The sustainability reporting landscape is constantly evolving, and right now financial institutions and large companies are finding themselves at the forefront of this transformation, as regulatory frameworks like the Corporate Sustainability Reporting Directive (CSRD) reshape their reporting obligations. It is imperative to understand the requirements and what impact it’s going to have on the firm's business, its value chain, and why readiness is a necessity.
CSRD introduces one of the most challenging disclosure requirements to face companies in the last decade as it replaces and significantly broadens the scope of existing sustainability reporting requirements today. The application of CSRD will begin on Monday, 1st January 2024 for large, listed companies already subject to the Non-Financial Reporting Directive (NFRD).
On a transitional basis, the CSRD brings into scope all large companies and listed small and medium-sized companies (SMEs). Many of these firms who are in scope for 2024 (reporting in 2025) have not yet started to prepare, and as this process is expected to take several months, it presents a major challenge. When companies report under CSRD they will need to use a set of new European Sustainability Reporting Standards (ESRS) which have been approved by the European Commission. Financial institutions and companies alike need to start preparing to meet the requirements and start putting additional resources into place.
1. Limited Assurance and the Enhanced Role of the Audit Committee
One of the core changes is the mandatory requirement for limited assurance of sustainability statements and the enhanced role of audit committees in ensuring the integrity of sustainability reporting. They are now tasked with informing the company’s decision-making and administrative bodies on the results of the assurance of sustainability reporting.
Audit committees must signify a new level of commitment to transparency and accountability. These committees are now expected to monitor the sustainability reporting process and the procedures used to acquire and present such information, in line with sustainability standards. Companies should prioritise the monitoring of effective internal quality control, risk management systems and internal audit functions, as a strategic measure to mitigate risk. CSRD has presented a shift with mandatory assurance. Sustainability reports now undergo limited assurance, with the possibility of moving towards reasonable assurance later this decade.
2. Double Materiality
CSRD has introduced a double materiality concept, which is a complex and nuanced framework where both impact materiality and financial materiality must be assessed. Impact materiality refers to an organisation's actual or potential impact on people or the environment (either positive or negative). Financial materiality refers to material risks or opportunities that sustainability matters trigger or may trigger for an organisation. The assessment of such will span across the short, medium, and long-term horizons and across the entirety of the value chain.
This will present a challenging measurement process for all financial institutions, as it is necessary to have a meticulous evaluation of both positive and negative effects. Disclosure requirements will be a combination of mandatory requirements coupled with the outcome of the double materiality assessment.
3. Engaging the Full Value Chain
Companies are now obliged to consider their complete value chain, including a company’s own operations, products and services, business relationships and supply chain, as appropriate, over different time horizons. This aspect of CSRD will require a comprehensive approach demanding careful planning and gathering of material value-chain information. This may present a challenge for companies, as they need to account for impacts, risks, and opportunities along the entire value chain. It will require careful consideration of the upstream and downstream value chain.
Given the increased requirement of detail and the double materiality requirement lens, companies have a lot of work ahead of them to assess, design, implement and disclose in line with the new requirements. Preparation for this phase of sustainability reporting is key. A CSRD implementation solution will be needed to build reporting functionality over a multi-year horizon.
The importance of high-quality reporting cannot be overstated, not only is it a prerequisite for high-quality assurance, but one must think who the users of this new vein of information will be. It will now form part of the company’s evaluation as they look to assess finance and capital. It will provide important information when firms are bidding on contracts as it will form part of the procurement and tendering process. It will also provide important information that the company itself may not have previously considered in evaluating its cost base, supply chain resilience, and developing new products and business relationships.
As organisations navigate this evolving landscape, collaboration with experienced partners like EY becomes invaluable. EY is experienced in navigating the intricate regulatory landscape, and strategic preparation is required for a sustainability reporting framework such as this.
It is important that companies remember these key points as they begin reporting on CSRD:
- Plan - conduct your readiness assessment and identify potential gaps in relation to ESRS.
- Team - stand up a cross-functional project team.
- Time - ensure enough time (6 months plus) to prepare and deliver this project.
- Map - how the ESRS interacts with other disclosure obligations (such as Pillar 3, SFDR and EU Taxonomy) to create one source of truth.
- Brief - your audit committee and management team, highlighting their obligations.
- Assurance - ensure your disclosure framework is built to the required assurance standard.