Conor Holland, ESG Director at KPMG Ireland, explains how the EU’s Business Sustainability Reporting Directive will lead to fundamental change in corporate reporting.
Without doubt, the European Union Corporate Sustainability Reporting Directive (CSRD) represents the biggest single transformation in corporate reporting in the last 25 years. In a change akin to the introduction of a whole new set of accounting standards, the CSRD proposes profound changes to corporate reporting requirements, and will be fundamental in supporting the Commission’s stated objective of directing capital flows towards sustainable activities across the EU.
Not only does the directive introduce new reporting requirements over and above those already contained in the Non-Financial Reporting Directive (NFRD). but it also brings a much broader range of companies within its scope. The NFRD applied to listed companies within the EU while the CSRD will also apply to large companies with more than 250 employees, or assets of more than €20m or annual turnover of over €40m
Mandatory Business Sustainability Reporting
At present, it is estimated that c.11,000 companies across Europe are covered by the NFRD, and that this will rise almost fivefold to around 50,000 under CSRD. And the number of Irish-based companies covered is likely to grow significantly. Ireland is home to a large number of subsidiaries of overseas multinationals, mainly from the US and UK. Heretofore, these Irish-based entities haven’t had mandatory sustainability reporting requirements, and this will change under the CSRD.
Another cohort of enterprises which will find themselves covered by CSRD are the large number of private companies in the indigenous manufacturing and retail sectors. These will include dairy co-ops, grocers, high street retailers, and manufacturers across a range of sectors. Moreover, these entities are increasingly being asked for more sustainability reporting as a result of their position in supply chains and pressure from their large suppliers to report in a way that satisfies their own ESG objectives. According to KPMG research, the vast majority of firms will not be ready for the new directive, and it is clear that many entities are underestimating the scale of change coming in the CSRD. The volume of information required by the new directive is broad ranging and, in most instances, will cover areas which companies have never reported on before, let alone measured.
In fact, entities may have up to 30 new standards to report on, each of which has underlying conceptual guidelines, quantitative metrics, and qualitative disclosure reporting requirements — all of which will be subject to mandatory assurance. In essence, non-financial information will need to be treated with the same rigour as financial information. That will represent quite a challenge for all entities as they build the requisite governance architecture, reporting processes and controls frameworks to support the veracity of what is being reported and assured. The timing of the CSRD introduction will be finalised in the coming weeks, with a likely delay to 2024 and 2025, depending on an entity’s size and public profile. As such, the time for companies to prepare is limited, and it’s therefore critical that management start to engage internally and externally to understand what steps need to be taken in the short term to start getting ready. This is a fundamental change in the nature of corporate reporting – the time to act is now.
Source: KPMG Ireland