CSRD Debrief: Who’s Impacted and How to Prepare
On November 10, 2022, the European Parliament voted overwhelmingly to pass the Corporate Sustainability Reporting Directive (CSRD)—a major ESG regulation that brings together financial data, ESG information, and assurance for the first time and affects even some non-European countries. The full proposal text can be read here.
The vote was a landslide with 525 in favor, 60 against, and 28 abstaining. Closing the debate the night before, Commissioner Mairead McGuinness concluded that “sustainability is the only path to be on.”
For organizations either based in the EU or that have subsidiaries within the region, that path is now unavoidable. With the CSRD confirmed, companies are facing up to some unavoidable facts:
- ESG is entering the annual reporting process
- Sustainability information will sit alongside financial information
- The amount of data that needs to be collected will greatly increase
- So too will the number of people involved in the integrated reporting process
- Sustainability information will be audited
The mandate aims to increase trust in ESG reports and bring greater transparency to sustainability information. It’s one of the single biggest changes to the annual reporting process in a very long time, and it will force organizations to rethink their reporting.
Right now, 98% of finance professionals in Europe are concerned about ESG metrics being added to the annual report. And understandably so. Accommodating more people, more data and more work within the same timeframes presents significant logistical challenges.
The drives to minimize risk and ensure data integrity are the two biggest concerns for organizations’ future reporting cycles. To address these concerns, it’s necessary to bring about meaningful, targeted transformation that eases workloads while increasing trust in data, ensuring transparency, and strengthening collaboration across traditionally siloed teams.
What is the CSRD?
First, it’s important to know what the regulation is. In short, the CSRD is a piece of EU legislation that establishes environmental, social, and governance (ESG) reporting requirements for organizations. The aim is to expand upon and replace the Non-Financial Reporting Directive (NFRD)—a regulation criticized, in part, for its implication that ESG has no financial relevance.
With the CSRD, there is no ambiguity. Sustainability information, which includes topics within ESG and is defined across 12 standards, is entering the front end of the annual report. It will need to be treated with the same degree of rigor and suspicion as financial information.
Who will be affected by the CSRD?
In total, around 50,000 organizations will need to comply with the CSRD. As for when they’ll need to ensure compliance, the European Commission has planned a phased rollout:
- FY’24: For all organizations that are already within the existing scope of the NFRD (currently around 11,700 organizations)
- FY’25: All “large” organizations—firms with a net turnover of €40 million or more, at least €20 million in assets and 250+ employees
- Later: All listed companies, including listed small- and medium-sized enterprises (SMEs) but with the exception of micro enterprises
Importantly, the CSRD will also affect non-EU companies with EU-based subsidiaries, or with securities on EU-regulated markets, which have a net turnover of over €150m within the EU. Because the CSRD was introduced following Brexit, the UK will also be treated as a third country.
Limited and reasonable assurance are both on the table
We now know that public organizations will also need to include an assurance report for sustainability disclosures—but not right away. Here’s how the rollout is going to work:
- October 2026: On or before October 1, 2026, the Commission will provide limited assurance standards for auditors to use when assessing the assurance of sustainability reports
- October 2028: On or before October 1, 2028, reasonable assurance standards will be provided—but only if it’s determined that reasonable assurance is feasible for auditors
The move toward greater assurance within the EU is significant. It means that organizations need oversight of all data within the integrated reporting process. The CSRD will greatly expand the scope of what needs to be reported and who needs to be involved, which could introduce new risk within the process—organizations will need to find ways to contain and minimize this risk.
A digital format has been mandated
The confirmation that the CSRD will require a digital format and the use of a digital taxonomy shouldn’t come as a surprise. The measures introduced when the European Single Electronic Format (ESEF) came into force in early 2022 will, most likely, be incorporated within the CSRD. By the time the CSRD comes into force, all affected organizations will have some level of comfort with XBRL®/ iXBRL™ tagging and converting to the iXHTML format. They will have likely established a process and taken steps to improve on it.
The motivation behind this move is clear. The CSRD has been created to bring greater trust and transparency to ESG reports, better demonstrate the financial value of sustainability information, and improve the accessibility of ESG reports. For investors to act on this information, it needs to be presented in a standardized format that enables comparability. It needs to be digital.
How to prepare for the CSRD
There are three main tenets that organizations will focus on during their preparations: trust, transparency, and collaboration.
- Trust: Organizations want to feel as confident in their sustainability information as they do in their financial information—they’ll look at how to ensure data accuracy and consistency
- Transparency: They’ll work toward gaining greater oversight of both data and process
- Collaboration: And they’ll establish seamless, open channels of communication and collaboration to reduce time to market
The passing of the CSRD is a significant milestone that will bring greater accountability to ESG reporting across the EU. Incidentally, it will also lead to widespread reformation of long-established reporting practices. The status quo for annual reporting is changing: the CSRD is the spark that’s lighting the fire.
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