The EU Corporate Sustainability Reporting Directive (CSRD) will bring a whole new set of reporting, data collection and curation challenges but also offers potentially transformational benefits for business, investors and society.
“The new directive sets out consistent environment, social and governance (ESG) reporting and disclosure standards which will be subject to audit assurance. This will offer investors, consumers and other stakeholders increased transparency in relation to companies’ sustainability strategy,“ says Fidelma Boyce, assurance partner with PwC Ireland.
We will see much greater transparency, whether it is on green house gases, gender pay gap, diversity or levels of carbon dioxide, these kind of metrics which will be more visible and capable of being audited. Reporting teams will be talking to parts of their organisations that are not used to producing information for financial statements to meet the new standards. They will need to work together to ensure the data is of the required standard. These include teams such as risk, sustainability, procurement, HR, production and tax functions. It will also include the board and audit committee, as they ultimately will be signing off that the new standards are complied with.
The CSRD deadlines are approaching fast and will be a phased approach. The first group of organisations to fall within scope of the directive include most companies listed on the stock exchange and those that currently publish information under the EU’s Non-Financial Reporting Directive (NFRD). Those organisations will make CSRD disclosures for the first time in 2025 on their 2024 data.
In 2026, its scope will expand to cover large private companies, which meet two of the following three criteria: have more than 250 workers; have in excess of €50 million in net turnover, and/or over €25 million in assets. Other smaller companies will be brought within the net in subsequent years.
“It’s very much connected to the European Green Deal, which sets out to change the way companies access finance and the capital markets and to make sustainable investment more transparent. The CSRD creates a new suite of reporting requirements on ESG,” explains Boyce.
It is not simply a question of publishing information on ESG impacts, which many companies already do. The difference is that information on ESG will now have to meet the same standards of accuracy and comparability as those applied to financial statements.
The introduction of standards is not before time, according to Boyce. “There has been increasing pressure from investors and others who want access to comparable and trustworthy data,” she says. “In PwC’s recent Investor Survey, 97 per cent of investors in Irish companies believe corporate reporting on sustainability performance contains some level of unsupported claims. The responses highlighted a strong undercurrent of doubt around the reliability of sustainability reporting and information that they use.”
Range of disclosures very pervasive
The sheer breadth of the information to be reported will present challenges. “The range of disclosures is very pervasive and reaches into every area of the companies involved,” she notes. “There is a huge amount of data to be collected and reported on. Organisations need a plan for how they are going to get the data and they will need to put controls around it to ensure that it is capable of being assured by auditors.”
Data gathering will also extend beyond the organisation. “The directive introduces a new concept of ‘double’ materiality for organisations, including their impact on the environment and society, looking at it from the outside-in and inside-out, as it were,” Boyce explains. “From a positive perspective, this could be the provision of free healthcare for an organisation’s workforce. On the other hand, a brewery would have to look at their end user consumption regarding potential health impacts if there is a breach of safety protocols. ”
This assessment will determine the disclosures a company needs to make under the directive. “Some people are finding the new materiality concept difficult to get their heads around,” notes Boyce. “They need to engage with the right stakeholders, put the right data gathering processes in place, and have the right governance and policies to oversee them.”
Important step in the journey to net zero
The volume of data involved is potentially enormous. “At the highest end of the spectrum, up to 1,200 data points will need to be collected and they will have to be auditable,” says PwC Ireland ESG leader David McGee. “This will require a major step-up in standards even for those companies already reporting ESG data. For example, diversity statistics may not be audited at present. Getting them to a position where they are capable of being audited will require a lot of time and effort. The team responsible for CSRD reporting will be reaching into parts of organisations that haven’t ever been exposed to audit before.”
McGee also notes that the new disclosures will need to be filed electronically. “This will enable investment analysts, journalists and other stakeholders to compare data within and across sectors. The low level of confidence in existing sustainability reporting standards demonstrates how much the CSRD is needed by the investor community. Companies will be able to prove that they are leading amongst peers, which will be powerful – giving confidence on the metrics, methodology and capable of being independently audited. But the planet needs it as well. What gets measured gets managed and this is an important step in the journey to net zero.”
Potential to drive behavioural change
McGee believes that the publication of the information has the potential to be transformative and drive behavioural change. “Getting the information into the public domain can be a real lever for change, it gives a solid base for comparison. It’s a real win when the data gets better and will fuel laggards to do it better. In the most recent PwC CEO survey, nearly one in three (28 per cent) Irish CEOs said they do not believe that their business will be viable in a decade without reinvention – up from 21 per cent in 2023. CSRD reporting will assist them on their change journeys.”
“For example, banks with companies on their loan books in sectors like construction and agriculture where there are a large number of small clients will come under pressure to gather auditable data. Companies will also need verifiable data from their suppliers. CSRD does not stop at the perimeter of the organisation – suppliers also need to have the same standards and governance around their data and this can be a real headache. The company that is able to produce ESG data audited to CSRD standards will be easier to buy from and it will enjoy a competitive advantage over those without that capability. If you want to be a supplier to companies of substance, you will want to comply with CSRD. Shifts like this can ultimately be transformative. The ultimate goal is to get to net zero.”
The whole concept of CSRD driving change is based on the old adage that what gets measured gets managed. “Once a company publishes a number they will be under pressure to get to a better number the following year”, says McGee.
CSRD will drive the change by having a reliable system enabling investors and consumers see the standards and have confidence in them. Once the numbers are in the public domain, companies will want to make them better and others will want to catch up. Investors and consumers alike will be assured.
McGee advises organisations to establish whether they are within the scope of the directive. “It’s not necessarily obvious,” he says. “After that they should identify what they need to disclose and how they are going to do it. At the end of the day you want data that can be trusted, that is comparable within and across industries and in which investors have confidence.”
Boyce concludes that this will be whole new territory for many. We are seeing a lot of CSRD data-gathering activity at present with many organisations doing dry-runs, which are critical. This is not surprising given there is only a few months left before many need to publish their first reports.”