The E.U. Corporate Sustainability Reporting Directive (CSRD) requires ESG reporting on a level never seen before and will capture a whole host of companies that previously were not subject to mandatory nonfinancial reporting requirements, including public and private non-EU companies that meet certain EU-presence thresholds. For US companies, the CSRD rules will result in mandatory reporting on a broader set of ESG topics than those required under current and proposed Securities and Exchange Commission (SEC) rules. In this podcast we will discuss:
To gain additional insights about this subject, be sure to explore the other episodes of the CSRD series available on the Assurance in Action Podcast network.
Rowena Curtis Intertek 0:10
Hi and welcome to the 4th episode in our CSRD podcast series.
There's approximately 50,000 EU businesses and 10,000 outside the EU will be affected by CSRD today.
We'll talk about some of the benefits to companies both in the EU and the US.
I'm Rowena Curtis, UK marketing Manager for Intertek Business Assurance. And I'm here with Elma Christian, Global Business Development Director at Intertek Business Assurance.
During her 19 years at Intertek, Elma has worked with all sectors helping global organizations manage risk and achieve more sustainable supply chains. Elma has grown Intertek’s responsible supply chain programs and helped bring to market new innovative sustainability solutions. She has also contributed thought leader content and presented on the topic of sustainability at many events. She's also contributed thought leader content and presented on the topic of sustainability at many events.
So firstly, is an introduction to our topic.
New environmental, social and governance (ESG) reporting requirements in the EU and the US are set to fundamentally change the nonfinancial reporting landscape. The E.U. Corporate Sustainability Reporting Directive or CSRD, requires ESG reporting on a level never seen before, and will capture a whole host of companies that previously were not subject to mandatory nonfinancial reporting requirements, including public and private non-EU companies that meet certain EU-presence thresholds. For US companies, the CSRD rules will result in mandatory reporting on a broader set of ESG topics than those required under current and proposed Securities and Exchange Commission (SEC) rules.
So Elma, developing the right ESG reporting is a serious challenge for many organizations. The amount of ESG metrics is vast and varies by industry, company size and complexity. In addition, there are many different measurement and reporting frameworks worldwide. Are there any advantages for companies complying with CSRD early?
Elma Christian Intertek 2:19
Yes, Rowena and hi everyone. Well, so with the European Sustainability Reporting Standards or as we call them ESRS shortly, the European Commission will provide concrete indicators and information to report on, so using these companies can better understand their performance through gathering the required ESG data for their reporting, which will allow them to identify developments and patterns, but also the “double materiality” principle on which the CSRD is built, pushes companies to get a stronger hold on their impact on society or impact materiality and the impact of ESG topics on enterprise value or financial materiality. So this can provide new insights in risks and opportunities, as well as strategic redirection and innovation.
So when companies get a grip on the non-financial indicators relating to corporate activities, they can expect new insights to arise. So for example, new opportunities for cost savings, including energy reduction innovations in the production process, but also in addition to this, early compliance with ESG reporting in the long term, really does offer scope for streamlining company own production and supply chain from a sustainability point of view. So in this way, companies can really enter into strategic partnership and identify future bottlenecks at an early stage. So this guarantees the continuity of the supply chain at the same time the directive enters into force.
Rowena Curtis Intertek 4:10
So could early compliance with the directive result in companies attracting more capital?
Elma Christian Intertek 4:17
Investors and financial institutions aim to minimize risk while maximizing return. That's the objective and to that end, most investors with a long-term horizon already use ESG information for that decision making. Now the CSRD was designed, you know, to improve the consistency, reliability and comparability of information on material ESG risks and opportunities. So to help make money flow towards sustainable activities now being able to comply to these high demands of the CSRD does increase transparency and trust in company and shows investors that as a company you are aware and in control of your risks. So therefore, the CSRD really can enhance investors engagements in companies that do comply, but could also exclude those noncompliant ones from their investments.
Now, not only are investors more likely to invest in companies complying with CSRD, but it can also lead to a more favorable reputation with the ESG data of companies being open for anyone who's interested. The reputation of companies is on the line, no doubt, so companies taking ESG more into account can gain a competitive advantage over those who really tend to put it on a lower priority.
Rowena Curtis Intertek 6:04
So in essence, the aim of this year CSRD is to drive companies to take ESG more seriously?
Elma Christian Intertek 6:12
Exactly. See. Yes.
So when they predecessor of the CSRD, the non-Financial Reporting Directive or shortly and NFRD was introduced, this legislation, (though the more limited than the CSRD) give companies in scope the push that many of them needed to look at ESG more seriously. So even though the starting point is compliance and well, we've been noticing with our customers and other companies, is that and she does get more embedded in the company and that it gives the people internally the leverage and the support that they need from higher up in their own organization. So as the information starts to be published externally and we know we'll also be subject to scrutiny by auditors, we see that companies really want to improve their performance, which is resulting in actual action. So in line with the proposed tightening up of climate ambitions, the EU will introduce more stringent legislation on ESG over the coming years. And so with that, the early anticipation of how this affects your own corporate activities and drawing up strategic plans to reduce any negative impact will certainly ensure that a company is more agile and future proof to face these challenges. So actively focusing on ESG, that's provide companies with the competitive advantage over those that you know have no reporting obligations yet.
Rowena Curtis Intertek 8:03
OK. So umm, could this result in more clarity on reporting obligations and have a positive impact on the costs?
