10 Key FAQs from Businesses Struggling to Navigate the CSRD

With Jaime Amoedo , Executive Director, The ESG Institute.

Understanding the Corporate Sustainability Reporting Directive (CSRD)?remains a crucial challenge for businesses across Europe... The CSRD isn’t just about regulatory compliance; it represents a transformative shift, pushing companies to embed sustainability into their core strategies and align with the European Union’s ambitious climate goals.

At The ESG Institute , we’re dedicated to helping organizations navigate this shift, providing them with the insights and tools needed to adapt to the ever-evolving landscape of?ESG reporting. Since the CSRD’s introduction, we’ve seen increased demand for guidance on how businesses cannot only comply but also leverage these requirements to build resilience, enhance stakeholder trust, and drive sustainable innovation.

"Materiality assessments are definitely one of the trickier aspects of CSRD compliance because they require a company to look at?both sides of the coin"

Earlier this year, on?January 9th, we spoke with?Jaime Amoedo, Executive Director of The ESG Institute, who shared his expertise on how businesses could prepare for the CSRD. Now, as we continue to field numerous inquiries from organizations seeking clarity, we’re taking a deeper dive into the?practical challenges?businesses are facing in implementing the CSRD. From?double materiality assessments?to?value chain reporting?and ensuring compliance with the directive’s?digital reporting requirements, Jaime offers fresh insights into the most common questions being asked by businesses today.

In this interview, we’ll explore the latest FAQs we’re receiving at The ESG Institute from businesses about the CSRD, providing real-world solutions and strategic advice to help companies stay ahead in their sustainability journey.

Jaime, it’s great to have you with us again. As Executive Director of The ESG Institute, you’ve had an ongoing dialogue with businesses on the challenges of sustainability reporting. Since our last conversation in January, companies have been reaching out with more specific questions as they navigate the complexities of the Corporate Sustainability Reporting Directive (CSRD). Today, we’d love to dive deeper into some of the most common questions you’ve been hearing from businesses struggling with compliance. Let’s start with one of the key areas—double materiality, probably one of the trickier aspects of CSRD compliance.

How should companies manage these assessments, and what best practices can they follow?

“That's a great question, and it’s something businesses are really trying to wrap their heads around. The concept of?double materiality?is at the heart of the CSRD, and it’s quite different from traditional financial reporting. In short, double materiality means that companies need to assess two aspects:?financial materiality?and?impact materiality.

Financial materiality focuses on how sustainability issues—like climate risks—impact the company's bottom line. But impact materiality is just as important, and this is where many companies are facing challenges. It requires businesses to assess how their operations impact the environment and society at large. This could be through carbon emissions, labor practices, or biodiversity impacts, for example.

To manage these assessments effectively, companies need to first build a?robust framework?that allows them to assess both angles clearly. Best practices we’ve seen involve engaging?internal stakeholders?across departments—finance, operations, sustainability—because this isn’t something that just the sustainability team can handle. You really need an integrated approach. Also,?stakeholder engagement?plays a huge role. Reaching out to investors, employees, suppliers, and even local communities can help businesses understand where their biggest risks and impacts lie.

And let’s not forget about?materiality assessments—a lot of companies are struggling with where to even start. A good tip is to?prioritize the key issues?that are both highly relevant to your business and important to external stakeholders. Aligning these issues with global frameworks like?GRI?or?TCFD?can also make the process smoother.”

The CSRD comes with a lot of technical requirements, especially around digital reporting formats like XHTML. How can companies prepare for this shift?

“Yes, the digital aspect of the CSRD is something that can’t be ignored. The?XHTML format?and?digital taxonomy?are really designed to make sustainability reports?machine-readable, which is a step forward in terms of transparency and accessibility. But this also means companies need to be prepared with the right digital infrastructure in place.

For businesses, this starts with ensuring their?reporting systems are up to date?and capable of generating data in the required format. Many companies are already familiar with XHTML because of financial reporting, but sustainability data might not be integrated into those systems yet. So, the first step would be to?consolidate sustainability data?into the same platforms used for financial reporting.

A lot of businesses are turning to?third-party software solutions?like XBRL or similar tools, which help with digital formatting and taxonomy compliance. These systems can make the whole process more efficient, especially for companies that are reporting for the first time under CSRD.

And it's not just about technology—training is critical. The people managing this data need to be aware of the CSRD’s specific requirements for tagging and reporting. So, setting aside time to upskill your teams will definitely pay off in the long run.”

