While the UK government is considering the application and endorsement of the International Sustainability Standard Board’s (ISSB’s) IFRS Sustainability Reporting Standards, developments in sustainability reporting across the channel are happening at a much quicker pace.

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. 

In July 2024, ICAEW hosted a round table, ‘CSRD compliance: challenges, opportunities and global impact’, attended by finance professionals in business and practice, to explore how things are faring in the run up to implementation. 

Transposing into national law is taking time

The tight timeline for implementation appears to be a challenge for jurisdictions as well as affected companies. At the round-table event, the European Commission (EC) pointed out that, as of 15 July 2024, only six (out of 27) member states had notified the EC of their national transposing measures, despite the deadline being 6 July 2024. Transposition activity has continued since then with most countries making progress towards implementation, albeit at a slower pace than perhaps anticipated. 

It is worth noting that jurisdictions do have some discretion when transposing the CSRD into national law. They can, for example, extend the scope of entities covered by the legislation, extend the requirements set out in ESRS and align relevant requirements with local statutory filing rules regarding the submission of sustainability information. The EC will still ensure conformity with the provisions of the directive – member states that delay or deviate from the directive risk being subject to standard infringement procedures.

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. Further complexity may also arise for groups operating across multiple EU member states because of potential jurisdictional differences in the application of the CSRD on transposition to national law, as noted above. 

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. Detailed scoping activities are therefore needed to assess the full impact of the CSRD, with more complicated corporate structures perhaps even requiring input from legal counsel. 

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. 

Taking into account the challenge involved in getting up to speed on these new requirements, companies are urged by the EC to take a proportionate and common-sense approach to implementation. Speaking at the round-table event, the EC encouraged companies to make use of all available flexibility and transitional provisions in their CSRD implementation plans. 

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.

EFRAG is now working on the development of multiple standards and publications, including sector specific standards, ESRS for listed small and medium enterprises, ESRS for non-EU groups, guidance to help companies disclose their transition plans, and a digital taxonomy.

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. The Committee of European Auditing Oversight Bodies (CEAOB) is currently working on non-binding guidelines for this interim period. Additionally, the CEAOB is contributing to the International Auditing and Assurance Standards Board’s development of a new international standard for sustainability assurance (ISSA 5000). The standard is expected to be finalised in September 2024, although the EU has not yet committed to adopting it.

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 at ICAEW’s round table 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