For private equity firms, the CSRD countdown has begun

By Nicolas Bourdier, Eric Janson and Nadja Picard

The EU’s Corporate Sustainability Reporting Directive (CSRD) constitutes the most extensive sustainability reporting mandate that private equity firms and their portfolio companies (portcos) have faced to date. The directive, which took effect in January 2023, calls for PE firms and other companies to make detailed disclosures on a wide array of environmental, social and governance topics for their European operations. And it specifies that the disclosures will eventually be subject to third-party assurance.

Fulfilling these requirements will be a formidable challenge. Few firms have the necessary systems and processes in place. Much of the required information isn’t readily available to them. Meanwhile, the regulatory landscape continues to evolve at a rapid pace. Many EU jurisdictions still need to incorporate, or ‘transpose,’ the CSRD into local law before July 2024. Because they will likely add requirements to those covered by the CSRD itself, companies with entities across multiple EU jurisdictions can expect a further degree of complexity. (Businesses will also want to keep an eye on new reporting regulations outside the EU: the US SEC, for example, just approved a long-awaited set of final rules on climate-related disclosures for public companies.) 

What’s more, the CSRD’s deadlines are coming up quickly. The companies that now issue information under the EU’s Non-Financial Reporting Directive (NFRD) are expected to disclose under the CSRD for the first time in 2025 on their 2024 data. Those that meet certain size criteria are obliged to make disclosures in 2026 on their 2025 data.

Despite these challenges, PE firms have much to gain from their CSRD reporting efforts. Even in the near term, CSRD readiness can boost or erode a portfolio company’s value at exit—consider that some acquirers already account for the potential costs of preparing for the CSRD and reporting annually. And in the long run, data for CSRD reporting can help PE executives and deal teams understand how sustainability topics such as climate, gender equity, and remuneration could affect the financial results of portcos or targets. That helps them work with portco leaders on identifying business opportunities and risks, applying powerful levers for value creation, managing threats, and strengthening their equity story. 

With no time to lose, how can PE firms better their chances of success? The efforts of some first movers point to practices that can make a big difference in the pace and effectiveness of CSRD readiness programmes—both at the PE firm level and across their portcos.

Like companies in other industries, PE firms have just begun responding to the CSRD requirements, if they’ve started at all. The experience of early adopters has highlighted practices that can benefit other firms as they plan and carry out their own reporting programmes. Below are four important areas where PE leaders are focusing attention.

Cross-functional teamwork

As noted earlier, preparing to report under the CSRD requires a far-reaching effort to determine how sustainability topics relate to a business’s strategy, and to set out credible plans for responding to those topics and measure more performance indicators than most companies track now. These obligations relate to the activities of many departments within a PE firm—notably, the finance function, where key performance data is tracked and managed; the IT function, which supports the systems required to manage a large volume of information; the sustainability function, with its expertise in understanding ESG issues; the risk management function, which ensures all sustainability-related risk factors are monitored and mitigated when appropriate; and the legal function, which ensures compliance with various rules and regulations. 

Recognising the breadth of these obligations, leading PE firms actively engage each of these departments—not just inform or consult them—in implementing the PE firm’s CSRD readiness programme. Experience suggests that the following points of emphasis can help promote effective cooperation.

Connect reporting with value creation. Busy managers and staff can be forgiven for seeing CSRD implementation as a mere compliance exercise, in which their responsibility is limited. They need to understand instead how CSRD reporting connects to the firm’s ability to create value—its strategy, its positioning in the market, its approach to conducting business. As a starting point, PE leaders and professionals already cite value creation as the main driver for their firm’s sustainability efforts, according to a recent PwC survey. Capitalising on that awareness, one PE firm is preparing workshops for deal teams to show that the sustainability reporting carried out in response to the CSRD will provide them with more information they can use in making business decisions.

