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Why CSRD is a game changer for sustainability reporting

Photographic portrait of Lars Fermann
Lars Fermann

Head of Climate Change and Sustainability Services, ESG Assurance Partner, EY Denmark

04 Jun 2024
Related topics
Consulting
Financial services
Climate change and sustainability services
Sustainability

Explore how the CSRD revolutionizes EU sustainability reporting, setting new standards for transparency and driving corporate change.

In brief:

  • The EU Green Deal's new Corporate Sustainability Reporting Directive (CSRD) has been introduced for enhanced ESG reporting.
  • High-quality sustainability reporting can lead to better funding opportunities and potentially lower capital costs.
  • Even though Danish listed companies are ahead in sustainability reporting, the new CSRD standards provide opportunity for further improvement.

The regulative landscape

The EU Green Deal, alongside nations’ aspirations and companies’ actions, has accelerated the shift toward net-zero transformation in Europe. Within the framework of the EU Green Deal, the Corporate Reporting Directive (CSRD) emerges as a pivotal EU legislation aimed at improving the quality and consistency of sustainable development reporting for companies operating in the EU. The CSRD is set to replace the Non-Financial Reporting Directive (NFRD), and it has introduced new standards and requirements for companies to disclose information on their environmental, social and governance (ESG) impacts and risks.

Historically, the NFRD mandated large companies to disclose information on their social and environmental impacts and risks. The CSRD introduces significant changes to these reporting practices. Some of the main differences between the NFRD and the CSRD are:

  • The CSRD applies to all large EU enterprises, all listed entities (except for smaller listed entities) and some non-EU entities with principal activities in the EU.
  • The CSRD requires more detailed and deliberate disclosures than the NFRD. The NFRD allows companies to choose from different reporting systems, while the CSRD mandates the adoption of European sustainability reporting standards, which are being developed by the European Financial Reporting Advisory Group (EFRAG).
  • The CSRD also expands on topics such as climate change mitigation and adaptation, biodiversity, circular economy, water and marine resources, pollution prevention and control, and land and forest management.
  • In addition, the CSRD mandates that an external auditor or a competent certifier provide assurance of reported sustainability issues. This enhancement will increase trust and comparability among investors and other stakeholders.

Figure 1: CSRD overview

The regulation will be introduced in three parts, as follows:

  • Companies already reporting under the NFRD will transition in the financial year beginning in 2024. Large companies that exceed the large company requirement set by the EU and that do not currently report under the NFRD will comply starting in the fiscal year 2025. Listed small- and medium-sized enterprises, as well as simple credit institutions and captive insurance companies, will begin reporting for the financial year beginning in 2026.

Figure 2: CSRD timeline

The impact on companies financing opportunities and transactions

A structured and business-specific process for sustainability reporting can help companies comply with regulatory requirements and improve their reputation by demonstrating their commitment to sustainable business operations. Increased sustainability information and data-gathering processes also provide opportunities for organizations to plan and allocate the resources more efficiently.

High-quality sustainability reporting can help companies access funding from investors who prioritize ESG performance, increasingly becoming a market standard. The demand for broader and more specific sustainability information from sustainability and stakeholders is leading organizations to intensify their efforts in sustainability disclosures, impacting corporate valuations. Thus, robust sustainability reporting and business operations can help companies increase companies’ market values and reduce the cost of capital for debt financing. The questions that companies need to address regarding sustainability include:

  • How do we fund our transitions and transactions?
  • How can we optimize the cost of capital?
  • How can we manage and address the requirements of our investor community?

In summary, companies that focus on sustainability reporting can benefit from better access to funding, address investors’ sustainability requirements and improve their reputation by demonstrating their commitment to sustainable business practices. With enhanced and more accurate sustainable data, companies are also able to incorporate ESG factors into decision-making process. The four sustainability dimensions that CFOs need to address are presented in Figure 3.

How EY can Help

Figure 3: CFO's four dimensions of sustainability
 

The impact on Danish listed companies

Denmark has a strong tradition of corporate sustainability reporting and has been ranked among the top countries in terms of ESG disclosure quality and quantity.

 

Despite the high level of quality in sustainability reporting among listed Danish companies, there is still room for improvement in terms of consistency, comparability and relevance. The CSRD offers Danish listed companies a chance to not only improve their reporting practices and align with EU-wide standards and expectations but also to adapt their operations to meet regulatory requirements and seize the opportunity to gain a competitive edge in the market.

 

In 2024, companies already reporting under the NFRD will report under CSRD requirements, and in 2025, large companies exceeding the EU’s large company criteria will need to comply with CSRD reporting. As presented in Figure 1, this includes companies that meet at least two of the following criteria:

  • Over €20m in total assets
  • More than €40m net turnover
  • More than 250 employees

This will impact smaller and more growth-oriented companies, such as those listed in First North. It is crucial for companies to start to build their CSRD readiness and embed the data and information requirements in their decision-making process for better visibility in their business operations.

 

How EY teams can help

As a leading transformation consulting organization in Denmark, has extensive experience and knowledge in helping EY clients with their sustainability reporting needs.

 

We can help you prepare for the CSRD-led transformation by:

  • Conducting a gap analysis of your current reporting practices against CSRD requirements
  • Developing a roadmap and action plan for CSRD implementation
  • Providing guidance and support on selecting and applying the appropriate reporting framework and standards
  • Assisting with data collection, analysis and reporting
  • Facilitating the assurance process and help ensuring CSRD compliance
  • Communicating your sustainability performance and value creation story to your stakeholders

We can also help you leverage the opportunities that the CSRD offers by:

  • Helping you identify and prioritize your material sustainability topics and stakeholders
  • Supporting you in setting and monitoring your sustainability goals and targets
  • Advising on integrating sustainability into your strategy, governance and risk management
  • Supporting you to measure and improve your sustainability impact and outcomes
  • Enhancing your sustainability reputation and competitiveness in the EU market
  • Embedding CSRD and sustainability in your company’s operating model and daily operations

Figure 4: Benefit from leading practice

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Summary

The EU's Corporate Sustainability Reporting Directive (CSRD) aims to improve reporting on companies’ environmental, social and governance impacts. It will apply to all large and listed EU enterprises, requiring more detailed disclosures than its predecessor, the NFRD. This regulation can boost companies' reputation and accessibility to funds by quantifying their commitment to sustainability. Considerable opportunities lie in improved resource planning and value creation. The new directive also impacts Danish listed companies and could lead to further improvements in their already high-quality sustainability reporting. Proper readiness for the directive is essential, as it affects operational visibility as well.

About this article

Photographic portrait of Lars Fermann
Lars Fermann
Head of Climate Change and Sustainability Services, ESG Assurance Partner, EY Denmark
State authorised public accountant, focusing on ESG assurance and the importance of having consistent and accurate data available in decision-making.
Related topics
Consulting
Financial services
Climate change and sustainability services
Sustainability

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.