Setting your company up for CSRD success

This article was written by Bipasha Ray & Erin Seglem

The European Union’s Corporate Sustainability Reporting Directive (CSRD) - a critical step in the EU’s ambition to become the first climate-neutral economy - has loomed steadily largersince it was proposed in 2021 as an update to the Non-Financial Reporting Directive (NFRD). With the adoption of the European Sustainability Reporting Standards (ESRS) in July 2023,around 11,700 companies will initially be required to report in alignment starting in 2025 (based on financial year 2024 data). This scope will then expand to encompass around50,000 companies over the next five years.

Under CSRD, companies are required to publicly report on sustainability impacts, risksand opportunities within their management report.

While not all affectedcompanies may fall into the first wave of compliance, all companies should understand the actions they can take to setup for success if they are subject to CSRD.

Key steps to achieve CSRD readiness

1. CSRD scoping analysis

One of the first questions you will be asking is whether your business or business subsidiaries are in scope for CSRD and when you will need to report. Companies need to determine the structure and size of their EU-based entities to determine whether they fall in scope. Taking legal advice is crucial at this stage to provide a robust view of the applicability of CSRD to your business.

Once you know CSRD may apply to your business (and when), the next step is to determine how to report to meet CSRD disclosure requirements. Companies headquartered outside the EU have the option to report at global level or subsidiary-level to meet CSRD requirements. There are pros and cons for each approach, and your decision may be based on a range of factors: the EU footprint of your business, the availability of data and resource at subsidiary level, the desire or need for the business to meet other mandatory or voluntary reporting frameworks, amongst others.

2. Double materiality engagement & topic scoring:

While many frameworks emphasise disclosing any and all information available, CSRD encourages companies to focus their engagement on identifying the topics that are most relevant to their business. 

To do this, a Double Materiality Assessment is necessary. Double materiality is the foundation of CSRD and the ESRS and asks companies to consider sustainability topics from two perspectives:

Financial materiality: Topics that can influence your company’s financial value (this is the so-called ‘outside-in’ perspective)

Impact materiality: Topics where your company’s operations are material to the broader economy, environment, and people (so the ‘inside-out’ perspective)

The ESRS has established 10 topics that companies in all sectors should evaluate when conducting a double materiality exercise: 

The ESRS topical (sector-agnostic) standards

In addition to these sector-agnostic topics, companies are required toidentify “entity-specific” topics. These will be more relevant to your company, and in many cases, provide a more sector-specific view of material impacts, risks, and opportunities.

Stakeholder engagement is always a valuable component of any materiality exercise, but it is a required element of a CSRD-aligned double materiality exercise. Engagement with affected stakeholders and report-users is seen as fundamental to building an accurate picture of the significance of sustainability impacts, risks and opportunities. Companies should consider their particular business model and value chain when identifying the stakeholders they should involve in their double materiality process. 

Once the Double Materiality Assessment has been completed, companies will be able to identify which topics meet the threshold for materiality for internal and external stakeholders.It is up to the company to define the thresholds for materiality, but these should take ‘severity of scale’, ‘scope’ as well as ‘likelihood’ into account.Both the material topics and the methodology for defining materiality will be required to be disclosed under CSRD.

3. Gap analysis:

CSRD joins a long list of existing disclosure frameworks, even drawing from or aligning with several significant ones, most notably the Task Force on Climate-Related Financial Disclosures (TCFD) andthe Global Reporting Initiative (GRI).

For companies preparing to complywith CSRD, performing a gap analysis will identify gaps in existing disclosures and should also identify any synergies between disclosures previously made in alignment with other frameworks.

This gap analysis will set the stage for data collection which will be critical in delivering the qualitative and quantitative information requiredfor reporting in line with the ESRS.

4. Data collection:

Crafting a strategic approach to data collection will ensure a smooth reporting process and establish any remaining data gaps to be addressed in the next reporting year. This is particularly critical to keep in mind if your company will be required to align with CSRD for the 2024 financial year.

To develop a strong data collection process, you should:

1. Engage with subject matter experts and data owners early to support data collection.
2. Map your value chain to determine both internal and external subject-matter experts and their role in data governance.
3. Document the methodology for data collection and governance. Not only will the documentation establish written guidance for future reporting but simplify the assurance process significantly during reporting.
4. Establish robust internal controls and governance mechanisms for ESG data.

5. Report:

The final stage is to complete the reporting in line with CSRD requirements. Youshould be sure to plan for adequate time to receive independent assurance of your sustainability disclosures and include any synergies with other existing frameworks in use to maintain alignment with all company reporting to date.

While timeframes for when companies will be required to comply with CSRD may vary, taking the steps to prepare for disclosure, sooner rather than later, will set you on a path for success both in aligning with CSRD and in determining the topics that will be material in maintaining your company’s resilience in the face of a changing global climate.

Get in touch

At SLR, we prioritise staying informed about the latest developments to ensure we provide the most up-to-date information regarding the evolving landscape of regulations. Our team is well-equipped to guide you through CSRD-aligned Double Materiality Assessment and assist with ESRS disclosures. We are dedicated to providing you with the support you need to meet these - or other - reporting rules.

For further information on CSRD and our other sustainability services, please get in touch.