Sustainability assurance: Are you ready for CSRD?

21 October 2024

2025 is set to usher in a new era in sustainability reporting.

The arrival of the Corporate Sustainability Reporting Directive (CSRD) will see the issuing of the first sustainability statements prepared in accordance with the CSRD and will require around 50,000 companies operating in the European Union to publicly disclose two things: how their environmental, social, and governance (ESG) activities impact their business, and how their operations impact people and the planet.

One of the directive’s main objectives is to drive more consistent data, elevating sustainability reporting to the same level as financial reporting.

This, of course, is a major departure for many organisations. Until now, there has been no strict regulation around the requirements for sustainability reporting, and some may have chosen voluntary assurance in the meantime. This meant organisations could choose the sustainability information they report, such as climate-related KPIs like Scope 1, Scope 2, and Scope 3 carbon emissions, and secure voluntary assurance via an independent service provider. The assurance process serves mostly to provide a level of credibility in the market in comparison to competitors.

However, the introduction of CSRD compels organisations to take that a step further, as they now face the need to report on possibly hundreds of disclosures mandated by the new directive.

It’s worth noting that UK organisations could be subject to CSRD if they have EU subsidiaries that meet the criteria. At the same time, the UK is readying itself for the proposed International Sustainability Standards Board’s (ISSB) inaugural standards, IFRS S1 and IFRS S2 – both being sustainability-related disclosures.

Limited vs reasonable assurance

For investors, assurance will be key to achieving transparency on corporate ESG performance.

“Companies have really ramped up their sustainability reporting in recent years. But there’s been no ability to ensure that the information reported is accurate and that there is no greenwashing” explains Michelle Olckers, Partner – Sustainability Assurance at Forvis Mazars.

“Companies can currently decide on what information they report, calculate the information on any basis they want to, and come up with how they gather the information. It might not be clear that they’ve accurately calculated it, so assurance will put that accuracy, consistency, reliability, and transparency in place more firmly for reported information.”

CSRD requires mandatory ‘limited assurance,’ which will transition to ‘reasonable assurance’ over a number of years. This accommodates the time, resources and effort needed to adapt to the more demanding compliance process.

“Financial reporting has developed over hundreds of years to where it is now. Sustainability reporting is relatively new in comparison, and the regulations now coming in mean that companies are starting to face the challenge of how they demonstrate compliant reporting, which will take time to develop,” says Olckers.

Double materiality assessment

The CSRD requires companies to report on two dimensions of sustainability: impact materiality (the inside-out perspective) and financial materiality (the outside-in perspective). A sustainability matter is considered ‘material’ if it is significant in terms of its impact on people or the planet, financial risk, opportunity implications, or both.

This is a new consideration for most organisations, which have historically only considered the risks posed to them by sustainability matters.

To determine what is material to the organisation, a double materiality assessment (DMA) is the first step towards CSRD aligned reporting.

“Stakeholders, and the assessment of which stakeholders are engaged with through the process of their DMA, is really important,” says Olckers. “The DMA process is subject to assurance and is a more robust process than the previous materiality assessments conducted by organisations. The DMA looks at reporting from an impact and a financial materiality perspective, whereas previous assessments wouldn’t have gone so deep into the impact on stakeholders.. ”

Challenges for investors

Gathering, organising, and analysing the large volume of sustainability data required under the CSRD may present a challenge for organisations. Many currently have gaps in their sustainability data, as it has not historically been collected and recorded as systematically as financial data. The CSRD also allows for estimates, and there is a significant volume of non-financial narrative disclosures.

Due to data quality and collection challenges, companies could receive qualifications in the initial rounds of CSRD-mandated assurance reports. Investors need to understand that this could be a transitional issue and not view it as a failure, as sustainability reporting is still maturing.

Elsewhere, the CSRD requirements can involve a degree of interpretation, especially for sensitive or subjective disclosures (for example, the number of grievances that occur within an organisation). Organisations may need to seek legal advice to ensure they are interpreting and reporting the information correctly, to avoid potential underreporting or misrepresentation.

“One of the challenges we’re seeing is that a lot of organisations have teams that don’t understand what evidence is required for assurance, particularly as a lot of this information is qualitative, and they’re more familiar and comfortable with quantitative information,” says Olckers. “So, ensuring that teams are well trained and versed in understanding what is required, and how information can be assured, is essential.”

Organisations should aim to apply the same processes they use for the collection of data for financial reporting to their ESG information. However, simply implementing a reporting system is not enough. There must be a focus on improving data collection, management, and analysis capabilities across the organisation.

“Establishing robust internal controls over sustainability data and information is crucial, but will require significant effort,” says Olckers. “Companies need to invest in upskilling their teams, including internal audit, finance, procurement, HR, or any other relevant department from across the organisation. They must all understand the role they play in supporting the collection of sustainability information.”

Transitioning from a financial-focused mindset to one that encompasses broader ESG considerations represents a significant cultural challenge for many organisations. It is important to ensure that the board and senior management are actively involved in understanding the implications of the CSRD and supporting the necessary cultural shift.

Benefits to organisations

For all the additional effort the CSRD requires, assurance offers tangible benefits to organisations.

Increased investor trust: Assurance can provide investors with confidence that the sustainability information reported by companies is accurate, consistent, and reliable. This helps address concerns about potential greenwashing.

Comparability: Assurance ensures that the reported sustainability information is calculated and presented in a consistent manner, allowing investors to better compare performance across companies.

Continuous improvement: The recommendations and insights from the assurance process can help companies identify areas for improvement, and continuously enhance their sustainability data collection and reporting capabilities.

Transparency: Assurance brings more transparency to the sustainability data, as it validates the processes and controls that companies have in place to gather and report this data.

Start planning for regulations

As mandatory assurance requirements are introduced, organisations that proactively seek assurance, and/or pre-assurance, can better position themselves to comply with upcoming regulations.

“Every organisation has to do an assessment of any potential upcoming regulation, consider whether there are any implications for them, identify where and what they need to report, and make decisions around how they are going to prepare,” says Olckers.

Don’t wait for the regulations to be effective before taking action. Begin assessing whether your organisation falls within the scope of the CSRD, and start planning now for any new reporting requirements.