Setting the standard for ESG policy

The Directive, which was approved in early November, will apply from 1 January 2024 in a rolling programme of adoption to 2028. Affected in the first two years will be around 50,000 large companies (250+ employees and/or €40m turnover and/or €20m total assets) operating in the EU – listed large to go first, followed by all other large companies. Those businesses will need to report auditable data on the impact of their activities on people, the planet, and their exposure to sustainability risks whether the company is listed on stock markets or not. Non-EU companies with substantial activity in the EU will also have to report individually (in line with the regular EU criteria), or if their EU activities in total generate EUR 150 million or more will need to report consolidated (by 2028). Smaller listed companies will follow, in FY2026.

How does it work?
The directive will be underpinned by European Sustainability Reporting Standards (ESRS). These standards will specify how companies report on sustainability matters, and how these affect the business’s development, performance and position. The disclosure requirements ensure greater transparency concerning the impact of business on human rights and the environment, amongst others, and leads the way on international standards for this class of reporting requiring both assurance and improved digital accessibility of information.

The ESG data will be published within in a dedicated section of company management reports, and this will be scrutinised by an accredited independent auditor or certifier. The reporting by non-European companies must also be subject to assurance. From April to August 2022, the European Financial Reporting Advisory Group (EFRAG) consulted with stakeholders and provided technical advice to the European Commission on the draft ESRS. On 22 November, 12 standards are advised by the Sustainability Reporting Board to the European Commission, covering: general principles; general, strategy, governance and materiality assessment disclosure requirements; climate change; pollution; water and marine resources; biodiversity and ecosystems; resource use and circular economy; own workforce; workers in the value chain; affected communities; consumers and end-users; and business conduct.

Key impacts
From 2024 onwards, sustainability reporting for many companies in the EU will logically fall within the domain of the CFO. The reporting will cover 50 mandatory data points specified within the standards on an all-or-nothing basis, meaning that failure to report on the required items could lead to a qualified audit report, or worse – reputational damage in the eyes of consumers and investors. It also requires material commentary on the ESG impact the company is leaving in its wake, in the short and medium term, plus a full analysis of how the company’s activities affect ESG matters along its value chain.

Complying with this reporting requirement will take some time to get right, and the sooner businesses start to adapt and test their capability the better. The scope of the ESRS goes way beyond the boundaries of the business itself (unlike financial reporting), to track its value chain and gauge its wider impact on society and the planet. Having the right systems and processes in place to generate the right quality of data will be a seismic change for most companies concerned. Even those with voluntary reporting experience will find this to be a stretch.

How Deloitte can help
Deloitte is directly engaged with the activities of EFRAG and other standards setters. We can help all affected companies understand where they stand relative to the CSRD requirements, and make the necessary changes that will effectively be a transformation for most if not all functions of the company. These standards are in their infancy, but they’re just around the corner and represent a revolution in company reporting within the EU. It is now 56 years since the idea of a worldwide standardised system of financial reporting was declared. The trajectory for standardised ESG reporting will be far faster, and starts in 13 months for the largest companies. That means any business serious about reporting on all 50 mandatory data points and other requirements with accuracy and honesty, will need to start shoring up their information management processes and procedures immediately. A dry run in 2023 is a must, which leaves little time to prepare.

Deloitte’s experience in financial reporting transformation, our digital capabilities and our work in the field of sustainability equip us perfectly to help all businesses and their leadership teams get CSRD reporting right first time. We can advise on the systems of analysis and control and underlying technology needed to gather data as disparate as environmental impact, worker health and safety issues, or the use of child labour within the value chain.

For more information on the implications of this new legislation, or to speak to a member of our sustainability reporting team, contact Helena Barton, Marie Voldby, or Mads Stærdahl Rosenfeldt