Companies complying with the Corporate Sustainability Reporting Directive could see real business benefits, but the right mindset is crucial, write David Connolly and Alba Boshnjaku
At its core the Corporate Sustainability Reporting Directive (CSRD) is a reporting requirement, but it should not be viewed merely as a compliance exercise.
Companies within the scope of the Directive will be reporting in a standardised way. This means that sustainability statements could become a powerful tool for communicating more effectively with their stakeholders.
The CSRD could potentially enable these companies to build trust, enhance their reputation and strengthen their accountability.
This scenario is not dissimilar to existing accounting standards, whereby the requirement for companies to report financial information to investors, lenders and other stakeholders, has facilitated better and more transparent comparability between businesses operating in the same industry.
Ignoring sustainability is no longer an option. Companies must be aware of, and report on, the impacts they have on people and the environment, as well as the sustainability-related risks and opportunities they face in the short, medium and long term.
Therefore, the CSRD gives companies an opportunity to understand what matters to them and their stakeholders. It allows them to re-evaluate their business to gain a competitive edge and potentially attract new customers, talent and capital, thereby strengthening their strategic resilience.
C-suite executives should recognise the potential the CSRD has to help steer their organisation towards a future that balances profitability with environmental and social responsibility governed by robust control frameworks.
Before exploring the potential benefits, however, let’s first revisit some of the key concepts of the CSRD.
Europe: leading the way in sustainability reporting
An estimated 40,000 companies based in the European Union will be brought within scope of the CSRD on a phased basis, starting this year and continuing through 2028. Reporting obligations apply to all large and listed companies, including small and medium sized entities (SMEs), except for listed micro-enterprises.
The size category into which an undertaking or group falls is defined by establishing thresholds in relation to net turnover, gross value and average number of employees during the financial year.
A large undertaking or a large group will, for example, exceed at least two of the three following criteria: balance sheet totalling €25 million; net turnover of €50 million; an average of 250 employees.
These criteria, including the ones for SMEs, are established in the Accounting Directive at EU level and transposed in national legislation, which companies must consult to determine whether they are captured within the scope of the CSRD.
Certain non-EU companies with listed subsidiaries or significant operations in the EU market are also required to report. Non-EU companies that fall under the scope of the CSRD need to have:
- Net turnover of more than €150 million in the EU for each of the last two consecutive financial years;
- A large or listed EU subsidiary, or EU branch, generating over €40 million in the EU.
The requirement for certain non-EU companies to report will impact some companies established in Northern Ireland where they meet the relevant threshold criteria.
Ireland transposed the CSRD in the Companies Act in July 2024. Companies should carefully consider the relevant provisions to determine whether they fall within scope.
The first wave of companies (large, listed companies with over 500 employees) have already mobilised their teams to get disclosure ready as they will be publishing their sustainability statements in the first quarter of 2025 for the current financial year.
Companies within the scope of the Directive must prepare their sustainability statements in line with the European Sustainability Reporting Standards (ESRS). The first set of twelve sector-agnostic standards have been adopted by the European Commission and are directly applicable to all EU member states.
Sector-specific standards are under development and proportionate standards for listed small and medium-sized entities are also expected.
Two of the standards – ESRS 1 and ESRS 2 – are cross-cutting and mandatory for all. The remainder, structured under Environmental, Social and Governance (ESG) pillars, are subject to the outcome of the materiality assessment. Companies will need to undertake a double materiality assessment to decide what they will need to report on.
They will have to identify and assess the impacts of their business on people and the environment (impact materiality) and the risks and opportunities the outside world poses to their business (financial materiality).
As part of this process, companies will need to understand the business and regulatory environment in which they operate and map their value chain.
The value chain is defined as the full range of activities, resources and relationships related to the undertaking’s business model and the external environment in which it operates.
The value chain encompasses the activities, resources and relationships the undertaking uses and relies on to create its products or services from conception to delivery, consumption and end-of-life.
As part of their double materiality risk assessment, companies will also need to identify material- and sustainability-related impacts, risks or opportunities relating to their value chain across time horizons.
Once they have identified their material matters, they will then need to identify the material disclosures and data points to be reported in the sustainability statement.
The sustainability statement will be subject to limited assurance, with added responsibilities for audit board committees. Companies will need to implement robust control frameworks that ensure high quality, reliable and comparable sustainability information.
