CSRD Early Adopter Meta Analysis

What Can We Learn From the Research of CSRD Early Adopters?

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Early adopters of CSRD, and especially their practice of double materiality assessment (DMA) have been in the spotlight since companies started to publish their annual reports in the spring. Alongside numerous case studies dissecting the “CSRD inspired” annual reports, several comprehensive studies (from the University Cologne, from We Mean Business Coalition, from PwC, and from EFRAG) were recently published to summarize the learnings from the few dozen early adopters. We read all of them – so you don’t have to!  

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Does ESRS Give us Freedom or Burden?

As the ESRS gives the freedom – or burden? – to companies to make some important judgement calls about their DMA methodology and the materiality of information, everybody is eager to learn how the ambitious early adopters handled these decision. Here are some common patterns, based on the comparative studies.

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Good Bye Subjective Judgement

Most companies recognised that a CSRD-compliant DMA process is a signficant shift away from their subjective, judgement-based legacy materiality assessment approaches towards an objective evidence-based method.

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Creating Objective Based Methods

To create such an objective evidence-based method, companies turned away from generic surveys (although many still used them in some form) and used data and the expertise of internal subject matter experts to identify and assess impacts, risks and opportunities (IROs). According to research by the University of Cologne, most firms in their sample conducted interviews (27 out of 48 firms), surveys (25 firms) and/or workshops (14 firms) to interact with internal and external stakeholders. In addition, many firms collect data from desk research (13 firms) and competitor analyses (13 firms).

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Quantifying IROs

Even though there’s clear intention to quantify IROs, not many companies succeed with this quest. Only 4% of the firms in the University of Cologne’s used a quantitative approach for the impact perspective, and 8% for the financial perspective.

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Incorporating Value Chain Information

Another area of struggle is incorporating value chain information, both to the DMA and to the reporting. 57% of the respondents in PwC’s Global CSRD Survey said that the complexity of their value chain is a key obstacle in implementing CSRD. This is also evident from the lack of IRO classification along the value chain in the early adopter reports. According to ESRS, companies must classify and disclose where the IROs originate from in their value chain. In 2023, only 12 out of 48 firms (25%) have carried out such a classification, according to the University of Cologne.

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Key Topics for Companies

As a result of the DMA, on average 7 topics are material (at least in part) for companies. Climate change (E1) and Own Workforce (S1) were material for all companies in the University of Cologne’s sample. PwC’s study shows that companies are quite confident that they can meet the reporting requirements of these two standards that seem to be generally material: 94 and 96 percent of the firms said that they were confident in their ability to meet the requirements of E1 and S1, respectively.

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Reporting More Datapoints than Necessary

The confidence in PwC’s sample is somewhat surprising compared to one of EFRAG’s key observations: 60% of the companies they interviewed doesn’t seem to understand the concept of information materiality well, therefore they have trouble filtering out the irrelevant disclosure requirements and datapoints from their material topics. This also means that most early adopters reported more datapoints than necessary.  

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Cyber Security is the No. 1 Entity- Specific Matter

Defining entity-specific sustainability matters to complement the list of sustainability matters on ESRS 1 AR16 is a requirement of ESRS. According to the University of Cologne, more than half of the companies in their sample defined an entity-specific matter, the most common being cyber security, followed by data protection and product safety.

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CSRD is a Cross-Functional Company Project

All studies underline an important pattern: CSRD implementation is clearly a cross-functional project. According to EFRAG, typically, five or more departments are regularly engaged in the CSRD implementation process. Beyond the Sustainability and Finance departments, Risk Management, Human Resources, and Auditing or Internal Controls are the most frequently involved. Departments such as Procurement, Communications, and Strategy are also commonly engaged, reflecting the interdisciplinary nature of effective ESG reporting.

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There is a Need for IT Transformation

‍Data availability and quality is the companies’ biggest headache when it comes to CSRD implementation. 90% of the respondents in EFRAG’s study claimed to have stared improving their ESG data quality controls, to create controls similar to those used in financial reporting. They probably have a long way to arrive at such robust data quality, as according to PwC’s study, 74% of companies used spreadsheets to do their CSRD reporting, and only 27% uses a disclosure management tool. It doesn’t come as a surprise then that 85% of the companies in EFRAG’s interviews acknowledged the need for an IT transformation.