The EU’s Corporate Sustainability Reporting Directive (CSRD) is transforming ESG reporting. Starting from 2024, almost 50,000 companies are subject to mandatory sustainability reporting, including non-EU companies which have subsidiaries operating within the EU or are listed on EU regulated markets.
As part of the CSRD, the first set of draft European Sustainability Reporting Standards (ESRSs) were released. The ESRSs are much more rigorous in scope and depth of disclosure requirements than the current Non-Financial Reporting Directive (NFRD). Affected companies must now report in accordance with ESRSs and disclose over hundreds of metrics and targets.
With the first CSRD reports due in 2025 — for companies with year-ending 31 December 2024 — the clock is ticking, and companies should be prepared to provide accurate information from different parts of the organization to support the new assurance requirements. In this paper we discuss potential impacts of the CSRD on your company and concrete steps to prepare for CSRD readiness.
The evolution of ESG reporting
Over the past two decades, ESG reporting has increased in transparency and importance, with greater integration of ESG-related information into mainstream financial reporting.
According to KPMG’s 2022 Global CEO Outlook, 69 percent of CEOs see significant stakeholder demand for increased transparency and reporting on ESG matters (up from 58 percent in 2021). Next to this, 72 percent feel that stakeholder scrutiny regarding ESG issues — such as climate change and gender equality — will continue to accelerate. Additionally, more than one-third believe their organizations struggle to narrate a compelling ESG story.
The number of companies that publish a sustainability report has been growing steadily over the past decade. KPMG’s 2022 Global Survey of Sustainability Reporting shows that 79 percent of the N100 group (the leading 100 companies in every country surveyed) report on sustainability. Among the world’s top 250 companies (G250), this figure is 96 percent.
For smaller companies, however, these figures are likely to be considerably lower. With the CSRD taking ESG reporting to a new level, every organization that falls into the scope of the CSRD must start putting together a plan to prepare for the first reporting year under the new standards.
"Companies need to continue to make urgent progress with ESG reporting in a way that supports their short-term and long-term business objectives. A robust sustainability reporting ecosystem can help businesses not only measure progress on executing their ESG strategy, but also support businesses in driving value while mobilizing capital markets to help support innovative and much-needed solutions to the many societal issues we face." John McCalla-Leacy
Head of Global ESG KPMG International and Head of ESG KPMG in the UK
Far more ESG performance data to report — across a wider range of topics
From 2024 onwards, companies will have to report on over hundreds of metrics and targets. In addition to tracking performance on climate change, the circular economy and pollution, organizations should be transparent about how they tackle biodiversity loss, and reductions in resource and water use - where this is material, or part of mandatory items required by other EU legislation. Social challenges like the treatment of workers, within their own organization and across the value chain, are also part of the new CSRD. Also, disclosures related to business conduct policies including corruption and bribery prevention, supplier relationship management, lobbying activities and payment practices fall under the G standard.
This is an extension to both the range of indicators that companies need to report on, and the depth of information required, with a need for far greater transparency over the entire value chain.
Effective ESG reporting will not happen overnight
One of the core objectives of the CSRD is to ensure that ESG and financial reporting become of equal importance.
Although many companies have already been reporting on their sustainability performance for some time, the CSRD will require a new level of disclosure, with ESG reporting now a board-level priority. Companies need to disclose their policies and targets across a wide range of areas, including emissions reduction targets and resource conservation plans. This transparency may drive them to revisit or develop policies and targets, and integrate ESG into corporate strategy and operations. To achieve this, they must set up processes to gather ESG data, evaluate ESG performance, and report according to the ESRSs in an appropriate, auditable way.
A substantial change management exercise
As companies’ ESG performance comes under growing scrutiny, ESG reporting is going mainstream. Keeping track of and adapting to evolving sustainability regulations has become a critical strategic priority for boards. As some companies only have a year before the first reporting period starts, it is vital to be prepared by considering the following key items:
- Establish a board-led governance structure
- Set up a due diligence process across complete value chains
- Integrate ESG into corporate risk management systems
- Prepare for assurance
- Consider short, medium, and long-term time horizons
Even those companies that are fairly advanced in their sustainability reporting are likely to require significant improvements to the way they gather, process and report data across environmental, social and governance topics across their entire upstream and downstream value chain.