Article

Navigating the CSRD: A sustainability reporting guide for U.S. companies

Jul 17, 2024·Authored by Benjamin Martin, Arnaud Bergero

In recent years, the global focus on sustainability reporting has experienced a significant shift. What was essentially a voluntary exercise for the last few decades has become a mandate for many companies across the United States and throughout the world.

One of the best examples of this reality is the European Union (EU) Corporate Sustainability Reporting Directive (CSRD), which created stronger rules surrounding the environmental, social and governance (ESG) information that companies doing business in Europe have to monitor and report.

Many European companies have already begun traveling down this path. In fact, some are already deep into the process. Meanwhile, many American companies are just getting started in their sustainability journeys. Why is that? Well, perhaps they aren’t sure where to begin, or they lack the necessary expertise to get going in a meaningful way. Or in other cases, companies simply do not realize that the CSRD applies to them.

Either way, companies have new reporting obligations, making it critical that they understand the basics, benefits and potential barriers of the CSRD before they can continue their path to sustainability success.

What do you need to know?

The CSRD is an amendment to the Non-Financial Reporting Directive (NFRD) that significantly increases reporting requirements for all companies that fall within its scope. It was originally announced by the EU commission in April 2021 and took effect in January 2023.

Approximately 50,000 businesses are impacted by the CSRD, which requires companies to disclose information about their impacts, risks and opportunities as it applies to climate, carbon footprints and other key sustainability efforts. While it’s a European law at its core, U.S.-based companies with European subsidiaries that meet certain criteria need to comply – and they need to get moving with their planning and preparation.

In general, many U.S. companies are not too concerned about these regulations, as non-EU companies that do at least €150 million in sales annually in the EU will not need to begin reporting until 2029. However, what many U.S. companies may not realize is that EU-based subsidiaries may have reporting obligations as early as 2026. “Large undertakings,” as they are called, that meet the criteria will need to report in 2026 over FY25 data. This includes EU subsidiaries that exceed €50 million in annual revenue and €25 million in assets, or over 250 employees. What’s more, because the rule is aligned with European financial reporting, oftentimes it is the holding company of these “large undertakings” that is responsible for preparing these disclosures, inclusive of all subsidiaries that roll up to the EU parent. This creates a significant challenge for U.S. companies whose sustainability reporting function is established at a U.S. parent level and does not typically perform subsidiary-level reporting.

These details and dates will become significant. Over the ensuing months and years, companies in the U.S. and throughout the world need to fundamentally change the way they handle sustainability reporting. It’s a multiyear conversion process, in most instances. Simply put, any company that does business in Europe needs to think carefully about the rule – and they need to do this now – in order to fully understand how it applies to them, what changes they must make and where they need to go for help.

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Setting the stage

For years, U.S. sustainability reports have consisted of collecting data as a voluntary exercise. Companies have used Excel and other similar programs to pull together basic reports that didn’t divulge much information or add significant value. Now, the CSRD requires companies to understand up to 1,200 indicators while compiling a report that aligns critical information in a systematic, methodical manner. Moreover, this report must be reviewed and approved by a third-party assurance provider.

This shift in reporting results in more stringent requirements, increased scrutiny in the review process and higher expectations from every angle. In short, everything U.S. companies know about sustainability reporting is about to change.

To start, U.S. companies should take note of how European companies approach CSRD reporting. In particular, American companies need to observe how companies in the EU have approached the day-to-day management and reporting of sustainability matters. When it comes to CSRD reporting, European companies have a head start, thanks to their longer history of ESG reporting and their stronger attention to detail regarding controls over sustainability and nonfinancial disclosures.

However, the reporting burden is not entirely on the European subsidiaries of U.S. companies. (Although some business leaders in the U.S. incorrectly believe that’s the case.) The reality is that the EU subsidiaries often don’t have the necessary view of the entire organization to prepare sustainability-related disclosures. They also typically do not have dedicated sustainability reporting functions. Ironically, the European business leaders often assume the opposite – that their U.S.-based teammates possess the necessary oversight and that everything is under control in the United States. Quite often, neither one is the case.

The CSRD process requires collaboration across the continents. Leaders in both the U.S. and EU must work together over the next several months and years to ensure the process moves in the right direction. Because when it comes to the CSRD, if companies wait, it might be too late.

Examining some CSRD benefits and challenges

At its core, the CSRD is about disclosing where your company stands at the moment. If you aren’t already making a commitment to sustainability, you can acknowledge that you’ll be starting in the near future. However, it is important to note that there is a finite amount of available resources. If you wait until next year, you may not be able to receive the timely assistance you require. Additionally, there is a reputational risk involved in delaying your sustainability efforts. With approximately 50,000 EU companies sharing key information as part of their CSRD reporting, some organizations are going to reveal low ESG performance, whereas other organizations will demonstrate a strong commitment to ESG and sustainability. This dichotomy could have varying impacts on organizations’ reputations and, in turn, on their business moving forward.

