How to successfully prepare for a CSRD audit?

July 19, 2024
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The Corporate Sustainability Reporting Directive (CSRD) represents a pivotal shift in how European companies approach sustainability reporting.

With the new directive requiring more comprehensive disclosures and the implementation of mandatory assurance, businesses are undergoing a substantial transformation in their reporting procedures

This article outlines strategic steps companies can adopt to ready themselves for the CSRD audit, ensuring compliance with regulation while also leveraging the process for enhanced sustainability performance.

Understanding CSRD

Expanding on the groundwork established by the Non-Financial Reporting Directive (NFRD), the Corporate Sustainability Reporting Directive (CSRD) aims to enhance the consistency, comparability, and credibility of sustainability reports across the European Union.

The CSRD sets forth more rigorous reporting standards and requires verification of sustainability information, showcasing the EU's commitment to integrating sustainability into corporate governance frameworks.

A pivotal aspect of CSRD is its focus on assurance, thereby raising the significance of sustainability reporting to a level on par with financial audits.

Key features of the assurance requirement

In contrast to its predecessor, the Non-Financial Reporting Directive (NFRD), where assurance was encouraged but not mandatory, CSRD mandates companies to undergo independent audits for their sustainability reporting.

Scope and level of assurance

Under CSRD, the assurance process must encompass the company's disclosed sustainability information, verifying its alignment with the European Sustainability Reporting Standards (ESRS).

Initially, CSRD will mandate a limited level of assurance, similar to a review engagement, with a planned transition towards a reasonable assurance level over time, as stipulated by future regulatory timelines.

Limited assurance:

  • Limited assurance involves a moderate level of scrutiny. It is similar to a review engagement where the auditor performs fewer procedures compared to a full audit.
  • The auditor assesses whether anything has come to their attention that suggests the sustainability information is not materially correct.
  • The outcome is a limited assurance conclusion, indicating that based on the procedures performed, nothing has come to the auditor’s attention that causes them to believe the information is not fairly presented, though this does not guarantee the absence of material misstatements.
  • It's important to note that limited assurance provides a lower level of assurance than reasonable assurance, and it is specifically not designed to detect all material misstatements.

Reasonable assurance:

  • Reasonable assurance provides a higher level of confidence. It is more comprehensive and involves a thorough examination of the information and processes.
  • The auditor gathers sufficient evidence to conclude that the sustainability information is free from material misstatement, similar to the level of scrutiny in a financial statement audit.
  • The outcome is a reasonable assurance opinion, which offers a higher level of certainty about the accuracy and reliability of the reported information, although not an absolute guarantee.

Eligible auditors

  • The auditor or audit firm usually auditing your company’s financial records, provided they meet the specific qualifications and independence requirements for sustainability assurance under CSRD.
  • Any independent and accredited body that meets the EU's assurance standards and guidelines, which includes having the necessary expertise in sustainability reporting and assurance.

Assurance standards and timeline

While CSRD mandates assurance, the precise standards and methodologies for conducting sustainability assurance engagements are anticipated to align with the European Sustainability Reporting Standards (ESRS) and other existing or forthcoming standards.

These standards will outline key principles and practices, including materiality, completeness, relevance, and reliability, for auditors to assess the accuracy and credibility of disclosed information on sustainability.

Until October 1, 2026, companies will use national standards for limited assurance, after which the EU will introduce unified assurance standards. By October 1, 2028, the EU aims to implement reasonable assurance standards, if feasible. By year-end 2028, the European Commission will review and potentially expand the sustainability assurance market through legal measures.

Implications and challenges

Enhanced credibility

The assurance requirement aims to enhance the credibility of sustainability disclosures, making the reported information more reliable for decision-making by investors, policymakers, and other stakeholders.

Companies must fortify their sustainability reporting processes and controls, as these will face heightened scrutiny from assurance providers.

Expertise and capacity

There is a growing demand for assurance providers proficient in sustainability matters. The industry may face challenges in scaling up capacity and expertise to meet this demand, particularly during the initial phases of CSRD implementation.

Cost considerations

Mandatory assurance will incur extra expenses for companies, especially those that have not previously sought voluntary assurance for their sustainability reports. Companies must consider these costs in light of the benefits derived from increased credibility and stakeholder trust.

The assurance requirement within CSRD represents a significant milestone in corporate sustainability reporting, aiming to bridge the divide between current sustainability disclosures and stakeholders' need for reliable and actionable sustainability information.

Companies must factor in this requirement at an early stage of the compliance process. To enhance their results, they should undertake the following steps:

Step 1: deep dive into CSRD and ESRS requirements

Before anything else, a thorough understanding of what CSRD entails and the specifics of the European Sustainability Reporting Standards (ESRS) is crucial.

This foundational knowledge guides subsequent steps, from data collection to reporting methodologies.

Companies must familiarise themselves with the scope of required sustainability information, ensuring alignment of their reporting practices with the guidance outlined by the ESRS.

