Navigating the CSRD: key insights and challenges

Published on October 25, 2024 by Jagrati Dhote

Understanding the CSRD: A brief overview

The Corporate Sustainability Reporting Directive (CSRD), adopted by the European Parliament in November 2022, is a comprehensive framework designed to standardise and improve sustainability reporting across the European Union (EU). It builds upon and significantly expands the scope of its predecessor, the Non-Financial Reporting Directive (NFRD), by encompassing a broader range of companies and mandating more detailed disclosures. This landmark legislation represents a paradigm shift in how companies report their non-financial information, aiming to enhance transparency, accountability and sustainability in the business world.

However, as with any major regulatory change, implementing the CSRD presents various challenges for organisations. This article provides a brief introduction to the potential hurdles companies may face in integrating these new requirements into their reporting practices.

Key features of the CSRD include the following:

• Expanded scope: The directive applies to all large companies and all companies listed on regulated markets (except listed micro-enterprises), covering nearly 50,000 companies in the EU, up from about 11,000 under the NFRD.

• Detailed reporting standards: Companies must report according to this compulsory sustainability reporting standard, developed by the European Financial Reporting Advisory Group (EFRAG).

• Dual-materiality analysis: Companies must report on the impact of sustainability issues on their operations, including their effect on society and the environment.

• Electronic labelling: Information on sustainability must be encoded for digital readability, ensuring seamless retrieval from the European Single Access Point (ESAP) database.

• Mandatory assurance: The reported sustainability information must be certified by an accredited independent auditor or certifier, ensuring its reliability and accuracy.

Potential challenges in CSRD integration

1. Data collection and management

Organisations are grappling with the significant hurdle of gathering and overseeing the vast amounts of data necessary for compliance with CSRD reporting mandates. Many may find their existing systems inadequate for this task, needing significant investment in innovative technologies and processes. Thus, companies must gather information across sustainability indicators, often from disparate sources from within. This may include the following:

• Developing new data collection processes and systems

• Ensuring data quality and consistency across departments and subsidiaries

• Establishing strong data stewardship structures to ensure the accuracy and reliability of data

2. Understanding and applying reporting standards

The CSRD introduces detailed, mandatory reporting standards developed by the European Financial Reporting Advisory Group (EFRAG). These standards are comprehensive and complex, covering a wide range of sustainability topics. Organisations may struggle with the following:

• Interpreting and correctly applying the new standards

• Keeping up with updates and changes to the standards

• Aligning existing reporting practices with the new requirements

• Training staff to understand and implement the standards effectively

3. Implementing double materiality

This requires companies to consider the impact of sustainability issues on their business and on society and the environment; this represents a significant shift in perspective for many organisations. Challenges in this area include the following:

• Developing methodologies to assess and quantify impacts in both directions

• Balancing financial and non-financial considerations in decision-making processes

• Communicating the concept of double materiality to stakeholders

4. Ensuring audit-readiness

The CSRD’s mandatory assurance requirement requires companies to be prepared to have their sustainability information audited. This presents several challenges:

• Establishing internal controls and documentation processes for sustainability data

• Preparing staff for sustainability audits, which may be a new business experience

• Managing the additional costs associated with external assurance

5. Digital tagging and technology integration

Digital tagging of sustainability information requires new technological capabilities. Organisations may face difficulties in the following areas:

• Implementing the right software solutions for digital tagging

• Ensuring compatibility with the European Single Access Point (ESAP) database

• Integrating sustainability reporting systems with existing financial reporting technologies

6. Cross-functional collaboration and cultural shift

Compliance with the CSRD requires input from the different departments in an organisation, necessitating unprecedented levels of cross-functional collaboration. Challenges in this area include the following:

• Breaking down silos

• Cultivating an organisational ethos centred on sustainability

• Aligning sustainability disclosures seamlessly with overall business goals

7. Resource allocation and cost management

Implementing CSRD requirements involves significant resources, both in terms of personnel and financial investment. Organisations may struggle with the following:

• Allocating sufficient funds to ensure compliance with the CSRD

• Hiring or training staff with the necessary skills in sustainability reporting

• Aligning expenses incurred to ensure compliance with expenses for other critical functions

8. Supply chain-related considerations

A substantial part of the environmental and social footprint of most businesses is embedded in their supply-chain operations. Meeting the CSRD's comprehensive reporting requirements may involve the following:

• Establishing processes to monitor and communicate vendors’ sustainability indicators

• Crafting infrastructure to log and convey details on ESG practices within the supply network

• Managing the potential reputational risks associated with supplier practices

9. Stakeholder communication

With the increased transparency introduced by the CSRD, companies must be prepared to communicate their sustainability performance effectively to a wide range of stakeholders. This involves the following:

• Developing clear communication strategies for different stakeholder groups

• Managing expectations and addressing potential concerns

• Balancing transparency with business confidentiality

10. Global implications and competitiveness

For multinational corporations, aligning CSRD requirements with other global reporting standards and regulations presents an additional layer of complexity. Companies must consider the following:

• Aligning CSRD reporting with other international frameworks (e.g., GRI, SASB)

• Managing potential competitive disadvantages if non-EU competitors are not subject to similar requirements

• Adapting global sustainability strategies to meet CSRD standards

The CSRD embodies a major transition towards increased transparency and responsibility in sustainability reporting. While its implementation poses challenges, it also offers companies an opportunity to enhance their sustainability practices and gain competitive advantages in an ESG-focused market. Successful integration would require a comprehensive approach, involving cross-departmental collaboration and investment in modern technologies and skills.

How Acuity Knowledge Partners can help

Leveraging our deep expertise in regulatory compliance and sustainability, we help companies integrate CSRD requirements into their operations. By providing tailored advisory services, we help them understand the nuances of the CSRD, ensuring their reporting aligns with enhanced transparency and disclosure standards. We help develop robust reporting frameworks and data management systems to capture essential ESG information. Our support in interpreting complex technical details enables companies to comply with regulations and harness sustainability as a strategic asset, improving long-term resilience and stakeholder trust.

Sources:

• https://eur-lex.europa.eu/legal-content/EN/TXT/?uri

• https://www.europarl.europa.eu/doceo/document/TA-9-2022-0380_EN.html

• https://eur-lex.europa.eu/legal-content/EN/TXT/

• https://www.efrag.org/en/sustainability-reporting/esrs/sector-agnostic/first-set-of-draft-esrs

• https://www.intertek.com/blog/2023/2023-08-03-intro-to-csrd/

• https://thecsrdcompass.com/eu-csrd-implementation-unravelling-the-challenges/

• https://www.ey.com/en_us/insights/nonfinancial-integrated-reporting/nine-actions-to-prioritize-as-the-eu-csrd-looms

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