There are more and more eyes on sustainability reports each year and, with the public nature of this reporting, it is quite possible that your banker, your insurance company, your business partners and even private equity firms and other potential buyers and investors are seeing your reports and taking notice. Ultimately, strong CSRD data could be a vital differentiating factor for a company’s future viability.

Of course, there are certain pitfalls that organizations need to avoid. The first one is failing to involve your company’s governance team. A common misconception is that sustainability matters can be handled entirely by the sustainability manager. On the contrary, executive leaders must be engaged in the process from day one, as the CSRD report ultimately will impact key areas such as strategic alignment, resource allocation and risk management.

Additionally, many companies err when they rely solely on consultants. Yes, you need a third party to get started and to guide you through your CSRD journey. But sustainability reporting is becoming a year-round process, and therefore, business leaders need to be educated, trained and regularly updated to maximize their company’s CSRD potential.

A helping hand

Business person is welcomed to a meeting with a handshake

Given the complexity and urgency of CSRD reporting, U.S. companies need to quickly formulate a plan that is efficient, cost-effective and reasonable from a reporting perspective. The first step in this process, naturally, is knowing where to begin.

Most U.S. companies are not beginning their CSRD journey from a mature starting point. Therefore, these organizations need support from an experienced team that understands the reporting and assurance requirements and that can adapt to their level of experience.

Maybe your organization is just dipping its toes into sustainability reporting and needs to achieve basic regulatory compliance. Or perhaps you’re seeking a long-term strategy around sustainability value creation and looking to have a deeper discussion around issues like goal setting, governance structure, investor sentiment and capital markets.

In either instance, companies need to partner with a versatile and collaborative team that offers:

Elite expertise: A high level of experience with audit, assurance and accounting services and a deep understanding of sustainability strategy and multinational reporting
A robust global network: A significant presence in the U.S. and in any European cities where you do business, including leading auditors and sustainability specialists
Access to cutting-edge technology: Software that conducts double materiality assessments – which is a key requirement for CSRD reporting – and helps with the digital production aspect of reporting, including workflow management, electronic tagging and data collection

The combination of these disciplines, working together simultaneously, will yield a smooth and efficient ESG strategy and ultimately a compliant CSRD report.

Four steps to CSRD reporting

The importance of a systematic approach to CSRD reporting

A grounded methodology features a four-step process that simplifies the complexities of CSRD into a systematic approach. Your third-party provider can assist with each part of the process. At a high level, the four steps are:

Step 1: Scoping, diagnosis and training
Step 2: Double materiality
Step 3: Gap analysis and action plan
Step 4: Preparing the next steps together

STEP 1

Scoping, diagnosis and training

The initial tasks start with scoping the process, including determining which entities are required to report, which entities are going to help prepare the disclosures and how the report will be presented. A maturity analysis and training sessions are conducted to raise awareness and increase overall team knowledge and comfort.

STEP 2

Double materiality

CSRD is centered around the concept of double materiality, meaning a company needs to disclose how its business is affected by sustainability matters (i.e., climate change) and how its activities impact society and the environment. In all, CSRD uses hundreds of indicators to essentially rank and score companies through a rigorous process of identifying impacts, risks and opportunities. The end result is a universal alignment on which topics will be included and how those results will be disclosed.

STEP 3

Gap analysis and action plan

Once the engagement is scoped and your achievements and goals are mapped and documented, you can begin to take action. A gap analysis will help you understand how much effort you will need to exert in order to get aligned with these regulations, and an action plan will help you stay on course.

STEP 4

Preparing the next steps together

You collaborate with your third-party provider on the actual construction of the ESG report, including analysis of taxonomy eligibility and alignment, careful structurization of the ESG reporting, appropriate updates and edits and a mock audit.

Where do you go from here?

When it comes to sustainability reporting, the reality is that no one has all the answers at this point. We are all together in this journey, learning as we go. The CSRD is still in its infancy and even sustainability reporting is relatively youthful, so to speak. With that in mind, it is critical for companies to learn from one another and to implement best practices based on the experience of those organizations who have already started down this path.

Companies in the U.S. have a unique opportunity to learn about sustainability reporting and materiality from our European friends. However, the opportunity is only valuable if U.S. companies initially connect with professionals who have the necessary CSRD knowledge, multinational connections and diversified skillset that includes audit, assurance and accounting expertise.

To discuss how Baker Tilly’s teams in the U.S. and the EU can simplify the reporting process and guide you through a successful CSRD journey, contact us today.