By Cécile Saint-Martin
Many companies are overwhelmed by the extensive requirements of the EU’s Corporate Sustainability Reporting Directive (CSRD), which are bigger, bolder and require more transparency than any sustainability reporting standards before. It’s tempting for companies to take a wait-and-see approach, but they need to act now to prevent a last-minute scramble. By diving into the complexities, taking important first steps and working with their assurance providers on the way, companies can improve their ability to deliver reliable reporting on time and with confidence.
Twelve reporting standards, 86 disclosure requirements, over 100 KPIs and more than 1,000 data points: This is what the CSRD requires—a vast, complex and far-reaching Directive that affects approximately 50,000 companies. The reporting is required for the first wave of entities on periods starting in the fiscal year 2024. Companies must understand if and when they are impacted regardless of whether they are an EU or non-EU entity. It is no wonder there is a buzz in the business world about the CSRD.
Daunting though it is, the directive makes sense—for business, society and the planet. The CSRD is one piece of the EU Green Deal, a package of regulations that is intended to drive change in corporate behaviour. The CSRD aims to bring sustainability reporting on a par with financial reporting by improving the quality and consistency of available sustainability information and, through this more transparent reporting, achieve the EU Green Deal’s intent to transform the business models and behaviours of companies for a more sustainable economy. It requires more stringent analysis than is common in current practice, e.g. about a company’s business model and strategy to ensure it is moving towards a more sustainable economy. It also requires companies to disclose sustainability targets and deadlines over wide-ranging sustainability topics.
While companies are already preparing, many are wondering where to begin or are waiting for others to show them the way—but they need to act imminently. Before the data-gathering exercise, companies need to perform a robust double materiality assessment to determine what they should report. The CSRD also requires those in scope to obtain independent assurance from the first year of reporting.
Delaying can lead to issues—such as process weaknesses, lack of controls or inaccurate and incomplete data—which companies will need to address well in advance of the initial audit. By working with their assurance providers now, companies can benefit from early identification of potential issues, with time for them to remediate before mandatory requirements.
The consensus among most investors is that sustainability reporting has a positive impact on companies, including their reputation and value creation. The results of our 2023 Global Investor SurveyOpens in a new window show that nine in ten investors said that client demand was a moderate, large or very large factor driving investor interest in environmental, social and governance (ESG) and sustainability investing. Of those surveyed, 57% also said that if companies meet upcoming regulations and standards (including the CSRD), they will meet their information needs for decision making to a large or very large extent.
Research has now shown that assurance itself on sustainability reporting can positively impact a company’s related outcomes. A recent MIT paper, On the importance of assurance in carbon accountingOpens in a new window, highlighted statistical evidence that assurance—not just reporting—has a positive impact. The research looked at companies that set carbon emissions reduction targets with the Science Based Targets initiative (SBTi). It found that companies that obtained assurance for their reported emissions reduced their absolute carbon footprint year-on-year by 7.5% and their carbon intensity by 3.3% a year—economically meaningful figures.
If that holds true for assurance on carbon emissions reporting, could it do the same for more extensive topics covered in the CSRD reporting? It may be that, with assurance, companies are held to account to create better sustainable outcomes.
That should help, too, with value creation. In a 2023 articleOpens in a new window, we looked at the business benefits and value creation associated with the CSRD. We explained how we believe that the CSRD reports will equip investors with more consistent, comparable data. Many investors can use this data to value companies and reward those that have compelling reports of how they will compete amid sustainability driven market forces. The CSRD gives companies the opportunity to reframe the narrative of their business model in the context of sustainability and seek opportunities for value creation. Add that to the statistical evidence of how assurance can help, and you may have a winning combination.
Although companies are used to financial reporting and assurance—or even previously existing sustainability frameworks and standards, and assurance over those—the CSRD timeline is vastly accelerated by comparison.
Its requirements are inherently complex and will undoubtedly take significant effort; there is no one-size-fits-all checklist, despite companies looking for ways to simplify preparation. For example, impacts, risks and opportunities (IROs) need to be disclosed in the sustainability report if they are deemed material under the European Sustainability Reporting Standards (ESRS). Preparers may be looking for a ‘magic number’ of IROs they are expected to disclose but really the answer is rooted in thorough analysis.
Instead of becoming overwhelmed by the process, we believe it is best just to get started. A robust double materiality assessment should be the first step. It allows you to define which topics and subtopics are material, which can pave the way for serious efficiencies in preparing the sustainability report. The assessment is the foundation for determining the next steps to take and directing preparation efforts towards material disclosures. In addition, the process itself must be assured separately as part of the four-part CSRD assurance opinion. More details can be found in our podcast, CSRD spotlight: Demystifying the double materiality assessmentOpens in a new window.
Ways to overcome pitfalls when conducting a CSRD-aligned double materiality assessment are discussed in this PwC articleOpens in a new window. The concepts of documentation, transparency and traceability are especially relevant and will resonate as fundamental concepts with any assurance provider. These concepts can be applied beyond double materiality assessment into all stages of CSRD preparation, from data gathering to embedding processes and controls. Considering all three when making decisions that lead to developing the sustainability report can help companies prepare for assurance.
By working with their assurance providers now, companies can benefit from early identification of potential issues, with time for them to remediate before mandatory requirements.
The solution lies in working closely with an experienced assurance provider from the very beginning of the reporting journey. In addition, engaging with an independent assurance provider early in the process can help provide an unbiased perspective into the current state of reporting.
Another solution can be working with industry peers—after all, the CSRD is intended to drive consistency and comparability across businesses. While the European Financial Reporting Advisory Group (EFRAG) works to develop implementation guidance and industry specific standards, working groups can assist with benchmarking, critically assessing each other’s determinations and working through matters of interpretation, all of which can enhance preparation towards comparability and quality reporting.
Keeping all of this in mind will certainly smooth the process when it comes to assurance, enhancing investor confidence in the reported information and leaving more time to reflect on next steps for your business.
Acting now to meet the CSRD requirements is worth it. Those companies that start preparing, and maintain open communication with their chosen independent assurance providers will save themselves from scrambling to get it right at the last minute—and, by doing so, help to create more sustainable outcomes for their business.
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Sarah Marsh (CPA, CA)
Partner, National Sustainability Report and Assurance Leader, PwC Canada
Tel: +1 604 806 7123
