Despite shared frustration with the new European reporting directive, more companies outside the original scope still intend to comply. And many might be more prepared to report than they realize, especially if they have already undergone a double materiality assessment, begun tracking their GHG emissions, or complied with existing disclosure frameworks.
The first wave of affected companies from a whooping 50,000 is now grappling with tight timelines and the complexity of implementing the new rules. Companies say that the reporting standards developed by the European Financial Reporting Advisory Group (EFRAG) are inaccessible and impractical, warns a study by SB+CO.
Regardless, in some countries outside the bloc, even companies not covered by the Corporate Sustainability Reporting Directive (CSRD) plan to meet its requirements. A global survey has found that 8 out of 10 UK or US companies intend to align some or all of their disclosures with the legislation. Nonetheless, those companies admit they find the reporting process “challenging.”
Confident, Though Not Without Struggles
Given the broad scope and complexity of the CSRD, how are companies moving forward with its implementation?
According to a survey by PwC, many companies expected to report in six months still have to finalize key activities such as confirming reporting obligations, conducting materiality assessments, and validating data availability. The survey found that 59% of companies cited data availability and quality as the biggest obstacles to successful implementation, followed by value chain complexity at 57%.
Despite the low completion rates for some early-stage activities, the respondents expressed high confidence in being ready to report under the CSRD by the required date. Only 3% of those expected to report in 2025 said they are not confident.
Significantly, those further along with their upfront scoping activities are more optimistic but the confidence levels differ among topical standards. Respondents have high confidence in their ability to meet reporting requirements on climate change but need more confidence about disclosing on biodiversity.
Accelerating Climate Transition
The standards that focus on climate change specifically ask companies to report their transition plans, with time-bound targets in line with a 1.5℃ limit, and disclose their greenhouse gas emissions, including those associated with supply chains, known as Scope 3.
That’s where most angst is because most actors in supply chains need to make a big effort to align behind one or two metrics.
Of the companies assessed by EcoVadis, about 25% are involved in reporting emissions levels associated with their activities (Scope 1 and Scope 2), and this proportion rises to nearly 52% for large companies alone. Scope 3 reporting levels are significantly lower, at 17% across all company sizes.
Although this is encouraging, teams who still need to quantify their footprint should do so as soon as possible. Without strong governance — how emissions data is defined, sourced and processed — there is a danger that they're not on a timeline to satisfy their reporting obligations.
The CSRD is part of a broad effort by policymakers and voluntary actions in Europe and other territories to steer economies toward a low-carbon future. Frameworks such as the Taskforce on Climate-Related Financial Disclosures (TCFD), GHG Protocol and Science-Based Targets initiative (SBTi) have been considered a bedrock for driving climate action for years.
The SBTi, in particular, has been considered by many to be a golden standard for climate target-setting, now with a clear uptick in absolute numbers. According to the WWF report, at the end of 2023, 5% of companies in the scope of the CSRD committed to set SBTi-aligned targets, close to around 2,500 companies. The organization calculates that if current adoption rates continue, by the end of 2026 roughly 18,500 companies that could end up in the scope of the directive will have committed to set SBTi targets.
Standards That Align With CSRD
Climate reporting is just one facet of CSRD reporting — the comprehensive nature of the directive is one challenge with CSRD compliance. However, many companies may find themselves in a favorable position if they have already reported to standards or frameworks that do not sidestep broader sustainability issues. The EFRAG (EU's technical advisory body) coordinated with the Global Reporting Initiative (GRI) when developing the CSRD reporting standards.
Given the high degree of commonality between the GRI and CSRD, companies that have already complied with the global standards may be well on their way to compliance with the CSRD.
EcoVadis data shows a clear nexus between sustainability performance level and readiness to report following the GRI standards. Of all large companies within EcoVadis’ network, about 21% report “in accordance with” GRI but this jumps to 52% among large companies rated Advanced or Oustanding. Those at the top of the scoring ladder are thus more likely to be well-prepared to meet new reporting requirements.
CSRD Reporting With EcoVadis
While companies show preparedness on some of the critical information required under the CSRD (topics of governance, strategy, risks and opportunities, metrics and targets), how they generally fare remains to be seen once the new standards are applied, starting this year.
We have to be mindful of the capability of smaller companies, too. Though they are given more time to comply, regulation should be pilot-tested with much support to see how requirements can be met with little effort.
This means 2024 is the year to get your compliance efforts in place.
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EcoVadis continues to guide companies toward this new era of mandatory sustainability reporting, driving best practice disclosure and action. Contact us to review your sustainable procurement program readiness to support CSRD reporting. You can also read our guide for disclosing organizations. → |
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