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The EU Corporate Sustainability Reporting Directive (CSRD), of December 14, 2022 (the transposition of which into Spanish law is already at the preliminary bill stage) marks a material change in the sustainability information to be provided by many companies in Europe, both in terms of the content of the information and how it is reported and verified. It will also give companies the chance to showcase their ESG performance, define their sustainability strategy and organize the steps to be taken.

The challenges and opportunities raised by the new Directive were analyzed in a new edition of the Garrigues Sustainable Dialogs entitled What does the Corporate Sustainability Reporting Directive have in store for companies? The symposium, moderated by Marta Guerrero, principal associate of Garrigues’ Administrative and Constitutional Law Department, was made up of two other experts in this field: María Dolores Urrea, Deputy Director-General of Standardization and Accounting Technique at the Spanish Accounting and Audit Institute (ICAC), and Luis Cabrera, ESG principal at G-advisory, the strategic energy and ESG consulting arm of the Garrigues group.

Following a brief summary by Marta Guerrero of the background of the CSRD, María Dolores Urrea discussed the ICAC’s role as contributor in the negotiations of the Directive and as a member of the EFRAG Financial Reporting Board, Sustainability Reporting Board and Administrative Board. She also highlighted ICAC’s participation in the Accounting Regulatory Committee of the European Commission and that European Union has taken on a leading role worldwide in sustainability reporting, placing financial and sustainability reporting on an equal footing.

What new obligations does the legislation entail for companies?

María Dolores Urrea indicated that the CSR Directive provides much greater detail regarding the reporting obligations that had already been imposed in Spain by Law 11/2018, although she noted that since Spanish legislation had already established additional obligations to those provided for in the 2014 Directive, Spanish companies are much further forward than companies in other EU countries.

Luis Cabrera, in turn, insisted in the fact that significant progress has been made in terms of the content and standardization of the information to be reported. This will mean that companies will be able to assess their position. The standards are extensive and demanding and have a high technical component. Companies therefore need to start getting ready now in order to understand the information they need to report and be able to compile it on time.

Double materiality analysis: challenge vs. opportunity

Luis Cabrera stated that double materiality is a very important concept and will determine which standards companies need to apply in their reporting. Companies must carry out this risk analysis in accordance with the two main general standards. The analysis will undoubtedly help companies to identify the opportunities and risks that this transition may generate.

What are companies concerned about?

Based on his experience assisting clients, Luis Cabrera focused on the initial analysis to be carried out. The analysis consists of assessing what stage the company is currently at and, specifically, what level of information it is reporting compared to what it will be required to report from now on. This is a major exercise, requiring the preparation of internal procedures and the involvement of the entire company, and it also requires technical knowledge and stakeholder participation.

María Dolores Urrea explained that the double materiality analysis and the involvement of the value chain are elements that are a source of much uncertainty for companies. She also stated that the EFRAG is working on additional standards to be approved, including sustainability standards for listed SMEs and voluntary standards for unlisted SMEs.

The importance of assurance

Marta Guerrero highlighted that the absence, in the prior Directive, of an assurance requirement concerning the content of the non-financial information reported was one of the main reasons it was considered unreliable by the market and she commented that, while Spain went one step further and required assurance under Law 11/2018, it did not regulate how assurance was to be provided.

She also explained that in aiming to place financial reporting and sustainability reporting on an equal footing in the medium and long term, the new Directive imposes this assurance requirement, stipulating that it may be carried out by the entity’s statutory auditor, a different auditor or an independent assurance services provider, in accordance with the assurance standards approved by the European Commission. Lastly, she also highlighted the alignment of the rules governing assurance providers and auditors (in terms of access requirements, independence, ethics, setting of fees, rules on supervision by the ICAC) and indicated the need, particularly regarding assurance service providers that are not audit firms, to adopt the necessary procedures and internal control systems to ensure the fulfillment of the new obligations.

In this regard, María Dolores Urrea highlighted that Member States must supervise assurance services, in accordance with EU requirements and that, as provided in EU legislation, the ICAC is planning to approve a specific standard, to be drawn up on the basis of the IAASB international guidelines, until the European assurance standards are approved.

What are the recommendations for companies and assurance providers?

Luis Cabrera stated that companies should be prepared. The new Directive needs to be studied, since the standards are both specific and technical. There is still time, but companies need to start now in order to understand the standards, what they entail and the scope of the information they will need to report.

María Dolores Urrea pointed out that this is an opportunity to organize systems and strategies. At regulatory level, significant effort has been made to avoid double reporting by companies. Lastly, she stated that SMEs also need to start to work in this area, given the demands that will be made by large companies in order to comply with their obligations.

Regarding assurance, the changes will be substantial and everything will be regulated, with a view to placing auditing and assurance of sustainability reporting on an equal footing. Assurance firms will need to adopt and implement the necessary procedures in order to meet the new requirements.