Putting sustainability and financial reporting on an equal footing
Society demands more transparency about companies’ environmental, social, and governance risks and opportunities. Yet, corporate reporting on sustainability information often lacks the transparency, consistency and reliability necessary to sufficiently inform stakeholders. The EU Corporate Sustainability Reporting Directive (CSRD) addresses this challenge.
The CSRD is designed to encourage change in business behaviour by ensuring that companies are transparent about the progress they are making towards a sustainable future. This addresses the information needs of stakeholders, and it is also expected to increase scrutiny on businesses’ sustainability strategy and performance. This may affect the way companies do business, who they do business with, and how capital is allocated towards sustainable business activities.
The overarching objective to put sustainability reporting at the same level as financial reporting.
Is your company affected?
The CSRD is a significant expansion of the current EU sustainability reporting obligations set out by the non-financial reporting directive (NFRD). The CSRD replaces the NFRD, applies to around five times as many companies, and requires more comprehensive disclosures.
Concretely, the CSRD will apply to the following companies:
Companies with securities listed on an EU-regulated market; or
Large companies, defined by exceeding two of the three following criteria:
250 employees
Є20 million balance sheet total
Є40 million net turnover
As the CSRD needs to be transposed into the national legislation, the EU 27 member states may decide to apply strict rules - as we have seen in the case of Belgium that applied stricter rules for the NFRD. Companies not under the scope for CSRD are still expected to be impacted due to the data needs of their customers, suppliers and wider stakeholders who are obliged to report under the CSRD.
The most pressing timelines are for companies that are already subject to the NRFD with the first obligation to report for FY24, leaving little time to prepare. The other companies in scope of the law will have to comply with the CSRD reporting requirements for their FY25 reporting while listed SMEs can voluntarily opt out of reporting until 2028.
Sustainability reporting to become more consistent, comparable and reliable
The CSRD will require companies to provide comprehensive and granular disclosures about how sustainability issues affect a company’s business, as well as the impact of the business activities on people and the environment. The specific disclosure requirement will be detailed by the European Sustainability Reporting Standards (ESRS) to ensure that companies have clear standards to report in a consistent and comparable manner.
The sustainability information that companies report will also have to undergo a mandatory audit. The requirements will begin with limited assurance and expand to reasonable assurance at a later date.
Common challenges in getting ready
With little time left for companies to prepare for the CSRD, we see the following as key challenges:
Identify what’s in scope
Determining if an entity of your company is in scope, and the level at which reporting is needed, can be complex. It affects not only the reporting structure, but also comes with legal entity structuring and tax implications, in conjunction with any other sustainability disclosure requirements for entities outside of the EU.
Embed sustainability into the business strategy
Companies need to align their sustainability strategy with the business strategy to create sustainable value. Beyond compliance, this is an opportunity to think strategically about how to improve business decisions, attract the best talent and differentiate from competitors.
Design a continuous process to identify what matters
How the company impacts the world and its people and how sustainability risks and opportunities impact the company affects business priorities and decision-making. Companies need a process: firstly, to monitor what sustainability topics matter to their stakeholders, and secondly, also to comply with reporting requirements such as the concept of double materiality.
Design governance and oversight and effectively implement change
Companies need structures, risk management and policies that allow directors to provide oversight and demonstrate compliance with statutory requirements. Companies need to evaluate their operating model and identify where and how to embed sustainability into the way they run their business to manage risk and create value.
Build an audit-ready reporting process
Sustainability reporting data, processes, systems and controls need to be designed taking into account broad information needs - across internal and external, voluntary and regulatory reporting - and embedded within the business to be on a par with financial reporting. Sustainability reporting will have to meet mandatory audit requirements which requires a robust and well structured data collection and reporting process.
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