information is pertinent and meaningful. More on this important point below.
• Assurance Requirements: For CSRD compliance from the first year, companies are required to obtain limited assurance over their compliance with the ESRS standards, their underlying double materiality assessment process, and certain reported indicators.

Navigating Compliance for Japanese Companies:

Conforming to the CSRD entails a systematic approach that involves several key steps, some of which you will likely be familiar with:

1. Gap Analysis: Japanese companies should conduct a thorough gap analysis to assess their current sustainability reporting practices against the requirements of the CSRD. This involves identifying areas of non-compliance and determining necessary adjustments.
2. Stakeholder Engagement: Engaging with stakeholders, including investors, customers, employees, and regulatory bodies, is essential for understanding their expectations regarding sustainability disclosures. This input informs the materiality assessment and ensures alignment with stakeholder interests.
3. Materiality Assessment: Japanese firms must conduct a more robust materiality assessment than they have likely done in the past. In this case they need to do a "Double Materiality". Under the CSRD, companies are required to assess and disclose not only financial risks and opportunities but also environmental, social, and governance (ESG) factors that are material to their business and stakeholders. Specifically this means you need to look at the financial materiality, i.e. significance of financial information to investors, and broader societal or environmental materiality, which considers the impact of a company's activities on society and the environment. This integrated approach ensures transparency and accountability by acknowledging that factors such as climate change, social inequality, and regulatory developments can have significant impacts on a company's long-term sustainability and financial performance, thus necessitating comprehensive reporting that addresses both financial and non-financial considerations.
4. Data Collection and Management: Establishing robust data collection and management systems is crucial for gathering and analyzing relevant ESG data. Japanese companies should implement internal processes to ensure the accuracy, completeness, and reliability of sustainability information.
5. Reporting Framework Selection: Selecting an appropriate reporting framework, such as the Global Reporting Initiative (GRI) Standards or the Sustainability Accounting Standards Board (SASB) standards, is essential for structuring sustainability disclosures in line with CSRD requirements.
6. Integration with Financial Reporting: Integrating sustainability reporting with financial reporting processes enhances coherence and transparency in corporate disclosures. Japanese companies should align sustainability metrics with financial indicators to provide a comprehensive view of their performance.
7. Assurance and Verification: Obtaining assurance on sustainability reports can enhance credibility and trust. We feel this may become more of an imperative in the future.

Although these steps are relatively straight forward, sustainability is a journey and not a destination once reached. Compliance with the CSRD is an ongoing process that requires continuous monitoring and improvement. Japanese companies should regularly review and update their sustainability reporting practices to reflect evolving regulatory requirements and stakeholder expectations.

In conclusion, navigating the CSRD presents both challenges and opportunities for Japanese headquartered companies operating in the EU market; the challenges are sadly always first. To frame it in a positive light, consider that understanding the key points of the directive and following a systematic approach to compliance will allow Japanese firms to enhance transparency, accountability, and trustworthiness in their sustainability disclosures. This may be an EU initiative, but the world is heading in this direction, so it may be best to embrace it wholeheartedly. Such a mindset not only ensures regulatory compliance but also strengthens stakeholder relationships and drives long-term value creation.