CSRD: Why do Canadian companies need to act?

October 10, 2023

Sarah Marsh, Partner, National ESG Report and Assurance Leader
Paul Feetham, Partner, Capital Markets & Accounting Advisory Services (CMAAS)
Jennifer Lawson, Director, ESG Reporting & Assurance

The new Corporate Sustainability Reporting Directive (CSRD) mandates companies, both inside and outside the European Union (EU), to report on sustainability and environmental, social and governance (ESG) issues. Many Canadian companies are unaware that the CSRD applies to them and of their obligations under it. According to research published in the Wall Street Journal, more than 1,000 Canadian companies will have to report.¹ Companies not preparing to meet these new regulations risk not only financial penalties but also reputational damage.

What should Canadian companies be doing right now?

Assess whether your company or group is in scope

Something as simple as one small European operation or a Luxembourg holding company can trigger these obligations. In our experience, Canadian companies are often surprised to discover that they fall under the scope of the EU directive, which is why it’s important to carefully review the provisions of the CSRD against your organizational structure.

We identified three common ways that Canadian companies may be subject to CSRD:

The company or its subsidiaries has securities listed on an EU-regulated market (e.g. a dual listing)
The company has a large (see definition below) EU subsidiary or EU branch
The company has a large EU group (e.g. an EU parent of a large group, or an EU holding company)

An EU subsidiary or an EU consolidated group is considered “large” if it exceeds at least two of the following three metrics on two consecutive annual balance sheet dates:

Total assets of €20 million (about $22 million as of July 31, 2023)
Net turnover (revenue) of €40 million (about $44 million as of July 31, 2023)
Average of 250 employees

For a detailed overview of who’s captured by the CSRD scope and the obligations under it, see our assessment of the worldwide impact.

Work out the reporting deadlines that apply to your organization

Many Canadian companies will not only need to publish their first report in the 2025 fiscal year, but they’ll also have to obtain a limited assurance audit (or independent review) over what they report. Now is the time to start preparing.

Run a gap analysis

Once you have determined that your company falls under the scope for CSRD reporting, carry out a gap analysis against the disclosure requirements of the European Sustainability Reporting Standards to establish which sustainability-related impacts, risks, opportunities and metrics are material, and how you’ll start gathering and reporting the required data and information. The number of specific data points required can easily run into the hundreds per entity.

The CSRD’s effect on value creation

The CSRD is a real driver for value. It brings several distinct improvements to ESG reporting:

It integrates sustainability into strategy.

It produces more useful data for short-, medium- and long-term decision making.

It recognizes the most important financial effects on the company, along with its impact on the world.

Implementing these standards now can give companies a head start in their reporting journey, especially for those that are—or will be—affected by disclosure requirements adopted by the Canadian Securities Administrators, the International Sustainability Standards Board and/or the US Securities and Exchange Commission.

An integrated approach to data collection and enabling technology systems will make reporting more efficient, particularly if multiple reports are required. Once data is being tracked, companies will have the information they need to inform targets and provide performance metrics. This allows for a more integrated communication of long-term value and sustainability with investors and stakeholders.

No matter what sector you’re in, mandatory ESG disclosure requirements are becoming increasingly onerous and complex. Data-gathering and reporting activities do come with costs, but they’re now a necessary part of doing business. Improving data collection now will increase your ability to report under all required standards and frameworks. Companies that get it right early on will reap benefits in the future.

_{¹ “At Least 10,000 Foreign Companies to Be Hit by EU Sustainability Rules,” Wall Street Journal, April 5, 2023, https://www.wsj.com/articles/at-least-10-000-foreign-companies-to-be-hit-by-eu-sustainability-rules-307a1406}