Reporting deadlines for the EU corporate sustainability directive are looming. What does this mean for firms, asks Jo Linehan
The Corporate Sustainability Reporting Directive (CSRD) was brought into effect by the European Commission in January 2023. While large companies, SMEs, and even some non-EU companies are obligated to report and comply with the new reporting standards, there is still a lack of information or conversation about the requirements. With reporting deadlines looming, industry experts break down the facts on what CSRD is, how companies can comply, and the benefits of the new directive for businesses EU-wide.
Defining CSRD
"The Corporate Sustainability Reporting Directive is a European Union directive that expands the scope and requirements of sustainability reporting for companies," says Alan Keogh, Chief Executive of the sustainability and decarbonization consultancy CoolPlanet. "It replaces the Non-Financial Reporting Directive (NFRD) and ensures that companies provide more consistent, comparable, and reliable information on their environmental, social, and governance (ESG) impacts."
The CSRD will present Irish companies with new reporting, data collection, and curation challenges. While the data collection task will be enormous, CSRD also offers potential transformational benefits for businesses, investors, and society, says Alisa Hayden, partner at PwC Ireland. "It will create a whole new level playing field for data that is measurable, trusted, and transparent, bringing greater confidence to investors and stakeholders in environmental, social, and governance (ESG) reporting."
"The new directive sets out consistent ESG reporting and disclosure standards that will be subject to audit assurance. This will offer investors, consumers, and other stakeholders increased transparency regarding companies’ sustainability strategies."
Who Does CSRD Affect?
The first group of organizations to fall within the directive’s scope includes most companies with ordinary shares listed on an EU-regulated market.
"Those organizations will make CSRD disclosures for the first time in 2025 on their 2024 data," Hayden says. "Then, in 2026, the scope will expand to cover large private companies, for example, companies that meet two of the following three criteria: have more than 250 workers, have in excess of €50 million in net turnover, and/or have more than €25 million in assets. Other smaller companies will be brought within the net in subsequent years."
As for disclosure requirements, the directive builds on the standards laid out in the 2014 NFRD but is much more ambitious in its scope. Companies will need to disclose similar information to what’s required under the NFRD, including environmental protection, human rights protections, anti-corruption and bribery policies, treatment and protection of employees, and diversity on company boards.
However, says Keogh, CSRD adds further requirements from NFRD for organizations to disclose. "Double materiality, which is how the information disclosed can be material both in terms of its impact on the company’s financial position and its impact on society and the environment, intangible assets such as social, human, and intellectual capital, and reports in line with the Sustainable Finance Disclosure Regulation and EU Taxonomy Regulation are just some of the additional requirements."
Barriers to Adaptation
Barriers to CSRD compliance are numerous, Keogh says. "Lack of awareness and limited understanding of the directive, difficulty in collecting and verifying the required sustainability data, and resource restraints all pose challenges," he admits. "By addressing these barriers through education, resource allocation, and collaboration, companies can better prepare for CSRD compliance and leverage it to enhance their sustainability practices."
PwC’s Global CSRD survey involved more than 500 senior executives and business professionals, including finance, sustainability, and risk leaders. It found that the EU directive, which will affect about 50,000 companies, is having a global impact.
Almost two-thirds of companies (63%) surveyed are very or extremely confident that they will be ready to report under the CSRD.
However, in the first wave of companies that have reported, executives cite data availability and quality, value chain complexity, and staff capacity as obstacles to implementation to a large or very large extent.
Despite even higher levels of confidence for those companies due to report in six months, fewer than half of these companies have completed key activities such as confirmation of reporting options, double materiality assessment, and validation of data availability.
Driving Change
David McGee, ESG lead at PwC Ireland, says that despite the challenges the directive poses for companies, in the long term it has the potential to drive behavioral change.
"Respondents to PwC’s Global CSRD survey are of the view that it will benefit their company to a large extent through environmental performance, improved engagement with stakeholders, and risk mitigation," he says.
"CSRD 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 among peers, which will be powerful."
McGee also shares how he believes the publication of the data will motivate companies that continuously neglect ESG. "In the 27th annual PwC global CEO survey, nearly one in three (28%) Irish chief executives said they do not believe that their business will be viable in a decade without reinvention—up from 21% in 2023. CSRD reporting will assist them on their change journeys. A company that is able to produce ESG data audited to CSRD standards 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."
Where to Start?
"For companies to report on these new areas and topics, they will need to set clear climate targets and put in place an audit-ready reporting infrastructure," Keogh says. "Companies need to gather, process, and disclose a large amount of data covering various periods and metrics. This will mean adopting new systems and processes and possibly bringing in external expertise to help set them up."
Hayden advises companies to first establish whether they are within the directive, map out their value chain, and identify what they need to disclose and how they are going to do it. "Data collection is critical, and that process should start as soon as possible," she says. "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."
McGee is confident all of the effort and work required for CSRD compliance will be worth it. “CSRD will drive change by having a reliable system that enables investors and consumers to see the standards and have confidence in them. Once the numbers are in the public domain, companies will want to improve them and others will want to catch up. Investors and consumers alike will be assured.”
