For many businesses with significant operations in the EU and European Economic Area (EEA), the Corporate Sustainability Reporting Directive (CSRD) will apply soon. In this article, Nick White, communications and reporting director at Friend Studio, discusses some of the practical challenges of compliance.

Up to now, most attention has been paid to which companies will be in scope, the double materiality assessment requirement and the numerous new mandatory data points. It is important, however, to recognise other practical CSRD challenges that are receiving less attention.

Gold-plated CSRD

An important challenge is the fact that the CSRD is not actually the regulation that companies must comply with. The CSRD is just a foundation that EU and EEA countries must then clarify when they come to produce their own legislation.

Companies are required to adhere to these local rules where they are registered. Many EU and EEA countries have in fact opted to ‘gold-plate’ the rules, making them even stricter. Notable changes include variations in the types of entities covered by the regulations, and adjustments in asset size, turnover and balance sheet criteria that determine regulatory scope. Companies must carefully review requirements in each jurisdiction for themselves and any subsidiaries they oversee.

Location of the disclosure

For EU/EEA-based companies, the ESRS disclosures must be included in the management report section of their annual report (equivalent to the UK’s strategic report). However, for third-country-based companies (e.g. the UK) certain dispensations may permit these disclosures to be included in a separate sustainability report.

Format and assurance

Importantly, the CSRD requires disclosures to be in the iXBRL format (XHTML with XBRL tags), which is the same format as the ESEF version of a UK annual report. Moreover, ESRS disclosures (both text on the page and XBRL tagging) are required to be assured. For UK companies, this represents a change from current practices, as auditing of ESEF tagging is not required for financial statements.

The tagging requirement has, however, been delayed by at least one year, due to technical challenges. In the meantime, EFRAG, which publishes the ESRS, strongly recommends that content matches the structure of the ESRS XBRL taxonomy. This makes each disclosure distinct and more comparable between companies.

Knock-on impacts

The added effort of making these disclosures will necessitate significant adjustments to the annual report production schedule to accommodate assurance, tagging and output in the iXBRL format.

We anticipate that the shift to an iXBRL format for both sustainability and financial reporting will prompt many reporters to opt for a ‘digital-first’ approach, rather than prioritising the PDF. This shift will enable the simultaneous production of iXBRL format reports – readable by both people and machines – and PDF files from a single source, streamlining the process significantly.