The CSRD - short for the Corporate Sustainability Reporting Directive – was published in the Official Journal of the European Union on 16 December 2022 and entered into force on 5 January 2023. This landmark directive will require companies to report on their environmental, social, and governance (ESG) performance in a standardized manner. A sense of urgency is imperative, as there is a strict timeline. “But there’s no need to panic,” says Rihab Kaibi, ESG reporting manager and Steven Mulkens, executive director, from KPMG in Belgium’s Sustainability team. “There are clear steps to follow and specialists to guide you in this journey.” 

Comparable sustainability information

“The CSRD was introduced within the context  of the EU Green Deal,” explains Steven. “It aims to direct capital and funding towards sustainable investments. The CSRD is designed to make sustainability reporting more reliable, consistent, standardized and comparable. In doing so, it meets the needs of capital markets and other stakeholders for high quality and robust sustainability information on which they can base their economic decisions.”

“Investors are increasingly focused on broader value creation and long-term growth, and companies that cannot demonstrate their contribution towards a more sustainable economy and society may face significant challenges in attracting funding and talent or in terms of reputation and credibility towards stakeholders”, adds Rihab. “The CSRD is an important step in addressing the environmental and social challenges facing the global economy.”

From declaration to management

“With the CSRD, we see a clear transition from declaration – which is now the case for companies reporting under the Non-Financial Reporting Directive (NFRD) – to management of sustainability-related impacts, risks and opportunities.” says Steven. “One of the main differences is that the CSRD requires companies to set clear KPIs and to measure their progress along the way against time-bound targets.”

“To ensure that the sustainability information reported is robust and reliable, the CSRD requires this information to be assured by an independent third party,” says Rihab. “At first this will be limited assurance, but there is a clear ambition to move towards reasonable assurance in the foreseeable future. Currently, generally speaking, sustainability information is less mature than financial information, but the European Commission is clearly determined to significantly increase the data and information quality and bring it to a comparable level.”

Double materiality assessment: the implications for your company

“Companies need to base their reporting over sustainability information on a double materiality assessment,” says Steven.  “This requires companies to assess material topics from two different perspectives. The first is the impact materiality assessment, which takes an inside-out perspective. The company will evaluate the impact it has on sustainability topics, such as climate change and diversity in the workplace. The second is the financial materiality assessment, which considers sustainability issues, such as climate change, that can potentially impact the company’s business and enterprise value. This is the outside-in perspective.”

“There are three levels of information that must be reported. Certain topics will be mandatory to disclose for all companies,” adds Rihab. “The ESRS - European Sustainability Reporting Standards - cover 12 sector-agnostic standards that will need to be disclosed, of which two are cross-cutting standards and 10 are topic-specific standards within the ESG context. These sector-agnostic standards are currently in final draft and will be adopted by the European Commission by the end of June 2023. In addition, the ESRS also entail sector-specific standards which will require companies to disclose information relevant to a specific sector. These standards, taking into account 40 different sectors, are currently under development. The third level of information is the entity-specific information, based on the company’s double materiality assessment.”

Out of the starting blocks with a gap analysis

“How mature is your sustainability strategy and reporting? To find out, a gap analysis can be a good starting point,” says Rihab. “This is an assessment of the current state of sustainability reporting, designed to identify key gaps towards CSRD compliance in the company’s reporting and to help shape a complete plan of action. If a company has a diversity policy but does not report on KPIs, there’s a clear next step: set diversity targets, develop a corresponding metric and report on your progress. You should assess the current situation to determine what information is already available and to have a clear insight into which steps to take next to fill the gaps identified.”

“What comes out of a gap analysis and readiness assessment of reporting processes is the basis for a roadmap to compliance,” says Steven. “What issues should be addressed, what reporting systems should be in place and what actions should be taken to improve data quality. An ambitious plan with a time-bound roadmap helps you to move forward and have all the information in place for a CSRD implementation.”

Governance is critical

“A governance structure is critical to the development and implementation of a sustainability strategy,” says Steven. “An ESG governance structure starts at the top, with the board of directors. They need to be involved in assessing risks, delegating actions and setting up reporting lines. There needs to be ownership and coordination from a central committee with formal buy-in from the highest decision-makers.”

“You also need to disclose your governance structure. This is one of the general requirements in the cross-cutting standards of the CSRD,” says Rihab. “How information is gathered and addressed, who is responsible for which issues, incentive programs in place, and integrating due diligence into the organization. Many of these aspects are embedded in the CSRD, making sure that governance on sustainability issues is entrenched in your company. It is an indicator that the European Commission has a clear ambition that sustainability is covered by the highest governance bodies in your company.”

Opportunities ahead

“The timeframe is very short as the CSRD will already be effective as of financial years starting on or after 1 January 2024 for large Public Interest Entities (PIEs) currently in scope of the NFRD and as of financial year 2025 for other large undertakings. The sustainability reporting maturity level of most Belgian companies is quite low. This is especially true for unlisted companies or non-PIEs. This makes the road to compliance even more challenging,” says Steven. “Reporting processes are not robust enough and not all required data is already available within Belgian companies. They need to identify gaps in their current reporting and assess the maturity and readiness of their processes, systems and data. This needs to be done in a short period of time.”

“Companies that address these challenges to achieve positive change – rather than viewing the CSRD as a mandatory and pointless directive – will reap the benefits,” says Rihab. “It is important to emphasize that reporting on sustainability information is not only relevant from a compliance perspective. It can bring significant benefits to companies that do good, such as attracting additional investors and funding, gaining additional insight into their non-financial risks, and improving their credibility and reputation with their customers, employees and other stakeholders. Companies can create a competitive advantage that will secure their future growth and profitability.”

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