Engage early. The sooner a firm can involve key internal functions, make employees familiar with what’s required and begin mapping their responsibilities, the better. Similarly, PE firms have found it helpful to engage the various groups that manage all of the firm’s business segments and asset classes (e.g., private equity, real estate, infrastructure, credit). This prevents individual teams from starting their own efforts and inadvertently duplicating activities or, worse, taking approaches that conflict with others. 

Create capacity. Leading PE firms avoid the mistake of underestimating how much effort is needed to comply with the CSRD—and how important it is to get CSRD reporting right, considering the information will need to undergo a third-party audit and will be used by investors and other external stakeholders to make important decisions. Executives should ensure the firm has enough personnel to carry out the work of achieving CSRD compliance. 

Legal entity scoping and consolidated reporting

PE firms must prepare for the CSRD across their businesses. It is a fairly straightforward matter to determine whether an individual legal entity is in scope; however, getting the big picture right can be challenging. To be consistent across their business, leading PE firms need to carry out this scoping exercise at two levels: the house and the portfolio.

House level. To plan their CSRD reporting, PE firms should consider not only whether each legal entity is in the CSRD’s scope but also how well equipped each entity is to meet the reporting requirements (this includes understanding whether leaders lack the information to make all necessary disclosures). Large PE firms invariably find that several of their legal entities (at the levels of an operating entity, fund and holding structure) are in scope, and they must then select a reporting approach:

• Single-entity reporting. Each legal entity that is in scope reports individually.

• Group reporting. The EU parent company issues a consolidated sustainability report covering all of its subsidiaries (EU and non-EU) that are in the reporting boundaries.

• Artificial consolidation. An ‘artificially chosen’ parent company—which must be one of the EU subsidiaries that generated the highest turnover (revenue) in the past five years—publishes a consolidated sustainability report covering all in-scope EU subsidiaries.

• Global reporting. The ultimate parent company reports on a consolidated basis for the entire group, including all EU and non-EU legal entities, even though not all entities meet the scoping requirements highlighted in the table near the top of this article. 

These reporting approaches come with trade-offs. Single-entity reporting allows the firm to disclose precisely what is required for each entity, align the narrative with the wider reporting of that entity and perhaps offer readers a fuller explanation of the entity’s particular sustainability considerations. However, reporting on individual entities can also lead to duplication and inefficiency in data collation, disclosure drafting and reviewing, along with higher costs for external assurance. 

At the opposite end of the spectrum, global reporting can limit redundancy, inefficiency and costs for groups with several entities in scope, while enabling them to create value more effectively. That said, the initial cost to prepare for global reporting is usually steep, and substantial effort must be completed in a short time. 

Portfolio level. Although complying with the CSRD is ultimately the responsibility of each portco, PE firms see the threat of value erosion when a portco is unlikely to fulfil its reporting requirements on time. In addition to not being able to get approval for the annual corporate reporting, including the financial statements (as the CSRD disclosures are included in the management report, attached to the financial statements), PE firms recognise that selling a non-compliant portco to a future investor might constitute a challenging exercise. Thus, firms are increasing pressure on those portcos that are likely to fall into the scope of the CSRD; further, PE firm leaders are thinking about cross-portfolio initiatives that could activate synergies.

For PE firms overseeing a dozen portcos, the assessment might be quick and easy. For large firms that may have hundreds of portcos, getting the big picture right is a sizeable endeavour. Potential complications include:

• difficulty scoping and assessing portcos headquartered in the EU with multiple legal entities

• difficulty identifying and organising portcos headquartered outside the EU that have significant operations in the EU 

• varied perceptions of the importance of CSRD readiness in portcos with different levels of ambition and sophistication on sustainability

• varied approaches among portcos according to each entity’s position in the deal life cycle. A newly acquired, majority-owned portco might be easier to manage than a company in which the firm has held a minority stake for a long time. And a portco that is preparing for an IPO might require more scrutiny.

Because portcos can be positioned differently with regard to the CSRD, leading PE firms often group companies by shared attributes, such as size or sector or level of CSRD readiness. Some treat one group as a pilot set, which allows them to gain experience with CSRD preparation and fine-tune their approach before aiding other portcos. Other PE firms launch a readiness initiative for all portcos at once.

