The EU Corporate Sustainability Reporting Directive (CSRD) heralds a new era in sustainability reporting. This new directive, proposed by the European Commission on 21 April 2021, aims to increase transparency on corporate performance in terms of sustainability. Companies not previously required to report under the predecessor to CSRD will now be expected to comply with a broad range of reporting requirements by 1 January 2024. The changes, therefore, would affect the 2023 reporting period.
All large companies and all companies listed on EU regulated markets (with the exception of micro-enterprises) would be required to apply the EU sustainability reporting standards. Large banks and insurance companies continue to be subject to the reporting obligation, regardless of their capital market orientation.
The definition of a ‘large company’ is when, on its balance sheet date, two of the following three criteria are met:
It is estimated that the number of entities affected by these new regulations will increase fivefold. This means that the reporting obligation would also apply to family-run and private equity owned enterprises.
Parent undertakings must include the sustainability report in the consolidated management report, in which case subsidiaries are exempted from the obligation.
If the parent undertaking is established in a third country, the subsidiary is exempted only if the EU recognises equivalence of the reporting standard in the third country.
The content of the report has been comprehensively expanded and new, binding EU sustainability reporting standards will be adopted. The purpose is to create more uniformity in application, to replace the current patchwork of standards.
These sustainability Reporting Standards are to be developed by EFRAG and will be adopted via delegated regulation by October 2022.
These standards must consider existing frameworks, EU Taxonomy, Sustainable Finance Disclosure Regulation (SFDR), Green Benchmarks regulation, as well as environmental legislation (product life cycle and emission trading). They must also meet the characteristics of understandability, relevance, faithful representation, verifiability and comparability
The proposed directive clarifies the principle of double materiality, confirming that undertakings should report information necessary to understand how sustainability factors affect the undertaking and information necessary to understand the impacts of the undertaking itself on society and the environment. Guidance on materiality assessment to be included in the reporting standards. It will be mandatory to disclose the materiality assessment.
The proposed directive also specifies in greater detail the information that companies should disclose. Compared to the existing provisions, it introduces new requirements for companies to provide information about their strategy, targets, the role of the board and management, the principal adverse impacts connected to the company and its value chain, intangibles, and how they have identified the information they report.
It also specifies that companies should report qualitative and quantitative information, forward-looking and retrospective information, and information that covers short, medium and long-term time horizons as appropriate.
In addition, reporting companies must disclose their green financial indicators in accordance with the EU Taxonomy Regulation to show which of their activities are green by EU standards. These were formalised by the delegated act, which was published on the same day. Qualitative and non-integrated sustainability reporting will no longer be considered compliant with the regulation.
The CSRD imposes an audit requirement for the sustainability part of reports. In order to increase the reliability of sustainability reporting, companies within scope will be required to seek limited assurance over their reported sustainability information - which may move towards a reasonable assurance requirement at a later stage. The assurance requirement covers the materiality assessment process.
The management report must now include sustainability reporting. It can no longer be issued as a separate report. This presents several challenges: companies must bring sustainability reporting forward to the time they publish their management report, and they must report more sustainability information than ever before. Furthermore, companies must prepare their reporting in a single electronic reporting format, information which has to be digitally tagged.
Administrative, management and supervisory bodies will be required to actively and demonstrably bear collective responsibility for sustainability reporting. The balance sheet oath, which until now only referred to financial reporting, is expected to be extended to the reporting of sustainability information. This is the first time that management has been required to show to the outside world - explicitly and in writing - that it bears this responsibility.
In particular, audit committees should monitor the effectiveness of the undertaking's internal quality control and risk management systems and, where applicable, its internal audit regarding the financial and sustainability reporting of the audited entity, including its digital reporting.
There is some relief expected for SME listed entities with specific standards being issued by October 31, 2023. SMEs who do not have mandatory reporting obligations may choose to voluntarily report under these standards also.
All organisations should review the proposed CSRD and consider the following:
Does the organisation fall with the expected scope of companies required to report under CSRD? If not, is there a strategic reason you might choose to report under this requirement? For example, would aligning with its disclosures, including the Taxonomy, afford you an advantage/be a requirement for your supply chain? Might it help you to continue to access financing as banks and shareholders are being asked to report on how they are deploying their capital? How does this reporting tie into other reporting commitments you may have made?
What information is required to report under CSRD? Is that information currently available? Are there underlying processes which must be described in place and operating? For example, has the ‘Double Materiality’ risk concept been included in your risk assessments which focuses on how sustainability risks affect your company as well as your company's impact on people and the natural environment?
What processes and controls exist to support your non-financial disclosures? Are they of similar robustness to your financial data? Would they stand up to an independent party auditing them and providing an assurance opinion? If not, now is the time to start improving your data and processes in advance of 1 January 2023.
With the ambitious timeframe set out by the European Commission for the implementation of this directive, time is of the essence. Even for companies that have already embraced non-financial reporting, the implications are far-reaching. If you’d like to discuss how PwC can help you with sustainability reporting, don’t hesitate to get in touch.
Senior Manager, PwC Ireland (Republic of)
Tel: +353 87 915 9296
Senior Manager, PwC Ireland (Republic of)