Elma Christian Intertek 8:12
So the CSRD standardizes sustainability reporting, which in turn prevents companies you know from having to make a choice. And these voluntary reporting frameworks, now you know there are many just to name a few, we have GRI, SASB, TCFD, SDGs and that the list goes on and but also having you know to provide ad hoc ESG information to multiple parties. So you know, although administrative costs might increase according to EFRAG, the average EU company will save 10 thousands of euros a year if the need for additional information, you know, request is eliminated.
So with all data found in the same place, it will be clearer to external parties where it's stored, meaning that you know the number of requests for additional information will also reduce over the time and hence you know the benefit that companies will will see from this.
Rowena Curtis Intertek 9:24
And is the proposed SEC climate Disclosure Rule expected to be eligible for equivalence?
Elma Christian Intertek 9:32
Hmm. Yeah, we get that question a lot.
So although the EC has indicated that it will allow in scope non-EU companies, you know such as say US parent companies right to use sustainability standards equivalent to ESRS, it has not yet decided which standards will be deemed equivalent. Now, if the European Commission decides that another country's sustainability reporting standards are not equivalent, and it may allow companies to continue using those standards during an appropriate transition period, and therefore you know, providing that reasonable time for them to prepare to report in accordance with ESRS or an approved equivalent standard. Now, when did this appropriate transition period comes to an end? The companies would be required to report in accordance with the ESRS or an approved equivalent standard.
Now we know is ESRS disclosure requirements are extensive with roughly 80 requirements covering both quantitative and qualitative disclosures and they do go well beyond the requirement of the SEC’s in the proposed rule on the climate related disclosures. So as of now, it really is still not clear, you know whether the SEC’s proposed rule, when finalized, will be an eligible ESRS-equivalent standard.
Rowena Curtis Intertek 11:24
So, Elma, what are the reporting options for U.S. companies with EU based subsidiaries?
Elma Christian Intertek 11:32
So there are a couple of options, and the CSRD provides three different reporting options for non-EU parent companies you know with EU based subsidiaries and one is a global reporting route and also you reporting route both to ensure that all entities within the scope of the CSRD ultimately report the report on the required information. The global reporting route allows a US parent company to report in accordance with the CSRD for itself, but also for all of its subsidiaries.
However, for US parent companies that are within the scope of the CSRD for enterprise-level reporting starting in 2028 and have a large subsidiary listed on an EU regulated market, they will need to report at the consolidated US parent company level, while at the same time continuing to separately report sustainability information in the management report for those large subsidiaries listed on an EU regulated market.
And on the other hand, the EU reporting route provides two additional options.
So the first one will be available until 2029 and will allow the largest EU subsidiary to produce a consolidated report which will contain information for all EU subsidiaries within the scope of the CSRD. Now this option is only allowed if the EU subsidiaries are not held by an EU holding company, and then the second option allows each EU subsidiary within the scope of the CSRD to issue a separate sustainability report.
Rowena Curtis Intertek 13:52
Can you outline some initial steps that companies can take to start preparing for CSRD compliance?
Elma Christian Intertek 14:00
Yes, so the first companies should conduct a boundary assessment to see you know whether they fall under the scope of the CSRD or not. If they do fall under the scope, it is important to determine the timeline of reporting and to start preparing accordingly. So the two key elements of the CSRD are its double materiality lens.
As we know, and it requires reporting on material impacts and risks, you know relevant to investors and other stakeholders, and its requirement is to have limited assurance over all disclosed sustainability information. So if a topic is material, it needs to be disclosed, and if a topic is disclosed, it needs to be assured. So you know, with this being said, companies within the scope of the CSRD should prioritize conducting a double materiality assessment by considering both financial and impact materiality and also evaluating and strengthening their processes and controls over their sustainability information. You know, so they can be “assurance ready”.
Now one important point to remember is that under CSRD requirements, companies will also be required to obtain third party assurance in relation to their CSR disclosures.
Rowena Curtis Intertek 15:43
Right. So does this mean companies will need to be independently audited to ensure they comply with the reporting rules?
Elma Christian Intertek 15:52
So yes, reporting must be certified by an accredited independent auditor or certifier.
So and this is to ensure that companies ultimately comply with the reporting rules.
So and then the independent auditor or certifier must ensure that you know sustainability information complies with the certification standards that have been adopted by the EU. So the reporting of non-European companies must also be certified either by a European auditor or by one established by a third country.
Rowena Curtis Intertek 16:34
Thank you so much, Elma, for your expert clarification on this complex topic.
So just to wrap up, how can Intertek help you prepare for the CSR Directive?
As mentioned, companies will be required to obtain third party assurance in relation to their CSR disclosures and our team of experts at Intertek can help you with this.
To understand your currency CSR readiness, we can help you undertake a gap analysis to ensure you have a clear view of your organization's current readiness.
We can also provide auditing solutions, in some markets will also be able to act as the auditor of your CSR Directive reports as one single provider supporting you from early preparations all the way through to audit of submission.
We can also train your teams to ensure everyone understands what is required to repair for your submission.
And finally, we've partnered with ESG Playbook, a leading SaaS reporting solution provider, bringing in one tool all required data collection, aggregation and tracking reporting for ESG.
For more information on any of these services, visit intertek.com/assurance/eu-csrd/
So this concludes today's podcast. Thank you again, Elma, and thanks for listening.
And please watch out for further CSRD episodes to help you with your journey to compliance. Have a great day.