For companies with significant business in Europe, regardless of where they are based, the era of mandatory environmental, social and governance (ESG) disclosure has officially arrived. Amid the ever-evolving alphabet soup of ESG standards, the EU’s Corporate Sustainability Reporting Directive (CSRD) will have significant, near-term and far-reaching impact on companies around the globe. While the uncertain fate of the Corporate Sustainability Due Diligence Directive (CSDDD) in Brussels and the watering down of the U.S. Securities and Exchange Commission’s (SEC) climate disclosure rule may signal a shift away from mandatory ESG regulation, the CSRD train has left the station, having taken effect in 2023 with the first tranche of reports due in 2025.
The impact of CSRD will be massive both because of the scale of who it applies to (an estimated 50,000 companies, 20% of which are based outside the EU) as well as the depth of the disclosure requirements across a wide range of ESG issues. And with countries like France threatening to jail executives for non-compliance, this is not something to be taken lightly. At APCO, we’ve been knee-deep helping our clients understand and get ahead of these requirements. And for those who haven’t spent time with the new standards, let us be the first to tell you: the sheer volume and quality of data that companies will need to disclose (over 1,000 potential data points across 12 topical standards) will require an enormous, multi-year effort for companies that are in scope.
Large listed European companies are already in the thick of it, with their first disclosure required in 2025, covering data for 2024. Companies outside the EU have more time to prepare, with disclosure (for most firms) not required until 2029, covering data for 2028. The European Financial Reporting Advisory Group (EFRAG), the association that developed the standards, plans to release supplemental standards for non-EU companies in 2026 that may pare back some of the requirements. As non-EU companies await this guidance, however, they would be wise to get started on preparation, and can take the following steps to get ahead of the requirements and bring key internal partners along in the journey:
- Understand scope and applicability. Companies should first understand whether they are in scope and under what timeline. Non-EU parent companies with over 150 million euros in net turnover in the EU will likely be required to comply in 2028. However, those who have listed subsidiaries in the EU may be required to comply sooner. Engaging legal counsel early on will help ensure there are no surprises down the line.
- Conduct a readiness assessment. EFRAG has released several helpful resources to support companies in implementing CSRD. Sustainability teams can use these materials to assess their existing disclosures (along with data they have available internally) against the requirements for each material topical area. This is a significant but important exercise to understand where the gaps are.
- Prioritize the major gaps. There are some bigger ticket items within CSRD, either because they are fundamental to responding to disclosures across topical standards (e.g., conducting a double materiality assessment) or because of the amount of effort that will be required to address them (e.g., developing a climate transition plan). As part of the readiness assessment, companies should identify these gaps and then build a roadmap that prioritizes the higher order investments.
- Build the data infrastructure. For companies complying with CSRD, the days of storing ESG data in offline spreadsheets and emails are over. CSRD requires that data be investor grade, auditable and electronically tagged to align with their digital taxonomy. Companies will need to get ahead of this by identifying and implementing software solutions that support this kind of tracking, auditing and tagging.
- Educate and engage internal stakeholders. CSRD compliance is not something the sustainability team can do on its own. Functions that will likely need to be engaged include internal audit, legal, compliance, supply chain and human resources. Sustainability teams should engage these functions early in the process to educate them on what’s being asked by the CSRD, map relevant information and data to those requirements and then develop a plan to address the gaps.
With such significant (and potentially cumbersome) regulation that mandates disclosure rather than performance, the inevitable question arises: will the CSRD actually move the needle on sustainability issues? Or will companies get so bogged down in data collection and compliance that they lose sight of actual improvement opportunities? While this concern is valid, the optimistic view is that once companies are required to disclose information across a broader range of topics, they will start paying attention to their performance on those issues—developing policies, designing programs and measuring progress. At APCO, we are going to do what we can to leverage our CSRD work as an opportunity to push clients in that direction, encouraging action on the issues most material to their business. We hope others will do the same.
