The introduction of the Corporate Sustainability Reporting Directive (“CSRD”) in the EU is without doubt one of the greatest shifts in corporate reporting for in-scope companies in recent decades, writes Lorraine Sammon, Partner, KPMG. This article first appeared in the Irish Examiner and is reproduced here with their kind permission.
The CSRD will require companies to make clear where they are on their ESG (Environmental, Social & Governance) journey, what their strategy, goals and targets are, and how good they are at achieving them.
Companies in scope of the CSRD will be required to apply the European Sustainability Reporting Standards (“ESRSs”). Reporting will be required as part of the management report at the same time and for the same period as the financial statements.
Scoping
First to report will be Public Interest Entities (as per the CSRD) and companies with listed securities on an EU regulated market, which are large and have more than 500 employees. These companies will report in 2025 on 2024 results. In the second year of phasing in, all other EU large companies will be required to report.
Large companies are those that on the balance sheet date exceed 2 out of the following three criteria: 250 employees, net revenue of €50 million or total assets of €25 million.
More companies will come into scope in subsequent years – including certain ultimate non-EU parent companies. Therefore, the net has been pretty widely cast and scoping can be nuanced. It is something that should be examined in detail at the outset of any project a company undertakes in respect of CSRD reporting.
Spot the gaps
Once a company has determined if and when it is in scope, the next step is to look at the information it already has from a sustainability reporting perspective, and critically, the gaps it has.
One of the nuances of sustainability reporting that can make this more challenging is that many reporting requirements extend to the company’s direct and indirect business relationships in the upstream and downstream value chain.
What this means is that a company cannot just look at its own internal sustainability information – it also needs to gather information upstream from for example its suppliers and downstream from for example its customers and distributors. This can be challenging as some entities within a reporting company’s value chain will not have readily available reliable information. So early engagement will be important.
Inside out, outside in
Generally financial statements are prepared to primarily meet the needs of investors. However, the CSRD aims to satisfy a much wider stakeholder base - and as a result the information that a company needs to gather and disclose is far more granular, and wide-ranging ranging than many are used to.
Looking at the concept of meeting the needs of various stakeholders, one of the key aspects driving this is what is commonly called “double materiality”. Previously companies focused their reporting on disclosures that were financially material, meaning those that may trigger significant financial effects on a company's development - its cash flows, financial position or financial performance (an outside in financial perspective). So far, so good (and so familiar!).
However the ESRSs also require companies to evaluate their ESG position from an impact materiality lens - focusing on a company’s impact on people and the environment from an inside out perspective.
Determining what is material in this regard will require analysis of what is important and impacts (or potentially impacts) its stakeholders.
This is a really new way of approaching corporate reporting requirements and is one of the key aspects that we work with our clients on right now in order to help clients determine what is material and therefore needs to be disclosed in their sustainability reporting.
Lorraine Sammon, Partner
The way of the future
The reporting obligations may seem daunting - however we are seeing over the last decade a real commitment by companies to embrace ESG principles and anchor these principles in business strategy.
This makes sense from a business performance perspective - and not just from a from a perhaps more cynical lens of “optics”. Indeed, as seen in the recent “Net Zero Readiness Report 2023” published by KPMG, at an international level the philosophy of net zero is weaving itself into the world’s economic systems and several of the world’s biggest emitting countries have increased their net zero ambitions.
The advent of reporting under CSRD allows companies to tell their story to their investors and wider stakeholders in a structured way that will allow comparability with their peers.
Given the focus on reporting in the EU many hope that the CSRD will help drive innovation around some of ESG related challenges facing society such as climate change, pollution and biodiversity loss. This is a positive for everyone.
One thing is abundantly clear - the direction of travel for sustainability reporting is only going one way - and the earlier companies get on board the better the opportunity they have to tell their story in a coherent and relevant manner that meets sustainability reporting requirements and also safeguards a company’s performance for the future.
Get in touch
Do you have any queries about the CSRD, or corporate reporting in general? KPMG can help. Please contact Lorraine Sammon of our Audit team; we'd be delighted to hear from you.