As part of the European Union’s (EU) Green Deal, the Corporate Sustainability Reporting Directive (CSRD) came into force on January 5, 2023. This EU directive requires large companies to provide information on the impact of business-related activities on people and climate. In addition, the social and environmental risks and opportunities of business operations must be recorded. The resulting sustainability reporting becomes part of the annual report. To improve the quality and comparability of these reports, the European Sustainability Reporting Standards (ESRS) have been developed. These form the reporting standard on which companies must report within the CSRD.
Complying with the CSRD is going to be a daunting task for many companies in the coming years. Not only because the reporting requirements are extensive, but also because investigating the impact of business activities requires a huge investment in both money, and hours, and workforce. Nevertheless, it is of utmost importance to start preparing for the CSRD, not only from a compliance point of view but also to ensure the future sustainability of the company. Crowe Peak is therefore happy to help you get ahead. In this overview article we list the most important steps towards preparing for and complying with the CSRD.
Looking for information on a certain topic regarding CSRD? Scroll through the table of contents below, click on the topic of choice and read about it directly.
Step 1. Start preparing in time
The CSRD has a phased introduction. On January 1, 2024, the CSRD will apply to companies that already must comply with the Non-Financial Reporting Directive (NFRD). For large (non-listed) companies, the year 2025 will be the first fiscal year for which they will have to report based on the CSRD and the European Sustainability Reporting Standards (ESRS).
In the Netherlands, a company is considered large if it meets at least two of the three conditions below:
- More than 250 employees;
- More than 40 million euros in annual sales;
- More than 20 million euros on its balance sheet.
Finally, listed SMEs and small and non-complex credit institutions will also be covered by the CSRD starting January 1, 2026.
This means that before the implementation date, these companies must have drawn up a sustainability strategy, set up their systems and processes in such a way that their reporting is accurate and meets European standards, and that the right data has been collected for reporting. The message is thus clear: to become “CSRD-compliant,” there is still a lot of work to be done in a short time. It is therefore essential for enterprises to take the urgency of these upcoming duties seriously and not wait long to prepare. Although SMEs are not covered by the obligations of the CSRD, it is highly likely that they too will be affected by this directive. This is expected to manifest itself in information requests on ESG topics within the chain.
To properly oversee the impact of implementing the CSRD, it is important to become familiar with the content of the CSRD and the ESRS.
Step 2. Identify stakeholders
It is necessary to conduct a proper stakeholder analysis. Stakeholders are the parties that can influence or are influenced by the decisions and actions of the company. Two groups of stakeholders are distinguished within the ESRSs:
- affected stakeholders: individuals or groups that have interests that are affected or can be affected – positively or negatively – by the company’s activities and through its value chain; and
- users of sustainability reporting: stakeholders with an interest in the company, such as, for example, existing and potential investors, lenders or business partners of the company and civil society organizations.
In determining the material topics, stakeholders, and the dialogue the company has with these stakeholders have a key role. This dialogue can take place in many ways. You can think of sending out surveys, holding conversations and interviews, but also using industry information. It is important to do this in a well-considered way and to document this process as well.
Step 3. Conduct a materiality analysis
A key concept in the CSRD and the ESRS is “double materiality.” Conducting a materiality analysis from the concept of “double materiality” means determining the most relevant sustainability topics for your company from two perspectives, namely “impact materiality” and “financial materiality.” This is not only important in complying with the CSRD but can also be of strategic importance for your company. Below we discuss the two aspects that determine double materiality:
Impact materiality is also described as the “inside-out” perspective: this refers to the impact of the company’s activities on people and the environment. This impact can be either positive or negative. Impact materiality involves both current and potential issues and looks at the short, medium, and long term.
To determine the materiality of the impact you look at the scale, magnitude, and recoverability of the impact. Also, in the case of a potential impact, you include the probability that the impact is going to occur in the analysis.
The second perspective of double materiality is “financial materiality.” This perspective is also called the “outside-in” perspective. It involves determining the sustainability topics that have or may have an impact on your company’s financial performance. In doing so, you include topics that can pose risks as well as those that can create opportunities. You assess these topics for “magnitude” and “likelihood.”
