Unsustainable Pain: Navigating the Challenges of CSRD Reporting

The buzzword of the moment in the world of sustainability reporting is "pragmatism". The Commission and EFRAG are very keen to get the message across that sustainability reporting under CSRD can be done "proportionately and pragmatically", without major disruption and excessive cost to businesses.

Why the dramatic shift? The drive to mitigate the burdens of CSRD has in fact been in the making for a while. In March 2023 (three months after publication of CSRD), the Commission's Communication on Long-term Competitiveness of the EU committed it to "a fresh push to rationalize and simplify reporting requirements for companies and administrations", stating that "[t]he aim should be to reduce such burdens by 25%, without undermining the related policy objectives". In February 2024, the Antwerp Declaration was published by 73 business leaders (at the time of writing, 1288 organisations support it), expressing full support for a European Industrial Deal to complement the Green Deal, but also calling for the development of an omnibus proposal to tackle, amongst other things, over-reporting. The Antwerp Declaration was recognised by Italy, Germany and France in April 2024, with the French Minister of Economy calling on the Commission to adopt an omnibus directive to "remove pointless standards and lighten those that are too complicated".

It is likely that the Commission realised that its own commitment to simplification, together with the growing backlash against CSRD, combined to provide an urgent need to make CSRD more palatable, to avoid the Directive being condemned to the regulatory bonfire in its entirety. The way to achieve that without any form of amendment, seemingly, was to encourage proportionality and pragmatism by reporters, to avoid any temptation to goldplate or over-report. At its November 2024 conference on supporting companies in applying the ESRS, the Commission addressed these core messages to member state regulators, reporters and auditors, and EFRAG played down the extent to which the ESRS required the collection and reporting of new information (130 data points stem from existing legislation) and encouraged reporters not to "be scared".

However, the Commission's push for the status quo with a side of pragmatism did not convince everyone, and Commission President Ursula von der Leyen is currently committed to a "simplification revolution" to be achieved via an "omnibus" regulation amending (at least) CSRD, CS3D and the Taxonomy Regulation. The uncertainty brought about by the announcement of a major overhaul of these key regulations is likely to be most unwelcome to those who have no option but to proceed with preparing to report next year under the current rules. We'll be discussing what's known and not yet known about the Omnibus proposal in our forthcoming podcast episode.

As gatekeepers of the sustainability statement, auditors would need to embrace pragmatism in the limited assurance process, but it is not clear whether that will happen. As noted, the current assurance requirement for CSRD reports is “limited”, a standard under which the assurer usually confirms (where true) that no matter has been identified by them to conclude that the subject matter is materially misstated. The Commission itself recognises in the recitals to the CSRD that “The amount of work for a limited assurance engagement is...less than for a reasonable assurance engagement…[which]...entails extensive procedures including consideration of internal controls of the reporting undertaking and substantive testing”. Auditors currently requiring extensive supporting documentation, including in respect of in the input into (i) scoping, and (ii) value chain and materiality assessments go beyond what is required in the legislation and fall foul of the wider push for pragmatism.

Auditors appear to fear that "pragmatism" and "proportionality" will be used to facilitate selective disclosures which do not fairly represent the reporter's impacts, risks and opportunities – in our experience, this is not at all the case. In fact, CSRD and the ESRS require the reporting entity to use its discretion in applying many of the rules – for example, in defining the value chain or determining materiality.  The discretion to be applied should be that of the reporting entity and, so long as supported by due processes and based on reasonable assumptions, the outcome should not overridden by the judgement of the auditor.

Pragmatism and proportionality could very helpfully be applied to these situations to provide businesses with the benefit of the doubt and give them the space to report on the most material matters to their business using high quality data and thoughtful narrative.

As noted above, EFRAG has been keen to play down the extent of the data collection and reporting required by CSRD, highlighting that 130 of the ESRS data points already existed in law prior to CSRD. However, EFRAG put this in the context of a total of 800 data points, when in fact the ESRS are generally considered to contain closer to 1,200 data points.