Double materiality assessment

Under the CSRD, companies must determine which sustainability topics to report on by examining them from two perspectives: a relatively new impact perspective (the ‘inside-out’ view of whether the company’s activities materially affect society or the environment) and a traditional financial perspective (the ‘outside-in’ view of whether a sustainability topic has a material effect on financial performance). 

This double materiality approach represents a noteworthy departure from financial reporting. To understand its implications, consider this example of how double materiality might work for a single environmental topic, water usage, at a manufacturing plant:

Firms that have previously issued sustainability reports might have completed elements of a materiality assessment that they can build on. Most, however, will have to perform a double materiality assessment for the first time. In doing so, they will want to learn from early movers and adhere to a deliberate, structured process:

1. Understand the company’s own operations, products and services, and how they affect other parties along the entire value chain, including suppliers and end users, as well as stakeholders such as governments, employees and local communities.

2. Perform the impact materiality assessment to identify actual and potential impacts, positive and negative, that the company has on society and the environment. Also, perform the financial materiality assessment to identify risks and opportunities that affect or could reasonably be expected to affect the company’s financial development, performance and position in the short, medium and long term. The resulting set of IROs informs subsequent analysis.

3. Assess IROs, using a scoring system to determine which items are material in their effects on society, the environment or the company.

4. Map the material sustainability topics, or sustainability matters, to corresponding disclosure requirements and, eventually, to the qualitative and quantitative data points and metrics that will be included in the published report.

Data and technology

PE firms just embarking on their CSRD readiness efforts are likely to find that their sustainability data, and the processes and technology systems for managing it, aren’t as reliable as the directive requires. Typical weaknesses include incomplete and inaccurate data sources, inconsistent procedures for capturing data, and inappropriate calculation methodologies. Few PE firms have adequate governance and accountability frameworks for their data. And many managers still rely on spreadsheets and databases that are poorly controlled, manually operated rather than automated, and disconnected from the main data architecture. 

To correct these shortcomings, leading PE firms are applying the following practices.

Tapping into existing data sources. PE firms’ IT systems may not provide all the information required to report under the CSRD. But these systems do often contain some of the necessary data. Metrics on energy usage, Scope 1 and 2 (and 3 to a certain extent) CO₂ emissions, staff turnover, employee health and safety, and board governance, among other subjects, typically need to be tracked for various purposes and compliance with other regulations, even if the firm isn’t reporting them publicly. 

Leveraging platforms used for other disclosures. Firms in the scope of the CSRD likely have IT platforms to manage and report on their finances as well as certain non-financial indicators. And most of these platforms have modules and features that can enable sustainability reporting. Integrating these elements with existing systems can be an effective shortcut to reliable CSRD reporting.

Building a solid data foundation. While upgrading their IT systems, leading firms are also designing and implementing new procedures to understand, collect, calculate and consolidate the information needed to report many required data points—hundreds of data points, in some cases. One portco, for instance, implemented a new process to collect levels of CO₂ emissions and energy metrics from all its locations and facilities, globally. Because the process is complicated, the company is holding training sessions on it for managers.

The short time frame to begin CSRD reporting should create urgency for PE firms and portcos to start working now. In doing so, they must balance haste with deliberateness. Legal entity scoping and double materiality assessment must be performed with precision so that companies neither fall short of what’s required nor create unnecessary work—particularly in building data processes and technology systems. PE firms will also need to find a balance when it comes to helping their portcos, providing them with enough guidance to deliver credible reports while allowing them to learn and build capacity. The good news is that by calibrating their efforts well, PE firms will compile sustainability information which is relevant and useful—and which points to new opportunities for long-term value creation.

The authors thank Miriam Pozza (PwC Canada), Leonie Schreve (PwC Netherlands) and Abhijay Jain (PwC UK) for their contributions to this article.