The European Union’s Corporate Sustainability Reporting Directive (CSRD) was adopted in December 2022 and will apply from 2024 onwards. It forms part of legislative measures under the New European Green New Deal and seeks to enhance requirements for corporate sustainability reporting. The CSRD expands on the Non-Financial Reporting Directive (NFRD) and aims to make sustainability reporting far more consistent and transparent across all businesses.
It addresses shortcomings of the NFRD by introducing mandatory third-party independent assurance of reported information, and more detailed requirements including reporting in the management report, digital tagging of the reported data, and establishing standard reporting requirements. While the NFRD applied to large public interest entities having more than 500 employees, the CSRD widens the scope to affect 49,000 companies across the EU directly, as well as several thousands of other entities forming part of their value chains. In-scope companies must align their reporting to the European Sustainability Reporting Standards (ESRSs) being developed by the European Financial Reporting Advisory Group (EFRAG). The aim of these standards is to ensure that reporting requirements are clear, and that reported information is comparable, relevant, and reliable.
Understanding and adapting to CSRD is a major task. Even those companies that have previously been commended for their sustainability reporting may find that their current disclosure practices fall well short of the new requirements.
With hundreds of metrics, the volume and breadth of reporting requirements will expand several-fold. For many companies, current environmental reporting only covers climate-related aspects. Under the CSRD, however, they need to report on pollution, water and marine resources, biodiversity and resource use and the circular economy – if analysis shows these to be material.
Similarly, the CSRD has more specific reporting requirements for a business’s social aspects, including its own workforce, workers in the value chain, affected communities and consumers and end users. And for governance, companies are obliged to disclose more information about their business conduct practices. Few organisations are set up to manage and track these additional requirements across their entire enterprise.
How can your organisation prepare for CSRD?
CSRD is not just about covering additional requirements in topics such as biodiversity, circular economy, workforce and communities; it’s about creating an ESG reporting management and measurement system based upon materiality, establishing policies and action plans for achieving compliant reporting, clearly defining achievable metrics and targets, and applying overall due diligence on ESG-related activity and disclosure. And reports must cover every business unit globally and be sufficiently robust to withstand an independent, external auditor’s assurance opinion.
Embracing the objectives of the CSRD can help avoid allegations of greenwashing and assure investors that a company places sustainability reporting on an equal footing with financial reporting. The metrics and targets required by the ESRS can play an important role in transitioning to a sustainable future.
With time running out fast, here are some initial steps to take to get ready for CSRD:
CSRD Readiness Assessment
Gain a high-level overview of where a company’s reporting stands in relation to ESRS, to help one understand what their CSRD journey will look like. This is the basis for any successful journey towards compliance.
Double Materiality Assessment
Understand what ESG topics are material to report from a sustainability and / or financial perspective.
Data Readiness Assessment
Assess the current quality of disclosures and / or information available; identify and close data and process gaps compared to CSRD requirements.
KPMG’s CSRD experts have already carried out CSRD readiness assessments for around 200 top EMEA companies. Most of the companies we assessed, across multiple sectors, fall well short of the new CSRD requirements. Our conversations with clients have also highlighted the complexity that preparing for the CSRD entails, and the need for organisations to start preparing now to ensure timely compliance.
However, as our work with companies who are leading the way on ESG has shown, ESG reporting can also be considered as an opportunity to integrate ESG into a company’s strategy and operations, in order to reduce risks, and attract talent, customers and investment.
