No company is fully prepared for new sustainability reporting and assurance rules. They need to quickly seek expert advice and dedicate substantial resources to ensure they get this next step on the reporting journey right.
The Corporate Sustainability Reporting Directive (CSRD) is now law in the EU and will affect tens of thousands of companies within and outside the bloc, including many in the UK. This legislation is not technocratic tinkering around the edges. It is vast, complex, far-reaching legislation for which just about no company is fully prepared.
The EU’s goal is that the CSRD stimulates a mass shift in corporate behaviour - a shift that ultimately and rapidly delivers not only a net zero economy, but a truly sustainable economy that operates within global ecological boundaries that is fair for society.
Leaders of the bloc believe that by massively expanding legislation governing sustainability reporting’s scope and importance, it will help all interested stakeholders to assess a company’s impact on the environment and society in the context of the EU’s goal.
The many UK companies who will have to apply the rules should bear the EU’s goal in mind: this isn’t only about providing more information but about transforming whole industries and supply chains to deliver sustainable outcomes.
The sheer depth and breadth of this legislation means that those companies caught by it have to move now to get ready in time. In this article, we’ll briefly cover what the CSRD requires, some key challenges, and what companies need to do.
Why every listed and large company needs to pay attention
Simply put, the CSRD requires that certain companies report a comprehensive set of sustainability information alongside their financial information in their annual report. The EU says companies will need to disclose “what they see as the risks and opportunities arising from social and environmental issues, and on the impact of their activities on people and the environment.”
Crucially, this information will need to be of investment-grade quality and will be subject to external limited, and later reasonable, independent assurance. It also has to be reported using the double materiality concept: financial and impact materiality. Concerningly, not many companies even know where to start in determining their material impacts on people and the environment.
The types of UK companies required to apply the legislation can be found here, but it’s important to keep in mind that in all previous major reporting developments, a rising tide has lifted all boats, so even those companies not caught by the legislation will likely feel its impact. This means there will be significant pressure from investors and other stakeholders for those not caught by CSRD to report and have assured a similar level of information.
The upshot: pretty much every listed and large company has to wake up to this.
Transformation through legislation
Plenty of companies already report sustainability information voluntarily and in response to narrower requirements like the TCFD. Some of the more committed large FTSEs even have broader reporting, of which some metrics are assured on a limited basis.
But without sufficient preparation and assistance even these companies will struggle to comply with the legislation let alone make their businesses more sustainable. As noted by Alan McGill (PwC’s Global Head of Sustainability Reporting and Assurance),
“The volume and detail requirements of the CSRD are unprecedented, and so is the speed of its implementation. So far, the EU has listed over 80 disclosure requirements that themselves require over 1,000 data points.”
It plans to develop more disclosure requirements in the years to come. This is on par with the introduction of IFRS accounting standards in the financial reporting world, however, the implementation period is much shorter. Based on our observations, there is no large company currently collecting or reporting the required volume or detail of information to meet CSRD, let alone having it assured. However, those companies that have made an early start will be more prepared from 2024 when the CSRD starts to apply and be able to use the information to transform their businesses and use sustainability to their competitive advantage.
Assuring uncharted territory
Financial reporting is well-established. Companies are used to essentially converting their financial information into a set of external financial reports. The path to having it assured is well-trodden. But sustainability reporting and assurance is very new. There is generally no ready-made sustainability information for companies from which to create CSRD-compliant reporting. Companies will have to find data that they don’t even know exists or begin collecting some types of data for the first time.
“The data companies find is likely to have a significant effect on how they operate. For it to be useful to decision-making, it needs to be consistent, comparable, and reliable - and sufficiently transparent.”
To fail in this regard could lead the company, its investors and society at large (through the double materiality concept) to make decisions using information that is inaccurate and unrepresentative of their economic reality. So, to ensure that the data collected is meaningful and decision-useful, early involvement from assurance practitioners is essential.
To illustrate, if a company engages an assurance practitioner long after they’ve built data collection systems and captured the data, then they might find that their information isn’t decision-useful or means they make the wrong decisions. If they go even further and compile a report using that data, then they might find that their assurance practitioner is unable to assure the information they’ve collected to the level required by law.
Qualified, adverse, and disclaimer assurance opinions or restatements are unusual audit outcomes for financial reports. But they will likely become more common for sustainability reporting under the CSRD. The scope and speed of these new rules means that it will take time for companies to get the process right and investors and other stakeholders should expect qualifications that describe what the company has got right and how much there is left to do. What is important at the moment is that all companies recognise the imperatives of starting now, dedicating large resources to the challenge, and quickly seeking assistance.
This is virtually uncharted territory, and companies have to treat the sustainability information they report as equally important as their financial information. Assurance cannot be an afterthought or a substitute for a thorough approach to sustainability reporting.
CEOs are concerned about climate change and sustainability more broadly. They see it as a fast-growing and unpredictable risk to their companies. The EU has been clear that the CSRD is about understanding that risk better and transitioning to a more sustainable way of doing business
Concern, urgency, and expert advice should underpin the application of the CSRD. It is a monumental reporting challenge. But while it will be difficult, it should not be seen as a compliance burden. It is an opportunity to stay competitive in an environment where sustainability information has become essential to a company’s existence.
In the meantime, if you want to know more about the CSRD, read the release "Worldwide impact of CSRD" or contact one of our team.
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