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The CSRD: Breaking Down the Walls Between ESG and Finance

Sustainability
CFO
Financial Reporting
ESG
Delivering ESG Results
CSRD ESG blog
5 min read
AUTHOR:

Andromeda Wood

Vice President of Regulatory Strategy
Published: April 28, 2021
Last Updated: November 15, 2022

Editor's note: The CSRD has now been passed by the European Parliament: the latest information about what this means for organizations can be found in this blog.

There’s a lot to talk about in the European Commission’s proposals for a Corporate Sustainability Reporting Directive (CSRD) that were shared in 2021. I will explore some of the biggest talking points in a moment, but for now I’m going to start with a change that might seem trivial to some. The name of the directive. 

The CSRD enhances and strengthens the measures already in place as a result of the Non-Financial Reporting Directive (NFRD) and is, in part, the result of a series of consultations that started as far back as 2018. Clearly, a great deal of feedback was received and considered during that time. But this feedback was unified by many emerging themes—one being that, “many stakeholders consider the term ‘non-financial’ to be inaccurate, in particular because it implies that the information in question has no financial relevance." 

Many organizations have long argued that a number of ESG topics have a clear financial impact. This is the case with BlackRock, which often refers to the financial effect of ESG-related issues in its famous annual CEO letters. At Bloomberg, Michael Bloomberg chairs the Task Force on Climate-Related Financial Disclosures. And the financial merit of ESG initiatives has been the topic of many speeches over the years at the IFRS Foundation. Significantly, the IFRS Foundation recently established a working group to start toward the proposed SSB, noting that the “working group will be chaired by the IFRS Foundation and include participation by the IASB, given the need for connectivity with financial reporting." 

As a result, the European Commission’s impact assessment concluded that, “many organizations, initiatives, and practitioners in this field refer to 'sustainability’ information. It is therefore preferable to use the term ‘sustainability information’ in place of ‘non-financial information.' Directive 2013/34/EU should therefore be amended to take account of this change in terminology.” The result of this? The CSRD. 

The terminology and name update has been made to bring alignment and connectivity between sustainability and financial information into long-awaited legal form. But it’s far from the only proposed change. Highlights include:

Location 
Sustainability reporting is now proposed to be mandatory in management reports as part of the annual financial report. The option for member states to exempt companies from including sustainability in their management reports has been removed. 

Digitization
The ESEF introduced the concept of digital tagging (using the Inline XBRL® standard) for financial reporting. This proposal includes the requirement that the sustainability information be “disclosed in a digital, machine-readable format” and points to the ESEF as that format.

Audit
One major proposal introduced (when compared with the current NFRD) is to, “require all companies within the scope to seek limited assurance for reported sustainability information while including an option to move toward a reasonable assurance requirement at a later stage.” This initial move toward limited assurance will bring more of the reliability currently associated with financial information to the future for sustainability information. It’s also worth noting that the proposal leaves the option open to move to full assurance and audit. 

Responsibility
The responsibility for ensuring that the management commentary (in the AFR) contains information reporting in accordance with the standards is proposed to sit with “the people responsible for financial reporting.” Thus bringing sign-off inline with financial statements. 

The European Commission is required to perform an impact assessment. It is keen to emphasize that while there is inevitably a cost to companies, “the aim is to achieve the best value outcome in terms of objectives and associated costs." 

This “best value” approach is reflected in its expectation that some updates, in particular the creation of the standards (clarifying required disclosures and frameworks) and the potential to reduce the number of ad hoc information requests from investors, will relieve some of that cost burden. (The European Financial Reporting Advisory Group (EFRAG) has released its first set of draft sustainability standards for public comment with the goal of sending a revised draft to the European Commission by November 2022 for adoption.) However, it’s worth remembering that, even with no change in the NFRD, the demand from investors is unquestionably increasing and will continue to do so as the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy come into force. To meet this demand, businesses face significant pressure to improve the quality of the ESG information that they share with investors and the market. 

The imperative to align ESG processes with finance processes gives companies the opportunity to make use of their wealth of experience in the financial domain. The tactics that they use to build closer connections between the teams and processes will help bring ESG data and controls up to speed. Sustainability matters do have financial relevance and, with a shared oversight and final report, it makes sense to break down the walls between finance and sustainability. Which is good—because that’s exactly what the CSRD proposes to do. 

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About the Author
andie wood headshot
Andromeda Wood

Vice President of Regulatory Strategy

Andromeda “Andie” Wood is vice president for regulatory strategy for Workiva and will be bringing her knowledge of the technology and regulation landscape in Europe to help inform the EMEA strategy and support the region's growth. She is an expert in data modeling, taxonomy design, and the role of technology in corporate reporting.

Andie is an experienced data and semantic modeler and also contributes to the XBRL standard at the international level. She brings a wealth of knowledge and deep understanding of regulatory impacts to global firms emerging from the European Union's Transparency Directive and Corporate Sustainability Reporting Directive (CSRD). Andie also serves as a member of the XBRL International Inc. Best Practices Board and is co-chair of the XBRL Entity-Specific Disclosure Task Force.

Previously, she was a senior technical manager for the IFRS Foundation helping to develop the IFRS Taxonomy and Standards. She served as a technical expert at global audit and consulting firm, Ernst & Young.

Andie is a frequent speaker on trends in technology for corporate reporting, and publishes various articles on XBRL, ESG, ESEF and digitally transforming corporate reporting. She has also written a column for Accountancy Today on technology and COVID impacts. She has a bachelor of arts in biological sciences from St Catherine’s College at Oxford University.

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