No Match Found
The reporting of non-financial information will become as important in the EU as traditional financial reporting and should be of the same quality level. That is the main goal of the Corporate Sustainability Reporting Directive (CSRD), the new EU directive that will take effect for the largest, listed companies as early as fiscal year 2024. Not only are the new regulations coming into force pretty soon, the requirements are comprehensive and specific. Therefore, it will require a huge effort from most companies to comply with the CSRD.
The CSRD obligation is fast approaching. Most organizations are now aware that a lot is about to happen and that this has major implications. But do you know at a detailed level what will be expected of you? What are the different ESRSs? And what do they mean for your company's operation and strategy?
The CSRD stems from the European Green Deal and its "Financing Sustainable Growth" action plan. These plans aim to transform the EU into a modern, competitive economy that works for people and delivers stability, jobs, growth and investment. The EU's goal is to become the world's first economic power to achieve net zero greenhouse gas emissions by 2050.
The current NFI Directive applies only to listed companies. The CSRD will cover all large companies that meet two of the following three criteria:
It is estimated that eventually more than a thousand companies in the Netherlands will have to comply with the CSRD. This also applies to subsidiaries of non-EU companies. A special disclosure regime will be developed for non-EU companies that achieve (consolidated) revenue of more than €150 million in the EU.
It will be phased in for different categories of companies. The obligation to report according to the new standards will apply to:
Although the implementation of the CSRD has been delayed by one year from the initial proposals, the schedule is still tight. Large listed companies (the companies in scope of the NFRD) will have to be ready to start reporting according to CSRD standards from early 2024 on, and thus only have 2023 to prepare for it.
The CSRD requires companies to publish what sustainability strategy they have formulated, what targets are associated with it, what the policies and measures are to achieve those targets, and how progress is monitored and reported.
The sustainability report will become a mandatory and integral part of the annual report that must comply with a set of new reporting standards (ESRSs). Companies must make the information available in a prescribed structure, tagged, in electronic format (xbrl) and accompanied by an assurance statement by an external auditor. These requirements are intended to increase the quality, reliability, transparency and comparability of ESG information and bring it to the same level as financial information.
At the heart of the CSRD are the European Sustainability Reporting Standards (ESRSs). The first set, consisting of 12 draft standards, was submitted in late November 2022 by EFRAG to the European Commission. The European Commission has issued a revised set of ESRSs for feedback on June 9th, 2023. The revised drafts contain a number of changes compared to the November 2022 version. The aim is for the final standards to be passed as law (a Delegated Act) no later than at the end of August 2023.
The ESRS contain 12 standards. The first two ESRSs are general in nature and contain basic principles and prescribe what should be reported on strategy, governance and decisions related to materiality. The remaining 10 standards cover different EGS aspects:
The 12 standards contain 'Disclosure Requirements' and an 'Application Guidance'. These describe exactly how the obligations should be applied; these guiding documents have the same status as the obligations and in practice represent a considerable broadening of them. Later, sector-specific standards and standards tailored to SMEs will come into effect.
When the CSRD takes effect, companies can no longer report on their sustainability plans and performance at their own discretion. The standards create an obligation for companies to develop a holistic view of sustainability and publish about it. Users of this information should be able to create a picture of how the company is implementing sustainability, now and in the future. It is noteworthy that, unlike in its financial reporting, the company must specifically state its objectives regarding sustainability.
The sustainability narrative must answer the following questions:
To give a (good) impression of the reporting scope required and how specific and detailed the information provided must be, let’s look at the fourth standard under the environment theme (ESRS E4). This standard relates to biodiversity and ecosystems.
This standard contains six disclosure requirements divided into four categories
Under the CSRD, companies will have to publish a great deal of new and very specific information. Therefore, it is clear in advance that in many companies a major leap forward is needed in their administrative organization and internal control. Where current sustainability reports may still be able to work with a spreadsheet, this will soon be insufficient.
The required amount of data increases must be qualitative and quantitative, look forward and backward, describe the short, medium and long term, and cover the entire value chain.
We expect the value chain to be the obstacle on the road to CSRD compliance for many companies. Some of the issues around data and technology that will come into play when implementing CSRD are data collection and procurement, methodology, processes and analysis, credibility and transparency, and IT systems and infrastructure and governance.
The information companies now publish on sustainability often leaves much to be desired. Relevant information is missing or incomplete, has not been created with sufficient reliability and transparency, and is often difficult to find, read and compare.
In order to raise the quality of sustainability information to the same level as financial information, the external auditor will have to provide assurance on both after the introduction of the CSRD. Initially this will be 'limited assurance', towards 2030 it will become 'reasonable assurance'.
Partner, PwC Netherlands
Tel: +31 (0)62 039 89 82
Kees-Jan de Vries
Partner, PwC Netherlands
Tel: +31 (0)61 069 68 28