Once you have estimated impact, risks, and opportunities, you can start preparing for them. This helps to make your business sustainable and future-proof. It is therefore important to take this step carefully. This means setting aside enough time, but also involving stakeholders and any internal and external specialists.
When performing the materiality analysis, the company will have to start making choices: what is material and what is not material? The ESRS provide limited guidelines for this. There is room for the company’s own assessment. It is important to make these choices deliberately. The materiality analysis forms the basis for the further strategy in the ESG field. Visualizing the materiality analysis is not prescribed in the ESRSs (European Sustainability Reporting Standards), but it can help maintain an overview of the assorted topics and motivate the choices made.
Looking for more background and knowledge on this topic? Read our article on double materiality analysis here.
Step 4. Conduct a GAP analysis
In preparing for CSRD reporting, performing a GAP analysis is a clever idea. With such an analysis, you gain insight into what your company has already set up and done so far in terms of sustainability. Your organization already measures and reports on topics such as “energy consumption” and “water use”. Or procedures are already in place on how to interact with staff? Put together a team that takes a broad look at your organization, sector and industry and gather what is already available. Compare the results of this survey with the requirements within the CSRD and the European Sustainability Reporting Standards (ESRS) and the themes that emerge from the materiality analysis. Then it becomes increasingly clear how big the gap is that still needs to be bridged and the basis can be laid for ESG reporting. Do you need help with this? Get in touch with us.
Incidentally, in ESG, there are many topics that could be material to your organization. It can be difficult to oversee this all at once. Therefore, set priorities. And be realistic: Are you not yet able to collect all the necessary data and meet all the requirements? Then explain this and make an (ambitious) plan to obtain the required data in the short term.
If necessary and possible, use the transitional provisions within the ESRS. These are aimed at supporting companies in the implementation of the ESRS. There are transitional provisions on “entity-specific-disclosures,” value chain disclosures and comparative figures.
In addition, there are provisions that delay the effective date of the disclosure requirements of several topics such as the potential financial effects of environmental opportunities and threats or the characteristics of workforce by one to three years.
The ESRS are not final yet. An update of the first set of standards took place on June 9, 2023. In many areas, the transitional provisions have been expanded, and there is more room for phasing in some topics. It is important to keep track of these developments. Our specialists will be happy to assist you with this and all other to become CSRD compliant.
Step 5. Put together an ESG team
Setting up a multi-functional ESG team is one of the most important steps in getting serious about the ESG strategy in your organization.
Many organizations that communicate their ESG progress and goals do so on their website. This website is usually managed by the marketing department, sometimes in support of the ‘sustainability officer.’ This depends on the resources available in the company. The subject of ESG is now evolving from voluntary reporting to mandatory reporting that will be closely scrutinized by stakeholders.
ESG is a broad topic, and it is impossible for one or two people to manage all the obligations and objectives of the organization. This requires a team with diverse backgrounds and expertise.
Many companies have (or are recruiting) an ESG team leader. The right person acts as an ambassador for the organization’s ESG strategy, can identify risks and opportunities, reaches consensus on implementation, and knows how to solidify the board’s commitment to the chosen strategy and goals.
To do their part, ESG team members must understand how they fit into the team strategy. Who identifies new legal obligations for the team? Who researches and prioritizes client requests? Who gathers industry and competitive benchmarks? Who determines the next steps?
Establishing roles and responsibilities early allows everyone to stay abreast of regulatory changes, customer requirements and other added information that affects strategy. It takes time to assign responsibilities, select technology, consider external support and managed service options, and address internal staffing needs. Therefore, now is the time to assemble your ESG team!
Step 6. Setting up the sustainability due diligence process.
Double materiality analysis is inextricably linked to the overall sustainability due diligence process within a company. This is the entire process in which companies – soon also mandatory under the CSRD – identify, prevent, mitigate, and administer material, actual and potential negative impacts on the environment and people resulting from business activities. Reporting on this will also become mandatory under the CSRD and the ESRS. The process of due diligence and reporting should eventually become a continuous process for all companies covered by the CSRD, including consideration of changes in strategy, business model, company operations, business relationships and other operational aspects.
As reporting guidelines, the CSRD and the ESRS primarily address the aspect of reporting. Thus, for each material topic, the strategy, implementation, and performance in these areas must be reported. The European CSRD and ESRS guidelines assume that a company has a process for moving from identification to reporting. In practice, this will by no means be the case for all material topics.