Step 2: conduct a materiality assessment

A materiality assessment lays the groundwork for sustainability reporting, entailing the identification of the most significant sustainability issues for the business and its stakeholders.

In this step, alignment with the European Sustainability Reporting Standards (ESRS) is crucial, as it not only assists companies in pinpointing material issues but also ensures that reporting adheres to CSRD requirements.

A key component of this assessment under CSRD is the principle of Double Materiality. This approach requires companies to consider both the financial impacts of sustainability issues on their operations (i.e., financial materiality) and the external impacts of their activities on society and the environment (i.e., impact materiality). The European Financial Reporting Advisory Group (EFRAG) is tasked with developing a methodology for identifying these material issues, ensuring a comprehensive and balanced reporting framework that addresses both how sustainability impacts the company and how the company impacts sustainability.

Step 3: define clear data points and metrics

Define specific, measurable metrics for each identified sustainability issue, in alignment with ESRS. This step is pivotal for setting up a consistent and transparent approach to data collection and reporting, safeguarding the integrity of the sustainability report.

The reliability and comparability of reported data are essential for ensuring the report's value to stakeholders and compliance with regulatory standards. Developing robust internal systems for data management supports the collection, verification, and accurate reporting of these metrics.

Step 4: implement robust documentation and audit trail collection

To meet CSRD’s assurance requirements, maintaining comprehensive documentation and a traceable record supporting sustainability disclosures is indispensable. This includes:

  • Record-keeping and managing detailed records of data sources, methodologies, and the rationale behind metrics calculations.
  • Establishing internal controls and verification processes to ensure the quality and accuracy of reported data.
  • Systematically organising documentation to support the external assurance process, streamline and enhance its efficiency.

Leveraging ESG data management and collection software like Apiday can simplify the processes of data collection and documentation, ensuring a reliable record of all pertinent information. This significantly reduces the complexity of gathering and verifying evidence, thereby ensuring a smoother assurance process.

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Step 5: assurance process

Early collaboration

The choice and engagement of an assurance provider are pivotal in CSRD preparation process. Opting for assurance providers with a proven track record in sustainability assurance and a deep understanding of CSRD and ESRS requirements is recommended.

Engaging with the assurance provider at an early stage helps clarify their expectations and align the company’s reporting processes. Early engagement facilitates the identification of potential issues and timely adjustments.

Collaborative communication

Collaboration and open communication with the assurance provider throughout the process enhances the efficiency and effectiveness of the audit. This involves granting access to necessary information and personnel and being responsive to queries and concerns.

Preparing for the CSRD audit goes beyond technical compliance; it also requires embedding sustainability into the corporate culture. This encompasses:

  • Educating and training employees on the significance of sustainability reporting and the specifics of CSRD.
  • Integrating sustainability into strategic decision-making processes.
  • Encouraging cross-departmental collaborations for unified and comprehensive sustainability reporting.

Step 6: reflecting on assurance outcomes

Compliance with CSRD is not a one-time exercise but a continuous journey for improving sustainability performance and reporting. Companies should:

  • Use insights from the audit process to refine and enhance their sustainability strategies and reporting practices.
  • Maintain communication with stakeholders, and provide transparent updates on progress and challenges.

Taking action on the suggestions derived from the assurance process is essential to enhance the dependability and trustworthiness of future sustainability reports, rectifying any shortcomings uncovered.

By implementing necessary improvements based on assurance findings, companies can demonstrate their commitment to transparency and continuous improvement in sustainability reporting, thereby fostering trust among stakeholders.

Bonus step: streamline the process with Apiday

Navigating CSRD compliance becomes significantly simpler with Apiday, as our platform is designed to automate and streamline your reporting process.

Here's how it transforms your approach:

Automated ESRS mapping

Apiday analyses your company's specific context and operations to identify the ESRS, including the 1,200 data points that are relevant to you.

Efficient data collection

Connect APIs, upload your documents and spreadsheets and launch company-wide campaigns from Apiday’s platform to gather the necessary data efficiently.

Guided ESRS compliance

Apiday helps you in conducting detailed assessment for each relevant ESRS, using a combination of single or multi-select options along with AI-supported free text entry. This approach ensures a comprehensive understanding and coverage of all required aspects, enabling accurate and thorough reporting aligned with CSRD requirements.

Audit-ready reporting pack

We highlight any data gaps that need to be addressed and provide you with a fully compliant CSRD reporting pack. This pack includes digital tagging and EU Taxonomy alignment, ensuring readiness for audit and integration into your annual reporting.

Our goal is to minimise the complexities of CSRD reporting, simplifying the process for your team.

With Apiday, you can focus more on your sustainability initiatives and less on the intricacies of compliance and reporting. Take the first step towards streamlined CSRD compliance now!

How to successfully prepare for a CSRD audit?

If your company must comply with CSRD, you should begin immediately!

Our cutting-edge tool is here to guide you on the right compliance track, gathering data and automating the creation of disclosure reports. With everything you need to be fully compliant in a single platform, take the first step towards CSRD compliance now!

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