Benefits of Early Compliance to the CSRD
07 Sep 2023
The amount of ESG metrics is vast and varies by industry, company size and complexity. In this blog we look at the advantages for companies complying with CSRD early.
New environmental, social and governance (ESG) reporting requirements in the EU and the US are set to fundamentally change the nonfinancial reporting landscape. The E.U. Corporate Sustainability Reporting Directive - CSRD, requires ESG reporting on a level never seen before, and will capture a whole host of companies that previously were not subject to mandatory nonfinancial reporting requirements, including public and private non-EU companies that meet certain EU-presence thresholds. For US companies, the CSRD rules will result in mandatory reporting on a broader set of ESG topics than those required under current and proposed Securities and Exchange Commission (SEC) rules.
With the European Sustainability Reporting Standards (ESRS), the European Commission will provide concrete indicators and information to report on, so using these, companies can better understand their performance through gathering the required ESG data for their reporting, which will allow them to identify developments and patterns, but also the “double materiality” principle on which the CSRD is built, pushing companies to get a stronger hold on their impact on society or impact materiality and the impact of ESG topics on enterprise value or financial materiality. This can provide new insights in risks and opportunities, as well as strategic redirection and innovation.
When companies get a grip on the non-financial indicators relating to corporate activities, they can expect new insights to arise. For example, new opportunities for cost savings, including energy reduction innovations in the production process, but also early compliance with ESG reporting. In the long term, this really does offer scope for streamlining company own production and supply chain from a sustainability point of view.
Attracting more capital
Investors and financial institutions aim to minimize risk while maximizing return. To that end, most investors already use ESG information for that decision making.
The CSRD was designed to improve the consistency, reliability, and comparability of information on material ESG risks and opportunities. So to help make money flow towards sustainable activities, now being able to comply to these high demands of the CSRD does increase transparency and trust in companies, and shows investors that as a company you are aware and in control of your risks. So therefore, the CSRD really can enhance investors engagements in companies that do comply but could also exclude those noncompliant ones from their investments.
Increased clarity on reporting obligations and positive impact on costs
The CSRD standardizes sustainability reporting, which in turn prevents companies from having to make a choice. There are many voluntary reporting frameworks such as GRI, SASB, TCFD, SDGs, but also having to provide ad hoc ESG information to multiple parties. So although administrative costs might increase according to EFRAG, the average EU company will save thousands of Euros a year if the need for additional information requests is eliminated.
With all data found in the same place, it will be clearer to external parties where it's stored, meaning that the number of requests for additional information will also reduce over the time.
Proposed SEC climate Disclosure Rule – eligibility for equivalence
Although the EC has indicated that it will allow in scope non-EU companies, such as US parent companies right to use sustainability standards equivalent to ESRS, it has not yet decided which standards will be deemed equivalent. If the European Commission decides that another country's sustainability reporting standards are not equivalent, and it may allow companies to continue using those standards during an appropriate transition period, and therefore, providing that reasonable time for them to prepare to report in accordance with ESRS or an approved equivalent standard. When this appropriate transition period comes to an end, the companies would be required to report in accordance with the ESRS or an approved equivalent standard.
We know ESRS disclosure requirements are extensive with roughly 80 requirements covering both quantitative and qualitative disclosures and they do go well beyond the requirement of the SEC’s in a proposed rule on the climate-related disclosures. So as of now, it really is still not clear, whether the SEC’s proposed rule, when finalized, will be an eligible ESRS-equivalent standard.
Reporting options for U.S. companies with EU-based subsidiaries
There are a couple of options, and the CSRD provides three different reporting options for non-EU parent companies with EU based subsidiaries. One is a global reporting route and also EU reporting route both to ensure that all entities within the scope of the CSRD ultimately report the report on the required information. The global reporting route allows a US parent company to report in accordance with the CSRD for itself, but also for all of its subsidiaries.
However, for US parent companies that are within the scope of the CSRD for enterprise-level reporting starting in 2028, and have a large subsidiary listed on an EU-regulated market, they will need to report at the consolidated US parent company level, while at the same time continuing to separately report sustainability information in the management report for those large subsidiaries listed on an EU regulated market.
On the other hand, the EU reporting route provides two additional options. The first one will be available until 2029 and will allow the largest EU subsidiary to produce a consolidated report which will contain information for all EU subsidiaries within the scope of the CSRD. Now this option is only allowed if the EU subsidiaries are not held by an EU holding company, and then the second option allows each EU subsidiary within the scope of the CSRD to issue a separate sustainability report.
Initial steps that companies can take to start preparing for CSRD compliance
Companies should conduct a boundary assessment to see if they fall under the scope of the CSRD or not. If they do fall under the scope, it is important to determine the timeline of reporting and to start preparing accordingly.
The two key elements of the CSRD are its double materiality lens. It requires reporting on material impacts and risks, relevant to investors and other stakeholders, and its requirement is to have limited assurance over all disclosed sustainability information. If a topic is material, it needs to be disclosed, and if a topic is disclosed, it needs to be assured. Companies within the scope of the CSRD should prioritize conducting a double materiality assessment by considering both financial and impact materiality
Evaluate and strengthen their processes and controls over their sustainability information so they can be “assurance ready”. One important point to remember is that under CSRD requirements, companies will also be required to obtain third party assurance in relation to their CSR disclosures.
Independent audit requirements
Reporting must be certified by an accredited independent auditor or certifier and this is to ensure that companies ultimately comply with the reporting rules. And then the independent auditor or certifier must ensure that you know sustainability information complies with the certification standards that have been adopted by the EU. The reporting of non-European companies must also be certified either by a European auditor or by one established by a third country.
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