ESG

EU CSRD Update 2024: What Do CFOs Need To Know?

With EU CSRD reporting rules now in effect, CFOs and accounting teams must understand how to meet new ESG reporting requirements.

Environmental, social, and governance (ESG) refers to the need for companies to consider and implement more ethical business practices as a means to address climate change and other social issues. Research reveals that over 75% of customers are likely to choose companies that promote ESG, and that 80% of investors feel ESG risks are important to their decision-making. EU research from 2023 emphasised the public desire for climate change action, with up to 81% of EU citizens favouring a transition away from fossil fuels and towards renewable energy. 

Governments around the world are acting on that public interest by implementing corporate ESG regulations. One of the most significant global examples of that trend is the EU’s Corporate Sustainability Reporting Directive (CSRD), a landmark regulation which imposes a range of non-financial reporting obligations on companies across the industrial landscape. 

The first CSRD reporting period began on 1 January 2024. In this article we’re going to take a closer look at the impact of the directive in 2024 in and beyond, and explore how CFOs can help their accounting teams meet their new ESG compliance obligations. 

What is the EU CSRD?

The Corporate Sustainability Reporting Directive modernises and strengthens ESG reporting rules for companies in the EU. The directive requires EU companies to report annually on material ESG metrics, which might include:

• Environmental impacts
• Diversity, equity, and inclusion
• Community initiatives and charity
• Responsible investment
• Declarations of conflicts of interest
• Senior employee remuneration
• Health and safety

Origin and Evolution

Published on 16 December 2022, and coming into effect in 2023, the CSRD replaced the EU’s Non-Financial Reporting Directive (NFRD). Under NFRD rules, the EU found that companies often omitted certain ESG information from annual reports, making progress and performance comparisons between organisations difficult to determine. By contrast, the CSRD represents a common framework for all EU companies, and standardises the ESG metrics that companies are required to report on. The CSRD also differs from previous ESG legislation in that it brings non-EU companies under its scope. 

CSRD: Main Objectives

The EU CSRD reflects the global momentum for mandatory ESG reporting, which is no longer being framed as an ‘optional extra’ but a must-have non-financial compliance consideration. 

Since the CSRD expanded in 2024 to apply to all EU companies, CFOs must think harder about how they integrate ESG controls into existing compliance infrastructure. With that in mind, the objectives of the CSRD might broadly be characterised as:

• Enhancing corporate transparency by opening up corporate culture and practices to public scrutiny.
• Introducing a standardised system by which different companies’ ESG performance can be compared and evaluated. 
• Promote sustainable investment and financial practices across the EU. 

Who Must Comply with the EU CSRD?

CSRD reporting rules are now in effect but, as it rolls out further over the coming years, it will apply to all companies in the EU, and to EU subsidiaries of non-EU parent companies, that meet any of the following criteria:

• Undertakings with EU-listed securities
• Large undertakings that meet two of the following criteria over the last two financial years:
  • Total assets exceed €25 million
  • Net turnover exceeds €250 million
  • Over 250 employees

The CSRD will also apply to non-EU companies that meet the following criteria:

• Undertakings with net turnover of over €150 million in the EU over the last two financial years, that are either:
  • A large undertaking (see above) EU subsidiary
  • A significant EU subsidiary or branch with a net turnover of over €40 million

The CSRD will be expanded according to the following schedule: 

CSRD Requirements and their Impact on Businesses 

The EU CSRD requires companies to collect and analyse ESG data relating to their operations, assess its materiality, and then publish that information in annual reports. Under the CSRD, companies will be required to apply the same rigour to their sustainability reporting that they apply to financial reporting – including developing effective internal controls and submitting data for audits. 

With that in mind, the core requirements of the CSRD include the need to report:

• The environmental impact of business operations, including carbon emissions, production of waste materials, and use of natural resources. 
• The treatment of employees, including health and safety standards and working conditions.
• Standards of diversity and inclusion amongst the workforce relating to protected characteristics such as sex, race, and age.
• Social responsibility initiatives including charity programmes, training programmes, volunteer schemes, and community outreach. 
• Corporate governance practices including responsible investment, declarations of conflicts of interest, and remuneration of C-suite employees. 

Over the long term, the CSRD is intended to prompt a culture-change in businesses across the EU and the world. In addition to integrating ESG into the day-to-day detail of products and services, companies may find that their CSRD reports distinguish them from competitors, serving to attract sustainability-conscious investors and customers, and ultimately enhance financial performance. Beyond its financial impact, the CSRD (and other sustainability reporting initiatives) will help businesses adapt to geopolitical challenges by addressing the effects of climate change, strengthening supply chains, and contributing to the financial health of their countries and communities. 

CSRD reports must be submitted in keeping with the European Sustainability Reporting Standards (ESRS). Third party assurance is required for CSRD compliance, which means accounting teams must be prepared to work with auditors to validate the information that they submit. 

