CSRD: Sustainability reporting directive has ‘huge implications’

The biggest change in sustainability action from a regulatory perspective is the Corporate Sustainability Reporting Directive (CSRD), which will be implemented on a phased basis from the start of next year.

Mary Whitelaw, chief sustainability and corporate affairs officer for AIB, views preparation for the directive – which updates and replaces the existing Non-Financial Reporting Directive (NFRD) – as a significant challenge for large Irish companies and international businesses based in Ireland.

“We expect that many companies across the EU are now preparing for the CSRD ahead of its first application on 1 January 2024,” says Whitelaw. “This new regulation requires companies of a certain size to report on how climate change and other sustainability issues impact their business and how their own operations in turn affect people and the planet – a unique principle called ‘double materiality’.”

Companies’ reports will need to meet specific standards – the European Sustainability Reporting Standards (ESRS) – which are similar to accounting reporting standards; and they must provide qualitative, quantitative, forward-looking and retrospective information. About 10,000 companies across the EU will be affected by the new regulations.

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Marc Aboud, environmental, social and governance (ESG) risk and regulation lead with Deloitte, sees the implications as huge.

“In terms of coverage, the CSRD covers the entire gamut of ESG-related matters,” says Aboud. “It’s not just focused on the environment – it also covers social and governance matters. Indeed, from a materiality perspective, it will require organisations to consider, on the one hand high-sustainability topics such as climate change, biodiversity and social issues, but it will also require organisations to measure how they impact those topics.”

Companies will be required to have mandatory assurance, which they must obtain from a third-party auditor.

“This is not a box-ticking exercise but real, live disclosure with incredible granularity, potentially including up to 84 new performance indicators and more. This is a transformation,” says Aboud.

Initially, CSRD will apply to those companies that came within the scope of the NFRD – listed companies in the EU that exceed two of the following thresholds: 250 employees; €40 million in annual net turnover; and/or €20 million balance-sheet total. In the coming years this will expand to non-listed and non-EU parent companies. And while there are some exceptions, it is also the case that SMEs that are part of the value chain of companies coming within the scope of the CSRD will be affected, as the larger companies they work with require more information.

Despite the challenges posed, Whitelaw welcomes the changes the directive will bring about and sees positives deriving from best practice.

“CSRD is designed to make corporate sustainability reporting more common, consistent and standardised – in a similar vein to financial accounting and reporting,” she says. “It places a welcome rigour and emphasis on non-financial reporting, standardising what has been a bit of a mix-and-match of reporting frameworks to date, and will be an important and helpful mechanism to increase transparency, prevent greenwashing and improve the sustainability of businesses across the EU and farther afield.”

Organisations will need to ensure they are set up and prepared appropriately, which includes assessing their own double materiality, addressing any gaps and working closely with their auditor and/or a third-party adviser, she says.

“For example, at AIB we began our own preparations as the directive itself was in development but this summer we stood up a formal, group-wide programme of work, beginning with board training,” adds Whitelaw.

“While there are no financial supports available for the implementation of CSRD specifically, there are some related funding options through, for example, the Climate Planning Fund for Business, part of the Government’s Green Transition Fund, which offers grants for the likes of training and consultancy to support environmental best practice.”

Aboud warns that although the CSRD sets it sights on large companies immediately, with smaller companies coming into the official reporting net in 2026 and 2027, SMES that supply large companies are likely to be affected sooner rather than later.

“The large companies implementing these reporting requirements are going to have to ask the SMEs in their supply chain to provide supporting data in order to help them comply with overall requirements. They need to get in gear now,” he adds.