CSRD: The Ins and Outs of the EU Regulation with EY

Sustainability regulation has become an increasingly important focus for governments and businesses worldwide as the urgency of addressing climate change grows. 

These regulations aim to promote responsible resource management, reduce carbon emissions and protect ecosystems while fostering economic growth. 

From international agreements like the Paris Accord to national policies and industry-specific standards, sustainability regulations are shaping how organisations operate and invest. As the regulatory landscape evolves, companies are adapting their strategies to comply with new requirements, mitigate risks, and capitalise on opportunities in the green economy. 

This is where companies like EY come in, where designated teams advise clients on the implementation of ESG strategies and practices.

Brian Tomlinson is a Managing Director at EY has advised corporations across sectors at different stages of maturity on ESG practice, helping them navigate complex and evolving reporting environments and the shifting expectations of institutional investors. 

Outside of advising, Brian has produced a significant volume of original research to advance the awareness and adoption of ESG approaches.

He is also a regular speaker at leading industry forums, webinars, podcasts and sustainability courses and widely published in leading journals and publications.

He explores the new European regulation, CSRD, with Sustainability Magazine. 

Please introduce yourself and your role at EY.

I’m a Managing Director in the Financial Accounting Advisory Services Practice at EY. 

I advise clients on the wall of ESG regulation that is approaching – with every major jurisdiction seeming to have a substantive ESG regulatory initiative underway (which often captures our large clients at a global level too). 

Often those regulators are trying to coordinate with each other (within the limits set by their different policy objectives) and are leveraging the same underlying elements of voluntary ESG reporting. 

My focus over the last couple of years has been CSRD and EU Taxonomy. Those are both part of the EU’s Green Deal and are among the most extensive and complex regulations in the ESG space that companies have to navigate. 

Interestingly, once again, even though these are EU regulations, they are capturing many US headquartered companies with operations in Europe, so much of my day-to-day is working with US clients on these EU regulations.  

What is CSRD?

The Corporate Sustainability Reporting Directive (CSRD) is the EU’s attempt to have standardised sustainability reporting across the EU economy for any companies doing substantial business in the EU. They want to be able to compare apples to apples. It replaces the existing sustainability reporting regime that the EU has had in place for a decade. 

As part of the Green Deal, the EU decided that it needed its own comparative set of extensive ESG reporting standards. The European Sustainability Reporting Standards (ESRS) are based on a laundry list of voluntary ESG reporting standards including GRI, SASB and TCFD among others. 

Reporting against these standards is based on a double materiality standard, which is an assessment of both the impact of sustainability issues on the company and the impact of the company on sustainability issues. 

Even the most advanced companies have a significant build to respond to these standards. In the context of these new standards, what used to get you an A, now probably gets you a C.

What challenges are arising for CSRD adoption in the US or EU member states?

First of all, let’s go back to the reason the EU did this – they wanted to limit greenwashing. 

In the voluntary reporting regimes, many companies often published favourable views of how they are protecting the environment and being socially inclusive. 

Mostly this was factually true, but it also allowed companies to shy away from disclosing unfavourable information. That will be more difficult to hide under CSRD, and the consequences of non-accurate reporting are greater. 

CSRD does present unique challenges for companies not headquartered in the EU. Those companies that have a more than a minimal footprint in the EU will discover that they are scoped into CSRD, often to a surprising extent. Companies may discover that more of their business is scoped in, higher up their structure, and including significant non-EU elements of their business. 

Given that, a front door challenge for those companies has been deciding how they are going to report on CSRD. 

Many US headquartered companies have opted to report on CSRD at the global level. That has been driven by a mix of strategic and practical considerations from wanting to avoid having to issue multiple reports in several member states, to being able to coordinate readiness at the enterprise level and avoid splitting up its ESG narrative. 

But CSRD presents a very broad set of challenges: 

• Conducting a Double Materiality assessment in accordance with the ESRS
• Navigating the ESRS, working out where they have gaps based on their existing disclosures
• Developing an implementation roadmap to close those gaps in a manner that is assurance ready 

A major challenge is also presented by the EU Taxonomy. Companies scoped into CSRD are also scoped into EU Taxonomy. 

Disclosures under the taxonomy require a company to indicate the share of its revenue, capex, and opex that are sustainable by reference to criteria developed by the European Commission’s platform on sustainable finance; essentially creating the notion through these disclosures of “green by law.” 

Navigating this novel disclosure framework is a huge challenge which companies are wrestling with. Such taxonomy disclosures are required on the same time horizon and subject to the same level of assurance as ESRS disclosures and are reported on in the same document. 

How does EY work with clients and partners tackling CSRD?

We are a deeply integrated, trusted advisor to our clients, whether they are our audit clients or non-audit clients. 

For audit clients, their disclosures will ultimately need to be assured, and their financial auditor would be the natural provider of those CSRD sustainability assurances as well. We can also help them get “assurance ready” through pre-assessments. 

For non-audit clients, we’re helping them implement these complex regulations in as efficient and strategic a manner as possible. 

Part of our role is to see the big picture of the regulations, how they knit together, where they overlap and the strategic implications of the disclosures and practices they require. That also involves helping our clients’ teams across functions to develop the data, processes and systems they need. 

How and why companies should harness a long-term view of the assessment process to optimise long term impact? 

The disclosures required by CSRD and taxonomy are strategically significant. 

The disclosures will indicate the extent of policies, action plans, and targets in relation to its material issues. Companies will disclose a broad set of metrics of their environmental and social performance to an extent and granularity that many will not have before.

 Value chain impacts will have to be accounted for. In taxonomy disclosures, companies will find themselves disclosing the share of revenues that can be considered “green” in a way directly comparable to their competitors. 

A company’s forward story on key sustainability topics will also be demonstrated through companies having to set out the share of their capex plan that can be considered “green.” All of these elements should feed into a company’s long-term strategy and help their stakeholders better understand how they will manage long-term sustainability issues like climate change adaptation. 

What advice would you give to leaders struggling with CSRD within their organisations?

There are several steps a company can take to help their organisations get ready for CSRD. 

• Resourcing / staffing the readiness effort: prepare for CSRD given the extensiveness of the standards, the process involved and the assurance standard applied to the disclosures is a very heavy lift. As a result, existing teams across sustainability and controllership will be significantly stretched and will often find themselves having to collaborate across functions with a depth and regularity they have not done before. 
• Raise awareness, particularly with leadership: it is important for the C-Suite to understand the extensiveness of the disclosures required, and the strategic implications of the disclosures. 

Finally, the EYs of the world have learned a tremendous amount about CSRD compliance through diverse client work, and are providing lots of free, publicly available guidance in addition to our paid advisory services. 

With appropriate resourcing and leadership, companies can get ready for these disclosures and realise the strategic opportunities that they offer. 

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