Key takeaways
- The new reporting requirements introduce a significant change in terms of volume and breadth
- Most of the 200 companies that were assessed, across multiple sectors and countries, fall well short of the new CSRD/ESRS requirements
- Sectors with a high ESG impact – like energy – are already reporting more information matching the CSRD requirements than other sectors
- Companies from Europe were more CSRD-aligned than those from other regions
An analysis of the top 250 EMA mandates showed that only 11 percent of the required disclosures were available.
How ready is your company for the EU’s new Corporate Sustainability Reporting Directive (CSRD)? If you represent one of the 50,000 or so companies affected by these new requirements, then you’ll have to meet the European Sustainability Reporting Standards (ESRS), whose last drafts have been published in November 2022. The ESRS make the CSRD significantly more complex and rigorous than the current Non-Financial Reporting Directive (NFRD).
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 requirements for clear ESG ambitions, strategies, policies and measures, and more than a hundred metrics and targets, the volume and breadth of reporting requirements will expand several-fold. For many companies, current environmental reporting only covers climate-related aspects measured by a few KPIs. Under the CSRD, however, they need to report groupwide on environmental issues like pollution, water and marine resources, biodiversity and resource use and the circular economy – if analysis shows these to be material. Moreover, this should include the value chain both upstream and downstream.
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 organizations are set up to manage and track these additional requirements across their entire enterprise.
Assessing the gap
In anticipation of these changes, KPMG ESG reporting professionals carried out a preliminary diagnostic assessment of over 200 global companies across multiple sectors, looking at publicly available reports like the annual and sustainability reports, to assess each companies’ readiness for ESRS disclosure requirements. As part of this exercise, KPMG also studied companies within specific sectors to help benchmark performance between industries. This paper looks at the findings from these assessments, in the form of a ‘traffic light’ dashboard of readiness.
The results suggest that most companies are at an early stage in adapting to the CSRD and have a lot of work to do if they want to be fully ready for the first reporting deadlines, which for some will be as early as the financial year 2024.
About the assessment
- ESRS disclosure requirements were grouped into 84 questions and 23 subtopics. The performance of over 200 companies was assessed using these questions, based on publicly available reports (i.e., annual reports, sustainability reports)1
- Each of the questions was evaluated and scored based on the percentage of requirements met:
o Red – mostly unmet
o Amber – partially met
o Green – mostly met
- Sector scores were achieved by aggregating responses across the respective companies in each sector
A sea of red for the overarching aspects
Looking at the aggregated results, the average score under Governance and Strategy was a red light – meaning that the ESRS disclosure requirements were mostly unmet. A similar red light for the Double Materiality2 considerations (for identifying (material) impacts, risks and opportunities) suggests that companies are not ready for the additional demands of reporting on these topics – especially given the specific requirements of the cross-cutting ESRS standards.
The results reveal that companies are not only providing insufficient information in certain topics, but also that the information is not aligned with the ESRS in terms of its granularity or units or measurement. When adapting to CSRD, much of the work ahead will involve collecting a larger volume of new data and restructuring existing sustainability data, whilst some companies will also need to apply the ESRSs group-wide
as well as achieving (limited) assurance readiness.
Drilling down, companies in most sectors already partially report on areas like composition of administrative, management and supervisory bodies, and sustainability reporting risk management and internal control systems. However, a majority do not yet meet many other CSRD disclosure requirements on how the various bodies are informed about sustainability matters, and the strategy, business model and stakeholders’ impact on it.
ESG reporting meets just a few requirements – and only partially
Turning to environmental reporting, it’s also red lights across all five standards (E1-E5). A closer examination reveals that relatively more companies partially disclose information around climate change mitigation, aligning strategy with transition to climate neutral economies, information on renewable and non-renewable energy consumption, and total greenhouse gas (GHG) emissions. And some also disclose – to some extent at least – their policies relating to climate-related mitigation, while a few also report on targets for this area, along with scopes 1, 2 and 3 emissions. Given the strong focus on climate-related topics in recent years, this is, perhaps not surprising. But the red light shows that even for these more established areas of reporting, most companies fall well short.
Additionally, the CSRD introduces a whole new range of reporting on pollution, water and marine resources, biodiversity, and circular economy (both up and down the value chain. The high number of red lights is a stark warning that these areas require urgent attention ahead of the new reporting deadlines – to assess whether they are material, and if so, how to comply with the new regulations. For metrics and targets, the disclosure often does not meet the required level of granularity, or categorization of data.
