Ready for CSRD? A Study of Companies' Readiness to Report in Accordance With ESRS

Abstract

In July 2023, the European Union adopted the European Sustainability Reporting Standards (ESRS), cementing the current reporting requirements which companies, reporting under the CSRD, have to comply with. The adoption of these standards allows for an examination of the current sustainability reporting practices of companies and the requirements set forth by the ESRS. Thus, the purpose of this paper has been to examine the readiness of companies to report in accordance with the CSRD. The directive is phased in across three groups, starting with large publicly-listed companies with over 500 employees, which is the focus of this analysis. Furthermore, this paper focuses solely on the environmental aspect of the requirements, given the comprehensiveness of the ESRS. Using multiple case studies, a GAP-analysis was conducted to assess companies’ current level of compliance with the ESRS. The analysis highlighted the discrepancies between companies reporting and the ESRS demands, whereafter the main challenges were identified and potential solutions for bridging these gaps were explored.
A brief introduction to NFRD and CSRD shed light on the EU's rationale for replacing NFRD with CSRD. Implemented in 2014, the NFRD mandated that major companies disclose policies on several sustainability issues, however, the minimal demands of the NFRD offered companies considerable flexibility in reporting. Consequently, the EU developed CSRD, under the Green Deal policy, to direct capital flows towards sustainable activities, by enhancing investors’ ability to assess corporate sustainability, and increase accountability for companies. In addition, the examination of ESRS E1-E5 has shown that companies face extensive environmental reporting requirements, and that each of these standards share certain commonalities.
The GAP analysis involved three publicly-listed Danish companies, assessing their compliance with ESRS through a detailed examination of their 2023 sustainability reports against ESRS demands. The findings indicate varying degrees of compliance with the standards, but also identified significant areas of improvement for all companies. Through the results of the GAP-analysis and an interview with an ESG-specialist, the paper identified four main challenges that companies will face when reporting in 2024. These challenges being the collection and management of ESG data, employee training, the need for best practice approaches, and effective stakeholder communication. Proposals to address these challenges include employing synthesis strategies for effectively integrating sustainability practices and engaging external consultants to supplement internal capabilities.
Despite efforts to minimize uncertainties in the GAP analysis, the reliance on publicly available information and subjective assessments is acknowledged, highlighting the inherent limitations of the study. Overall, the study clarifies that the implementation of the CSRD imposes a significant reporting burden on affected companies, both administratively and financially. Nonetheless, it is evident that the new reporting standards play a critical role in promoting corporate accountability, which is essential for addressing the environmental challenges we face.