CSRD vs CSR: What are the Differences?

The CSRD is similar in its intent and implementation to previous EU Corporate Social Responsibility (CSR) policies and initiatives, including:

• The Eco-management and Audit Scheme (EMAS) 
• EU environmental requirements for products
• EU policy on sustainable trade and development 

Like the CSRD, CSR policies promote sustainable corporate activities, including ESG factors such as climate-friendly business practices and fair labour practices. Critically, the EU’s previous CSR policies were voluntary, and did not impose reporting requirements. The CSRD is such a significant change because it expands the scope of the CSR policy, introduces a robust legislative framework (built on the NFRD), and imposes mandatory compliance rules on the companies to which it applies for the first time. 

Defining Principles of the CSRD

Companies should bear the following principles in mind when implementing CSRD compliance solutions: 

Double Materiality 

The CSRD requires companies to conduct a materiality assessment in order to establish which ESG factors should be included in their reports, and their relevant key performance indicators (KPI).

Importantly, the assessment must consider double materiality. In this context, double materiality means that a company must assess both the internal impact of ESG factors, and the external impact of those factors on stakeholders, including customers, communities, and investors. For example, a manufacturing company might consider how its carbon emissions  impact the wider global climate (external) including local air quality, and at the same time, how that metric may affect its investors’ financial interests (internal) via reputational damage.

Convergence of Standards

The CSRD will create a convergence of EU sustainability reporting standards by bringing companies into alignment with a number of existing EU initiatives, including the European Green Deal, the Sustainable Finance Disclosure Regulation (SFDR), and the EU taxonomy for sustainable activities. That alignment serves the EU Parliament’s goal of harmonising regulatory standards across the bloc, while creating a standardised sustainability metric for companies, and their customers, across different jurisdictions. 

Information Auditing

Sustainability data is critical to the CSRD and companies will be required to submit the relevant information to third-party audits. Accordingly, companies will have to track and record the relevant ESG data throughout reporting periods, apply appropriate internal controls during the reporting process, and fulfil auditor requests for data during the audit. Accounting teams must understand which ESG metrics are relevant to their audits, how to track and record them, and be able to facilitate access to that data for auditors. 

Digitisation

Given the importance of data to CSRD compliance, best practice dictates that companies implement suitable accounting software solutions to automate their ESG data management, reporting, and audit workflows. Automated software solutions will not only bring speed and efficiency to the reporting process, but reduce human error, centralise storage and access, facilitate better communication and collaboration and enhance important business decision-making. 

Related Content: Making ESG Work for Finance Teams: Leveraging Technology for Compliance Challenges

CSRD KPIs and Monitoring 

Following a materiality assessment, companies should set out their CSRD KPIs, which will dictate which ESG data they track and analyse. The KPIs should align with the company’s responsibilities under the CSRD, and with their business objectives. Examples of CSRD KPIs include: 

• Reduction in carbon footprint
• Diversity, equity, and inclusion (DEI) outcomes within the workplace
• DEI outcomes in the company board 
• Employee health and safety outcomes
• Impact of charitable initiatives
• Financial outcomes 

Companies should also consider how they will measure their CSRD KPIs. A carbon footprint KPI, for example, will require an initial examination of emission levels, research into appropriate reduction targets, and then effective data collection and monitoring. Companies should review their data collection and analysis capabilities with their KPIs in mind, and update their software solutions where necessary, in order to ensure accurate and timely reporting. 

How Will the EU CSRD Benefit Businesses?

While it will inevitably create administrative challenges, effective CSRD compliance will also benefit companies in a number of meaningful ways, including: 

• Insight: The CSRD’s double materiality requirements will help companies better understand their own ESG performance. That insight may help companies identify new vulnerabilities, risks, and opportunities – and ultimately implement more efficient workflows. 
• Investment: The CSRD will enhance ESG transparency, and help companies demonstrate long-term prospects (including risks) to investors. In the wake of global corporate scandals, investors are increasingly pushing for the disclosure of ESG information while recent research suggests that over 50% of investors plan to increase their ESG investments in 2024. 
• Company culture: By promoting the disclosure of ESG data, companies can encourage a wider culture of transparency, facilitating better communication, data flow, and efficiency at all levels of seniority. 
• Public image: Companies that play their part in creating a more sustainable, environmentally-friendly future will find it easier to cultivate a more positive public image. Given the scope for performance comparison, CSRD reports may serve to distinguish companies in a competitive and connected business landscape, populated by informed customers. 
• Talent retention: In addition to PR effects, positive ESG performance can help companies attract and retain the best employees. In 2023, research revealed that around 71% of jobseekers considered environmentally sustainable companies more attractive, while around 50% suggested they would accept a lower wage to work at environmentally and socially responsible companies.

