In January 2023, the EU brought into force a new Corporate Sustainability Reporting Directive (CSRD) to strengthen the rules concerning the social and environmental information that companies have to report. 

Companies subject to the CSRD are required to report according to European Sustainability Reporting Standards (ESRS) on their impacts, risks and opportunities (IROs) across environmental, social and governance matters. The Directive also introduces mandatory third-party assurance on the sustainability information reported by companies. 

The first in-scope companies with December year ends will be preparing to report for the first time on 2024, with first reports due to be published in H1 of 2025. The tight timeline for implementation appears to be a challenge for jurisdictions as well as affected companies, with most countries having made progress towards implementation, albeit at a slower pace than perhaps anticipated. 

The scope has a wide reach

The CSRD applies to a broad range of companies in the EU, but also affects companies outside it. In brief, non-EU companies fall into scope if they have securities listed on an EU-regulated market, have significant activities in the EU or are parent companies of in-scope EU subsidiaries. Application of the CSRD will occur progressively over a number of years depending on company type.

The scoping requirements are particularly complex, especially within group situations and where there are non-EU country parents. Even those companies not directly in scope may find that they fall within the value chain of an in-scope entity and are therefore required to provide sustainability information to enable that entity to report. 

A pragmatic approach to implementation is needed

To date, EFRAG has published 12 sector-agnostic ESRS standards that cover a full range of sustainability issues. They include two cross-cutting standards and 10 topical standards covering environment, social and governance matters. 

To help address technical implementation questions, EFRAG has developed an ESRS Q&A platform and published detailed implementation guidance covering materiality assessments, value chain and data points. It has also released guidance on the alignment between the ISSB’s IFRS Sustainability Disclosure Standards and the ESRS to help demonstrate how companies can integrate both sets of standards.

A set of assurance standards is still to come

All companies subject to the CSRD are required to obtain limited assurance from a third-party assurance provider from their first reporting year. The directive also includes a provision to move to reasonable assurance in the longer term. 

As yet, the EC has not adopted any assurance standards, but is required to do so by the CSRD by 1 October 2026 for limited assurance (and by 1 October 2028 for reasonable assurance). In this interim period, member states may apply national assurance standards, procedures or requirements.

Work is ongoing to establish exactly what limited assurance over sustainability reporting will look like. 

With challenge comes opportunity

As highlighted by many at ICAEW’s round-table event, we are currently at the start of Europe’s sustainability reporting journey. As we see companies and their advisers grapple with double materiality, data collection processes, scoping requirements and the level of interoperability with IFRS Sustainability Disclosure Standards, it is clear that the challenges of implementation remain at the forefront of minds.

However, participants were also keen to see beyond that and highlight the potential long-term opportunities arising from the CSRD. Sustainability reporting is moving ahead at great speed in the EU and with that comes the realistic possibility of increased transparency, better comparability through the standardisation of sustainability data and reporting that serves a wide range of stakeholders, including society at large.

Kate Beeston, Technical Manager, Corporate Reporting Faculty, ICAEW

• A longer version of this originally appeared on By All Accounts.