As the effective date of the CSRD draws ever closer, this will mean that companies will have to start reporting in some areas that this process is not yet fully set up for all material topics. For the achievement of the objectives of the EU Green Deal and the future sustainability of the company, it is inevitable that companies will eventually fully integrate sustainability into business processes.
The ESRS aligns with international guidelines such as the UN Guiding Principles on Business and Human Rights and the OECD (Organization for Economic Cooperation and Development) Guidelines for Multinational Enterprises. If you are looking for a practical guide for your company, the OECD Due Diligence Guidance for Responsible Business Conduct is a useful tool.
Tips and tricks:
- Especially for companies with limited human and financial resources, implementing a sustainability due diligence process is quite a challenge. Check whether your company can connect to public sources in some areas, such as model policies or public information on risks in supply chains;
- Make IT work for you to become CSRD compliant! Often there is already more information available than you think to help you in terms of administration and monitoring.
Step 7. Gain insight into the value chain
One of the reasons the CSRD is listed as a very sweeping new regulation is that the CSRD and the ESRS do not just focus on your own organization. Information is also required about the material sustainability impacts, risks and opportunities in the value chain.
Reporting on the value chain requires a good understanding of how it is structured and functions. Knowledge is needed about the products and services that are purchased, the resources that are used in the creation of these products and services, as well as what happens to the product or service after it is sold.
Materiality analysis and sustainability due diligence provide important input in mapping the value chain. Good to know is that not every party in the chain needs to be reported on, but only to the extent material to the sustainability reporting. The ESRS requires companies to report on policies, actions and objectives and results in the form of “metrics.” Most “metrics” under the ESRS will be reportable without directly requiring information from the supply chain. The information can be reported based on the resources available to you as a company itself. Most of the information needed from the chain will oversee the “policies, actions and objectives” sections.
Depending on the information you need from the materiality analysis and the type of relationship the company has with partner in the value chain, it may be possible to engage directly with these partners and coordinate the information needed. If this is not possible, an estimate can be made based on sector information, for example.
Tips and tricks:
- If information from the value chain is not available in the first three years after the CSRD takes effect, the company can also comply with the CSRD by explaining why the information is not yet there and what the company is doing to still obtain this information.
- Need information from value chain partners? Start informing them early! Want to know more about metrics and the value chain? Contact Crowe Peak.
Step 8. Understand the data flow for each ESG business process.
Once the ESG team is assembled, you are already on the right track. However, now the team must get to work and start collecting the data needed for ESG reporting. A good first step for this is to understand the data flow for each ESG business process. ESG touches every area of an organization. From greenhouse gas emissions and human resources to information security and privacy. That means a lot of data needs to be collected. It is also important to understand the data flows for each ESG business process: where does the data come from (internally or externally)? Where do they go? Who is tasked with collecting, validating and reporting? A flowchart can help visualize the data flows.
Organizations will also need to determine whether they own and store the data themselves or whether the data comes from a third party. It is important to document the specific location of data (such as applications or spreadsheets) to evaluate its completeness and accuracy.
Step 9. Perform a GAP analysis between the data gathered and ESG reporting requirements
Check that for each material topic the necessary data is available to report correctly and completely. Data comes from many distinct parts of (or even outside) organizations, and each data set requires a reliable process for collection and verification of this data. Because data will continue to evolve, this process should not be designed as a one-time option, but as a repeatable approach to obtaining data from multiple sources and at multiple intervals.
Develop a plan to fill identified gaps and still obtain needed information.
Step 10. Implement controls within ESG business processes.
There are several risks that can affect the completeness and accuracy of collected ESG data. For example, consider unauthorized access for adding, modifying or deleting data stored in an application or spreadsheet.
The next step is to identify control measures that can mitigate the identified risks. These control measures can sometimes be implemented manually, but increasingly automated solutions are available. If external parties are involved in providing the necessary data, it is wise to consider how the completeness and accuracy of this data can be assured.
Step 11. Review and implement additional controls
Organizations should assess whether they have appropriate controls over data and whether they need to introduce new controls or modify existing ones. It is important to implement relevant and effective controls that meet specific needs – and not simply take a one-size-fits-all approach. As new regulations and technologies emerge, moving from manual data collection processes to more automated software solutions can help organizations stay ahead of the curve.