Consequences for Noncompliance

The governments of EU member states will set the penalties for CSRD noncompliance, although the EU has stated that punishments for violations must be “effective, proportionate and dissuasive”. 

With this in mind, national governments may follow their existing NFRD legislation as a guide for imposing CSRD penalties. In Italy, for example, NFRD breaches can lead to fines of between €20,000 and €150,000, while in Germany, NFRD fines can reach as high as €10 million. Penalties may go beyond the imposition of a fine: France, for example, CSRD breaches can result in fines of up to €75,000 and a prison sentence of up to 5 years. 

Implementing the CSRD in Your Business

Accountants will take the lead in completing’ CSRD reports – and do so in addition to existing financial reporting obligations. The following factors are important to a company’s CSRD implementation:

Strategic Planning 

Companies should conduct strategic planning for the implementation of their CSRD compliance solution. This means that accountants must become familiar with ESG data analysis methodologies, and workflows, and then develop new internal controls to ensure efficient reporting. It’s worth remembering that CSRD ESG concerns will cross-over frequently with existing reporting metrics, and lead to the closer integration of financial and non-financial reporting teams, and of external auditing partners.

Integration with Existing Business Practices

The complexity of CSRD compliance may create challenges for CFOs and accounting teams seeking to integrate new reporting processes with existing business practices. Under the new regime, employees will need to manage a range of new data, documents, and resource requirements in order to meet deadlines. 

With that in mind, In order to optimise the reporting process, and reduce administrative friction, accountants should prepare for CSRD reporting ahead of time, by taking the following steps: 

• Define the company’s ESG profile by fact-finding – including questioning employees, investors, partners and other stakeholders.
• Set roles and responsibilities within the accounting team and, if necessary, establish new management structures to handle new ESG reporting processes. 
• Conduct a double materiality assessment to identify important ESG factors. Reconcile materiality with corporate strategy to ensure synergy with financial and non-financial reporting teams. 
• Define CSRD KPIs based on the materiality assessment, and then collect and analyse relevant data based on those KPIs

The final step in the CSRD compliance process is the creation and submission of the report itself. The report should contain not only facts and figures derived from ESG data, but narratives that explain the results and frame company progress towards goals. 

Implementation Challenges

As part of their strategic planning effort, companies should consider the possible challenges to the implementation of their CSRD compliance solutions. These include:

• Poor data: The quality of the ESG data that companies collect and analyse will be critical to reporting outcomes. Poor data will affect the ability of accounting teams to produce effective, impactful CSRD reports. 
• Inefficiency: Some companies may struggle with the complexity of the relatively-new CSRD rules, or fail to properly assess their impact on wider business operations, and as a result, face reporting delays and inefficiencies.
• Skill shortages: CSRD compliance may require new skills and technical expertise, which will require companies to recruit employees or implement CSRD training courses. 
• Third parties: The CSRD’s reporting rules may require companies to look beyond their business’ internal risk exposure and consider potential third-party risks, including risks up and down their supply chain. 
• Legal risk: The novelty of the CSRD means that firms may be exposed to unexpected legal risk, or have to navigate unfamiliar legal territory when conducting business. 
• Costs and resource limitations: CSRD compliance will likely incur upfront costs as companies adjust to new duties and responsibilities and manage new resource requirements. 

Empowering Accountants: How to Become CSRD Compliant

The CSRD is a landmark regulation which expands and codifies ESG in a meaningful way for firms across Europe and the world and, crucially, aligns sustainability reporting with financial reporting. It’s worth remembering that the CSRD is the first in what will certainly be a wave of new ESG regulations. This wave will involve not only mandatory ESG disclosures but ESG targets, and oblige companies to improve their sustainability performance as the EU works towards its goal of carbon neutrality by 2050.

With that challenge in mind, CFOs should seek to empower their accounting team by leveraging technology and leaning-in to process automation. The FloQast platform offers a suite of powerful tools to achieve those goals: FloQast Ops, for example, helps accountants collaborate across swathes of reporting data and coordinate progress across easy-to-use high-level dashboards, while FloQast Remind lets accounting teams automate critical ESG data collection tasks – involving colleagues, vendors, and even external auditors. For deadlines and other regulatory details, FloQast Compliance Management enables companies to build powerful compliance controls into day-to-day tasks, reducing friction and the need to re-do, and enhancing audit readiness. 

The EU CSRD roll-out highlights the increasing significance of ESG, its importance in a global business landscape, and the role that corporate entities must play in the fight to make the world a better place. 

If you’re preparing to implement your EU CSRD process or are concerned about any aspect of ESG reporting, contact FloQast today. 

Hugh O'Neill

Hugh O'Neill is a Chartered Accountant and Senior Sales Engineer based in the UK. Prior to joining FloQast, Hugh served in several senior accounting and financial operations positions.