The CSRD: a competitive edge
The CSRD offers an opportunity for companies to gain a competitive edge, because it requires that they report, not only on the material impacts they have on people and the environment, but also on the potential risks and opportunities they face.
For example, supply chain disruptions caused by climate change or dependencies on scarce natural resources could lead to operational risks for companies, which could then take the form of credit risks for financial institutions.
Similarly, negative impacts on employees or affected communities could lead to litigation and reputational damage.
On the flipside, investment in green technology or innovation could generate profit and add shareholder value.
By treating double materiality assessments as a box-ticking exercise, companies will miss the opportunity to better understand their business and make more informed strategic decisions.
A thorough, data-driven assessment should take into consideration value chain relationships, sector and geographical exposures.
Supported by stakeholder insights, this approach can help a company to identify the existing and anticipated effects of sustainability on its business model and strategy, including risks or opportunities related to its financial position, cash flow and access to capital.
The double materiality assessment is dynamic and requires companies to think and assess what is material, not only this year, but in the medium to long term – and how this will impact its wider business plans and strategy.
For C-Suite executives, the results of the double materiality assessment could yield insights that enhance efficiency, improve performance and help them set realistic targets, all while demonstrating their company’s commitment to transparency.
Opportunity for increased internal accountability
Under the CSRD, companies will need to report on the processes they have in place to identify and manage material sustainability matters. The preparation process will trigger important internal questions that require owners and demand accountability.
Are our policies and actions effective? How are we tracking the effectiveness of our targets? Is our data accurate? How robust is our internal control framework? Is sustainability integrated into our risk management process? What is the role of the Board in sustainability reporting?
These are only a small fraction of the questions companies will need to ask themselves to ensure that their reports are CSRD-compliant. These are also questions that could help companies become efficient and foster a transparent and risk-focused culture.
Further, reported sustainability information, such as financial reporting, will need to be reliable, accurate and comparable. What gets measured gets done.
By having to define baselines and measure progress from year to year, companies must ensure that time and resources are adequately allocated to set the business up for success.
Communicating what matters to stay ahead
Companies will have to report on what is material and relevant to stakeholders and, with stakeholder expectations evolving, ongoing engagement will be key.
Investors, employees, customers, suppliers and the public at large are becoming more aware of the sustainability impacts of companies, so they can make informed, ethical decisions.
Some stakeholders will be more interested in the sustainability credentials of companies than others. While customers and employees will take account of sustainability when deciding where they spend their money or where they work, funders and regulators will have more than a passing interest.
In 2023, according to the latest World Investment Report, the value of sustainable investment products, both bond and equity, reached more than $7 trillion, up 20 per cent on the previous year.
Both investors and lenders rely on accurate and transparent information to make informed decisions, meet their own reporting requirements, and mitigate greenwashing risks. C-suite executives should be prepared to answer their questions.
Regulatory requirements are becoming increasingly onerous across industries and regulatory bodies worldwide are pushing for uniformity and transparency in sustainability reporting.
While climate change has dominated the regulatory agenda in recent years, other environmental and social issues are also coming into focus, including human rights and labour practices within supply chains.
As new requirements are introduced globally – for example, IFRS sustainability disclosures –businesses operating across jurisdictions will need to think about interoperability to ensure consistent messaging and compliance.
By understanding who the users of the sustainability information are, and what they need to know, companies have scope to build trustworthy relationships that could benefit their market position, value and access to capital, while also ensuring compliance.
Cultivating a winning mindset
With the right mindset, companies complying with the CSRD could see real business benefits.
The CSRD is a function of the European Union’s wider Green Deal, designed to revitalise and transform the European economy by decoupling economic growth from resource use to ensure long-term sustainability.
This will require a focus on innovation, new technology, sustainable products and services, responsible and sustainable business practices, employment and supply chains.
So, while companies prepare for their first year of CSRD reporting, C-suite executives should be thinking about potential opportunities and risks, emerging material sustainability issues, and how they can use sustainability reporting to improve their strategic resilience and business value.
David Connolly, FCA, is a Director in EY Financial Services Climate Change and Sustainability Services (CCaSS)
Alba Boshnjaku is a Manager in EY Financial Services CCaSS, specialising in ESG reporting
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