Over the next 6-9 months, it will be interesting to see the shape of the mandatory reports published by the first wave of reporters. These are businesses already required to report under NFRD, and are therefore accustomed to the rigour of collecting sustainability information for inclusion in statutory filings, and in some countries, obtaining assurance over it. While the voluntary "early adopter" reports to date have been helpful in indicating a direction of travel, it is clear that those reports are not – and do not yet profess to be – compliant with CSRD. Even for NFRD-compliant companies, the uplift is significant.

Little hard data exists in the market at present regarding “average” numbers of material matters or data points, which those preparing to report might find useful as a benchmark for their own ambition. Of course, material matters must be reported and cannot be excluded simply because they would make reporting too burdensome but, given that there are several areas of reporting where discretion is required (including thresholds for materiality), benchmarking can nonetheless provide some comfort for reporters to know that they are not outliers at either end of the reporting spectrum.

The University of Cologne published some "Early Adopter Insights" based on FY2023 reports by STOXX 600 companies, but 90% of those companies did not provide any type of report. For the 48 analysed companies, an average of seven of the twelve topical standards were material. Cybersecurity was a common entity-specific disclosure. In June 2024, PwC released the results of its Global CSRD Survey of more than 500 business leaders. The survey showed no real consistency in the number of topics businesses were considering in the DMA, and did not indicate how many material topics were engaged.

In the early years of reporting, where the DMA shows topics to be borderline perhaps due to a lack of consensus within the business and its stakeholders or where there is a lack of data to confirm that the topic meets the reporting business's materiality threshold, then consistently with the push for pragmatism and proportionality, we would expect that reporters could lean towards under- rather than over-inclusion of such topics. That is not to say that those topics will not be included in future reports, when data collection and reporting processes are more familiar and embedded. There is also a common-sense test of whether the omission of a borderline topic is likely to give the impression that the reporter is deliberately omitting relevant and material information (for example, where peers very commonly report on a topic); it is advisable to wrap this calibration into the DMA process as a final step.

Whether your chosen approach is gold standard or minimal compliance, regardless of how you define your value chain, it is undeniably the case that data collection across ESG topics for which (in many cases) data has not previously been collected will be a challenge. A CSRD sustainability statement is a mixture of narrative explanations and metrics, so some core content can be generated based on information from internal expert colleagues, acquired via, for example, interviews or internal records.  In the case of metrics, it is important to note that this will need to be done for the entire calendar year. The more entities within a reporting group, naturally, the more complex the data collection exercise. However, for the many companies that have not started to collect data by 1 January, there is likely to be an opportunity to put that right without prejudicing the overall quality of the report.

It is worth bearing in mind that there are significant transitional reliefs available, in particular to those entities or groups with less than 750 employees. These include entire standards (though certain core information on material topics needs to be disclosed) and, to a more limited extent, entity-specific disclosures. They also include value chain information, which should be disclosed where available to the reporting entity but which need not be disclosed in full for the first three years of reporting.

CSRD is a Directive, which means that it is not effective in any Member State until it is implemented by a national law – a process called "transposition".  The deadline for Member States to transpose CSRD was 6 July 2024. However, at the time of writing, several Member States have not even published a draft CSRD law, and Germany looks set to pause its transposition indefinitely.  

For any given reporter, it will be the relevant national law that they will need to comply with – not the CSRD itself – which is why it is so important to see the draft legislation at the earliest possible opportunity.  Ongoing delays to transposition have increased the uncertainty. 

Although most Member States transpose Directives faithfully (and the Commission acts against those who do not, which is already happening with Sweden's CSRD law), some differences will naturally occur. The risk of that is particularly acute with CSRD, because the new rules amend existing financial reporting rules which have developed over time. (See our briefing for our August 2024 snapshot of national implementations.)

Ireland is one key jurisdiction where nuances of national law may significantly change the CSRD scoping outcomes, in particular for financial services firms. This stems partly from the fact that Ireland defines turnover in a specific way for investment firms, to include all gross revenue derived from those activities. Furthermore, in what is thought to be a drafting error which it is hoped will be corrected in due course, several types of investment-related entities, including AIFMs and UCITS management companies, are automatically deemed "large" under Irish law, meaning that they will have to report under CSRD regardless of their turnover and balance sheet figures.