The situation for social reporting is similar. On the positive side, companies surveyed in all the major sectors partially report on their workforce policies to address risks and opportunities, and most organizations partially disclose measures related to material impacts for their workforces. But when it comes to workers in the value chain, affected communities, and consumers and users of their products and services, companies do not currently report the information required by the CSRD on risk management, or metrics and targets. For metrics and targets, the disclosure often does not meet the required level of granularity, or categorization of data. Additionally, companies should be aware of and, if necessary, address the overlap between the “S” pillar of the CSRD and other (upcoming) regulations, such as the German Supply Chain Act (LkSG) or the European Corporate Sustainability Due Diligence Directive (CSDDD).
Governance provided at least some respite from red lights, with an amber rating denoting partial disclosure in corporate culture and business conduct policies and evaluation, including strategy to foster an ESG-oriented culture and some details on how to evaluate subsequent progress. However, a few companies report on systems to prevent and detect corruption and bribery, information on confirmed incidents, legal proceedings and corruption-prevention-training, and management of supplier relationships. In many cases this is not specific enough, while it’s also uncertain whether governance measures are implemented group-wide and ready for assurance.
Sector snapshot –a game of catch-up
A focus on specific sectors reveals that some are relatively more mature in their CSRD readiness – notably Energy & Natural Resources, and Technology, Media & Telecommunications (TMT) – while companies from Asset Management and Private Equity (PE) appear to be the least prepared, due in part to a large gap in climate-related reporting. The complete absence of any green lights implies that there is a lot of work to be done across all sectors to conform to ESRS requirements.
On average, this sector outperformed others by achieving amber lights for governance and strategy, as well as for climate-related topics. This is highly relevant, given the presence of energy-intensive and traditionally less sustainable companies, such as large oil and chemical multinationals. Own workforce and business conduct also scored amber. All of which demonstrates the value of transparency in reporting to become CSRD compliant. Another lesson here is that improved CSRD reporting does not necessarily signify more sustainable performance; it only means that sustainability information (positive or negative) is better aligned with ESRS requirements. For example, one large international oil company assessed in this study was better aligned with ESRS in climate mitigation than a large pharmaceutical company, despite the former having significantly higher emissions.
Given the close relationship that the Energy & Natural Resources sector has with its environment, there appears to be a distinct lack of disclosure around aspects such as pollution, water and marine resources, biodiversity and circular economy (E2-E5), which are likely to be material.
TMT companies have also performed relatively well in this study, with, for instance, better disclosure than other sectors for the climate-related subtopic. Interestingly, although the TMT circular economy subtopic scores poorly, with a red light, a few of these disclosure requirements are still higher than other sectors: notably actions and resources related to circular economy and resource use. However, TMT companies are not yet meeting reporting requirements for circular economy and resource use policies, which are also a significant part of ESRS requirements. Greater transparency over policies is important in an industry where circularity is often material, especially in light of its manufacturing footprint and use of rare metals.
Furthermore, a few amber lights for partial reporting – around climate-related topics, own workforce and business conduct and corporate culture – do not mask the need for companies in this sector to improve their CSRD readiness.
According to our assessment, virtually all ESRS disclosure requirements are mostly unmet for Consumer & Retail companies. Social aspects are especially relevant to this sector, notably treatment of company’s own workers and those of their suppliers in, for example, providing a living wage. So, there is a small beacon of light in the amber light showing partial reporting for own workforce and business conduct. But otherwise, there is significant work needed to bring reporting of these businesses from this sector up to speed.
The row of red lights points to the challenges facing IM companies in their quest to be CSRD compliant – although the sector is partially meeting reporting requirements for overall governance and materiality – on a par with most of the other sectors. The companies surveyed score on average an amber light for climate-related metrics and targets, but a red light for climate-related implementation, management of impacts, risks and opportunities. IM traditionally has a high impact on the environment and is a heavy user of fossils fuels, but this need not hold companies back from making vast improvements in CSRD reporting in these material areas – as the energy sector has demonstrated.
Automotive is another sector with a significant carbon footprint and extensive use of raw materials. Although the sector, on average, shows significant room for improvement in meeting ESRS environmental reporting requirements, a few individual companies are partially disclosing across many of these subtopics. Issues such as water/marine, pollution, biodiversity, and circular economy are likely to be material to companies across the automotive value chain, but remain largely unaddressed in their sustainability reporting, and are far from being CSRD compliant. Like the TMT sector, some circular economy actions are reported effectively compared to the other sectors, but policies, on the other hand are not well-reported. Although reporting on the social subtopic of ‘own workforce’ partially met the requirements (with an amber light), the subtopic of ‘workers in the value chain’ needs considerable improvement – in common with other sectors.
Banking and Insurance may have a modest environmental impact through their own activities, but a much higher impact from the companies they invest and transact with. The Banking sector shows a partial readiness in terms of climate-related information, suggesting efforts to deliver more comprehensive information on stakeholders’ environmental performance. Otherwise, financial institutions have not disclosed CSRD-ready information for most of the E, S and G pillars´ requirements. Although insurance companies are relatively more compliant with overall, high-level disclosures requested by the CSRD, they lag slightly behind banking companies in their CSRD readiness.
