EU Updates CSRD Law While First Reports Get Released
As the largest European Union companies subject to the law begin publishing their integrated financial and EU Corporate Sustainability Reporting Directive reports this year, the European Union has announced an omnibus directive to merge and simplify the Corporate Sustainability Reporting Directive and its sister Corporate Sustainability Due Diligence Directive, while significantly reducing the number of corporations subject to the law.The New Law and Changes Underway
Early Reports Find Need for Fine-Tuning
Compliance or a Roadmap for Better Business?
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In a move that surely will inspire organizations to hold off until the last minute to address the European Union Corporate Sustainability Reporting Directive, the EU has released a draft omnibus directive to simplify reporting and concentrate reporting requirements on larger companies. In the meantime, the EU’s largest companies have begun publishing the reports under the current requirements. Those required to publish them this year now have a two-year reprieve.
The proposed modifications exclude about 80% of the companies originally obligated to report by raising the threshold to companies with 1,000 employees or more in the European Union; delaying reporting compliance for up to two years; significantly reducing the number of required metrics disclosures under the European Sustainability Reporting Standards (ESRS); introducing voluntary standards for companies with under 1,000 employees; eliminating the bulk of reporting burdens on smaller companies doing business with large companies subject to reporting, and giving companies more time to address the law’s taxonomy reporting requirements related to environmental risks. The modifications will be submitted to the European Union parliament for the purpose of legally updating the directives, after which each EU nation must incorporate them into their own legal statutes.
The omnibus recommendations retain the core concept of double-materiality: identifying the risks and opportunities created by organizations for their stakeholders and the environment, and the risks and opportunities stakeholders and the environment create for organizations.
In the meantime, for the first time in history, large companies are publishing integrated financial, human capital, environmental impact, and governance reports that begin to address the increasing concerns that financial reporting fails to address the financial and other impacts of the 80% of an organization’s value carried as “goodwill” on balance sheets. See: How to Spotlight Dark Matter in Accounting.
On the other hand, early results suggest that the ambitious goals so far are falling short in terms of addressing consistency and greenwashing. Issuing new requirements addressing all stakeholders based on a new concept known as double-materiality; the sheer breadth of the requirements and number of metrics involved, and lack of standardization in auditing practices, among other factors have failed to produce a consistency in reporting that lives up to the comparability envisioned by the lawmakers, based on a review of expert assessments of the recently issued reports. Not all organizations have followed the outline and protocols established to make it relatively easy for stakeholders and shareholders to evaluate and compare the information, and the variety of exceptions tolerated by auditors (including the world’s leading accounting firms) appears similar to the “wink-winks” that occur in IS0 9001 total quality management certifications.
The New Law and Changes Underway
Effective Jan. 5, 2023, European Union law “requires all large companies and all listed companies (except listed micro-enterprises) to disclose information on what they see as the risks and opportunities arising from social and environmental issues, and on the impact of their activities on people and the environment. This helps investors, civil society organizations, consumers and other stakeholders to evaluate the sustainability performance of companies, as part of the European green deal. As the first reports show, were it that simple.
The “omnibus” simplification is a result of opposition from leading countries such as France and Germany and from the Draghi Report, an independent assessment conducted last year of the competitiveness of the European Union in the world economy. It found that “Innovative companies that want to scale up in Europe are hindered at every stage by inconsistent and restrictive regulations. As a result, many European entrepreneurs prefer to seek financing from US venture capitalists and scale up in the US market.”
The new audited EU CSRD reports published so far range from 35 to over 200 pages, providing valuable fodder for AI and other analysis when the data is available online with information tagged to conform with the ESRS (European Sustainability Reporting Standards) framework, but tedious reading for the general public. Those reports that summarize their financial and CSRD sustainability metrics in the introduction demonstrate the potential of giving all stakeholders a picture not only of an organization’s financial position, but also an overview of the risks and opportunities it creates for all its stakeholders, and in turn the risks and opportunities those stakeholders and the environment create for their organizations.
Early Reports Find Need for Fine-Tuning 
Maria Tymtsias, Co-Founder and Head of Sustainability for the Palau Project, an advisory firm, community, and provider of software to support CSRD and related reporting, recently reviewed the preliminary reports and found many inconsistences despite the fact that all are independently audited, many by the same major accounting firms that handle financial reporting and audits. These include:
- Failure to disclose the materiality assessment process—what factors directly impact the organization and its stakeholders.
- Inconsistent explanations of IROs (impacts, risks, and opportunities.)
- Failure of auditors to note missing critical disclosures; vague assessments, or the presentation of mitigation of negative impacts as a positive impact, specifically prohibited in the directive.
- Lack of disclosures related to governance or value chain assessment, even though these are required.
- Use of entity-specific topics instead of the ESRS categories designated for comparison purposes.
- No common structure as envisioned in the ESRS framework, so that information is provided in a format inconsistent from one report to another.
Compliance or a Roadmap for Better Business? 
A survey of professionals involved with CSRD reporting by Datamaran, a UK-based provider of AI-powered ESG analysis, finds that “companies see the identification of material impacts, risks, and opportunities (IROs) as the most valuable element of CSRD reporting for internal decision-making. Over 54% of respondents ranked IROs as their top priority. Additionally, 37.8% ranked the strategic alignment of ESG (environmental, social, governance) with business objectives as highly valuable.
According to Datamaran, “this highlights a shift from compliance-driven sustainability to a strategic framework for business risk and opportunity management. Companies that conduct robust double materiality assessments will be better equipped to navigate risks, seize opportunities, and build resilient business models."
Over 70% of respondents report that their boards conduct regular ESG strategy reviews, and 63% have dedicated ESG committees overseen by executives. ESG-linked performance metrics in executive evaluations are growing in popularity, the report finds, with 33% of respondents incorporating them.
Value chain integration is cited as the biggest hurdle by 42% of respondents, followed by data gap analysis (30%) and third-party assurance (auditing company) readiness (27%). Conducting double materiality assessments was the fourth most common challenge noted by 25% of companies that responded to the survey.
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