The IDW, the German Institute of Public Auditors, takes the view that reporting should continue under the existing NFRD rules, meaning that those newly in scope of CSRD would not be under any obligation to report but may do so voluntarily. The Austrian Minister of Justice provided a similar view at a December 2024 event, though also expressed the hope that the Austrian law would be in place soon. On the other hand, the CSSF in Luxembourg does expect companies to comply, even though Luxembourg is another jurisdiction with only a draft law in place (at the time of writing).

On the other hand, the ESRS were enacted via a delegated regulation which is directly effective – meaning there is no scope for national deviations in the standards themselves. This, at least, gives a degree to certainty to businesses and, crucially, uniformity to disclosures.

In complex structures, there may be choices to make regarding the entity or entities that will report. Groups that have multiple EU entities in scope from 2024 or 2025 and which will have a non-EU parent in scope later have a particular conundrum. They will need to decide whether it makes sense for each company to report individually, or whether it is preferable to report at an EU level using "artificial consolidation" (whereby one EU subsidiary temporarily acts as a parent reporting for all covered entities), or whether to "rip off the band aid" and report at an international group level now, including the non-EU parent. There is no single answer to that question, although given that changes to the rules are likely, it may pay to be cautious for the time being.

For businesses still deciding how to report, EFRAG recently threw another factor (and another acronym) into the mix.  In November 2024, the advisory group published working drafts (and in January 2025, further drafts) of its proposed reporting standards for non-EU entities, which will come into scope of CSRD in 2028 with reporting in 2029 onwards ("NESRS"). Two critical factors relating to the NESRS should be considered by multinational groups defining their reporting strategy:

• The NESRS will be based not on double materiality but on impact materiality only, meaning the impacts the group has on people and the environment. This means that a reporting entity will not be required to report on risks or opportunities which affect their group's financial position, financial performance, cash flows, access to finance or cost of capital over the short, medium or long term, unless those matters also have a material impact on people and the environment. They will not need to carry out a DMA, but will still need a materiality assessment compliant with the NESRS to determine which topics to disclose based on their impacts. In other respects, the NESRS are not materially different, and as it is EFRAG's declared intention that non-EU preparers should be able to use the same implementation guidance and Q&As as those reporting under the EU ESRS.
  
  
• Importantly, non-EU reporters will have the option to only disclose information about impacts that are related to the sale of goods or provision of services to EU customers. This will allow reporters with extensive international operations to exclude some operations from their report entirely, which may be very attractive depending on the maturity of those international operations and the local environment and culture. Determining when goods and services are for the EU market may not, however, be totally straightforward – a fact not unnoticed by EFRAG, which included several illustrative examples of international operations in the draft standards. 

However, although a group with a non-EU parent may be able to take advantage of a lighter reporting burden under the NESRS, any in-scope EU subsidiaries of such a parent would still have to report under the EU ESRS. Moreover, those EU companies will lose the option to use the "artificial consolidation" option mentioned above after 2030 where they do not have a single EU parent. As noted above, therefore, the structure of the group in question will be all important in determining the question of who should be included in early reports, as well as how reporting should be structured from 2028 onwards.

It should be noted that the Commission had already built into the recitals of the CSRD the principle that while sustainability reporting should meet the needs of users, it should not place a disproportionate burden in terms of effort and cost on the reporting undertaking or those in its value chain. In spite of this, the volume of ESRS datapoints the lack of consistency in implementation across Member States and the tendency of auditors towards overly-conservative position has, to date, left many reporters feeling disproportionately burdened. As such, the warm words from the European Commission and EFRAG, that companies take a pragmatic and proportionate approach are only meaningful if auditors are willing to accept reasonable judgements made by preparers that have taken heed of the Commission's pronouncements. Alternatively, perhaps, preparers may be willing to accept some qualifications in their audit opinion (though this might not be accepted for other reasons).

More concrete help might be on the way if the anticipated omnibus directive can be passed quickly and includes some meaningful relaxations of the rules.  But, for the time being, companies that might have to report this year or next cannot afford to wait and see.  They may be wise to push back parts of the process which are not on the critical path, especially as we await further information on the omnibus towards the end of February.  But most will have no choice but to press on with scoping, with their DMA and with data collection, even if the lack of final form national laws – and, in many cases, even draft legislation – is making some of that more difficult.