Following the COVID-19 pandemic, Life Sciences & Healthcare inevitably received a great amount of attention. KPMG´s study shows that companies in this sector need considerable support to become CSRD-ready. The firms surveyed are, on average, partially compliant in only some of the disclosures for climate-related targets and metrics, and management of impacts for own workforce and business conduct, but otherwise there are red lights all around. In an industry with a significant manufacturing footprint and pollution risk, double materiality is likely to play a key factor in assessing the level of reporting necessary for a range of factors like climate change, biodiversity, water/marine and circular economy.
Companies in this sector are largely not treating social aspects as material; hence disclosing information related to the ‘S’ pillar is rarely to be found among of the companies in scope of this assessment because of the inherent characteristics of the Life Sciences & Healthcare industry, companies in this sector have not historically reported much information about social topics. Using a double materiality perspective, we expect that this will need to change, as companies in this sector need to address their impact on different stakeholders.
Of the Asset Management and PE companies surveyed, not one managed to achieve even an amber light for partially meeting ESRS disclosure requirements – placing them at the bottom of the CSRD readiness rankings. The nature of the sector suggests that areas such as business conduct, own and suppliers’ workforces may be material areas, as well as environmental topics relating to businesses in which these companies invest. All the more reason for taking swift action to assess materiality and move towards closer compliance with CSRD reporting requirements.
Next steps: bridging the ESRS reporting gap
The rows of red lights across the assessment dashboards demonstrate the scale of the CSRD reporting challenges for companies across all sectors. It’s 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 (limited) assurance opinion. By giving the wider public greater transparency, reports can enhance companies’ ‘green equity’ story – but it’s vital to also address stakeholder and capital market expectations.
Embracing the objectives of the CSRD can help avoid allegations of greenwashing and assure investors that your 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 key steps to take to get ready for CSRD:
- Pre-assessment: Gain a high-level status-quo overview of where your company reporting stands in relation to ESRS, to help you understand what your CSRD journey will look like. This is the basis for any successful journey towards compliance and be a foundation for further discussions within the organization.
- Impact and readiness assessment: Understand in detail (at a disclosure requirement level) the state of your reporting, to achieve a first impression of the scope, of legal entities to consider, the reporting strategy, potential gaps and, as a result, a roadmap covering fields of action.
- Fully-fledged CSRD readiness project: Outline a project plan based on your company’s assessments and ambition level and get clarity how to transform ESG reporting including governance, processes and controls as well as IT.
How KPMG can help
Sustainability is vitally important for all companies. KPMG firms support organizations of any ESG reporting level to make their sustainability transition as smooth and beneficial as possible. The CSRD will require corporations to integrate ESG as a major topic in their risk discussion, which must be qualified and quantified in their ERM. Our three-phase approach, spearheaded by our CSRD readiness assessment tool, can help you embed the CSRD requirements in your organization while, at the same time, seizing ESG-related opportunities.
Our comprehensive CSRD readiness services begin with a pre-assessment phase, where our CSRD experts have already performed preliminary diagnostic assessments of over 200 top EMEA companies. In this phase, they bring this expertise to give companies a clear and concise overview of where they stand in relation to the upcoming requirements. As a next step, KPMG is also uniquely qualified to help companies conduct an impact and readiness assessment to dive deeper into the state of their current reporting. Finally, KPMG pulls all these services and capabilities together in a fully-fledged CSRD readiness project, to help companies efficiently become thoroughly compliant. With our tailored, modular project approach, and KPMG professionals’ extensive experience in providing advisory and assurance services over sustainability reporting, we deliver pragmatic solutions and services to help you address the CSRD challenges and to help you get ready for a new level of ESG reporting.
Leveraging our expertise and resources, including team members who have contributed to the development of the standards and who work as part of the EFRAG team, we will work with you to understand your next steps and formulate a path to compliance. We recommend businesses start today by carrying out a pre-assessment of the kind described in this paper, which will give your company a view of the reporting gaps, as a foundation for further action.
KPMG ESG Reporting Readiness tool for CSRD
KPMG has developed a CSRD tool that quickly provides a clear overall picture of a company’s readiness for CSRD-compliant reporting. We have already used this tool to help companies get a head start on their CSRD journey. The tool is generally used as a starting point for our phase approach, to provide an initial high-level overview and then a deeper understanding at the disclosure requirement level to gain a first impression of potential fields of actions. For more information on our CSRD approach, please visit kpmg.com/CSRD.
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1 This assessment takes into account the latest CSRD requirements as of November 2022, but does not consider exemptions to requirements based on company-specific immaterial topics.
2 Double materiality considers materiality in 2 dimensions: 1) impact, and 2) financial materiality.