Step 12. Anticipate sustainability reporting and prepare a transition report
By now it should be clear that creating your first sustainability report cannot be done overnight. There are many issues involved and much work to be done within a brief time. Therefore, preparing a transition report can help improve the quality of the first ESG report under the CSRD. How? We explain that further below.
Reporting format under the CSRD
Under the Corporate Sustainability Reporting Directive (CSRD), sustainability reporting will become part of the company’s management report. It is intended to form a contiguous whole. Reference can be made to other sections in the annual report, but there are specific requirements for this.
The sustainability report will consist of general information and then the sections:
- Society; and
There are very limited opportunities within the CSRD to set this up differently.
Preparing a transition report
Preparing a transition report can be seen as a practice exercise before preparing a sustainability report under the CSRD requirements. It can help identify where the bottlenecks are in gathering reliable information from the company.
Preparing the transition report can also help to better identify processes and controls. The enterprise can test how effective the internal control measures are in making the information flows reliable.
Step 13. Evaluate and improve
The time that remains between the preparation of the transition report and the effective date of the CSRD can be used by the company to evaluate the results. You can then make further improvements until the eventual mandatory sustainability reporting matches your level of ambition.
Tips and tricks:
- In the transition report, use before the reporting requirements prescribed by the CSRD. Then fewer adjustments will be needed at a later stage;
- It is not necessary to prepare the transition report for an entire reporting period. It may be convenient to choose a shorter period so that the transition report can be prepared more quickly. This leaves more time for finding an appropriate solution to identified bottlenecks.
- You can also choose not to prepare a transition report on all material issues. In that case, however, you should at least shadow the areas where you expect the most bottlenecks.
- Also consult with your accountant or consultant. The sustainability report under the CSRD will also have to include a limited degree of assurance.
Step 14. Be aware of the required assurance report
The time has finally come: your first ESG report is ready. However, to fully comply with the CSRD, an assurance report from an auditor is required after all the challenging work. It is therefore important that you prepare for this. Below we address the two most frequently asked questions about this assurance report:
Why is an assurance report required with sustainability reporting?
To ensure the quality and reliability of the reports, the CSRD states that the sustainability reports prescribed therein must be accompanied by an assurance report. With this, the EU wants to reduce the risk of companies pretending to be more sustainable in their reports than they are. In other words, less “greenwashing.”
What is “limited assurance” in relation to “reasonable assurance”?
In the world of assurance, a distinction is made between limited assurance reports and reasonable assurance reports. When issuing a limited assurance report, the auditor performs fewer audits than when issuing a reasonable assurance report. Therefore, as the name also suggests, less assurance can be derived from a limited assurance report than from a reasonable (but never absolute) assurance report. The CSRD requires that sustainability reports be accompanied by a limited assurance report. However: gradually this will move to an assurance report with reasonable assurance.
Step 15. Perform an assurance readiness check
To avoid surprises, it may be wise, before the start of the real assurance process, to have an assurance readiness check performed. Such a check lets you know in time whether the auditor has important comments about your reporting and even sees reason to reflect these in the assurance report. You can then also use the results of this check to correct any deficiencies. If you do this properly, you increase your chances of being able to provide your first ESG report with an assurance report without comments from the auditor.
Tips and tricks:
- Involve your auditor in this process on time!
- You can have the above check performed on several critical components.
- Also, prepare in time for the transition to reasonable assurance!
Want to know more? Crowe Peak
The above makes it clear that preparing your organization for the upcoming statutory ESG reporting requirement is a long way off. You simply cannot assume that all the necessary information is already available within your company. You need cooperation from the internal organization, and you need to find a suitable auditor to audit you. Moreover, the value chain will be different for each company and the material topics are slightly different for everyone, making customization insurmountable. Therefore, do you need help identifying the important themes for your business? Are you looking for more information on how to go about reporting? Do you need help putting together a well-functioning ESG team? Or do you just want to spar about the obligations coming your way? Then contact the specialists at Crowe Peak. They are experts in ESG, CSRD and ESRS and would be happy to help you.
Curious to see what we can do for your organization?