Gathering data from global value chains is notoriosly difficult, especially for Scope 3 emissions. What should companies do if they can’t get all the necessary information from their suppliers?

“You're absolutely right—Scope 3 emissions?are one of the most complex parts of sustainability reporting, and they can account for a huge portion of a company’s overall emissions. But value chain data isn’t always readily available, especially when you’re dealing with global suppliers who may not have the same reporting capabilities.

The first thing companies should do is make?reasonable efforts?to collect this data. The CSRD is clear that while you may not get everything right away, you need to demonstrate that you're actively trying. This means reaching out to your suppliers, asking for data, and where possible, offering support to help them meet your reporting needs.

If the data simply isn’t available, companies are allowed to use estimates?in the interim. This can be based on industry averages, benchmarks, or other reliable sources. But you must be transparent about this in your report—disclose the gaps, explain why the data isn’t available, and outline your plans to improve data collection in the future.

Another strategy that works well is to focus on your?largest or highest-risk suppliers?first. Start with the suppliers that contribute the most to your Scope 3 emissions or pose the highest environmental or social risks, and then expand from there.

It’s also important to look at this as a long-term process. The CSRD allows for a?three-year grace period?for value chain reporting, so use that time to strengthen your relationships with suppliers and build the necessary systems to collect better data over time.”

Climate transition plans are a key requirement under the CSRD. What should companies focus on when developing these plans to ensure they meet the directive’s standards?

“That’s right, and it’s one of the more forward-looking aspects of the CSRD. A?climate transition plan?is essentially a company’s blueprint for how it intends to align its operations with the?Paris Agreement and the EU’s goal of achieving?net-zero emissions?by 2050. But it’s not just about setting targets; it’s about having a clear, actionable plan to get there.

For companies, the first step is to establish?science-based targets—these are emissions reduction targets that are aligned with the latest climate science. It’s crucial that these targets aren’t just aspirational but are achievable and measurable. The CSRD asks for transparency, so businesses need to show how their?short-, medium-, and long-term goals?fit into this larger vision. And this isn’t just about reducing emissions; it’s about rethinking how the business operates entirely, from supply chains to energy use.

The?implementation?side is equally important. Companies need to demonstrate that their?business strategies?are actually aligned with their climate goals. For example, are they investing in renewable energy? Are they moving toward more sustainable products or services? Stakeholders, especially investors, are keen to see that a company’s leadership is committed to these goals, and that progress is being monitored year over year. This level of accountability will ultimately build trust, but it requires companies to have strong?governance?in place, ensuring the transition plan is actively being executed and not just sitting on paper.”

Materiality assessments seem to be another complex area. What are the main challenges companies face when conducting these assessments, and how can they overcome them?

“Materiality assessments are definitely one of the trickier aspects of CSRD compliance because they require a company to look at?both sides of the coin—how sustainability risks affect the business, and how the business impacts the environment and society. That’s?double materiality, and getting it right means diving deep into your operations and value chain.

One challenge is knowing?where to start. Many companies are overwhelmed because sustainability covers such a broad range of issues—climate, human rights, biodiversity, and more. The key is to?prioritize. You can’t tackle everything at once, so businesses need to identify which topics are most?material?to their specific industry and operations. For example, a tech company might prioritize?energy use and e-waste, while a fashion brand might focus on?labor practices?and?water usage.

Another challenge is the?data collection?process. Gathering reliable, meaningful data can be tough, especially when it comes to areas like Scope 3 emissions or supplier practices. Here, we often advise companies to start with what they can measure accurately today, then build capacity over time. Materiality assessments aren’t static—you can update and refine them as your reporting improves and your understanding of your impacts deepens.

Engaging with?stakeholders—whether it’s employees, customers, investors, or even local communities—is also critical. They can provide insights into what’s most important to them, which in turn helps you align your priorities with external expectations. This stakeholder input is often a game-changer because it helps businesses go beyond compliance and actually connect with their broader ecosystem.”

Assurance is becoming increasingly important under the CSRD. How can companies ensure a smooth transition from limited to reasonable assurance in their sustainability reporting?

“This is a hot topic because third-party assurance is not something many companies have had to deal with in the context of?sustainability reporting?until now. Under the CSRD, companies initially need to provide?limited assurance, but eventually, the goal is to transition to reasonable assurance, which is a higher bar.

For those unfamiliar, limited assurance is essentially a lower level of scrutiny. The assurance provider checks that nothing is materially misstated, but it doesn’t involve the same level of deep dive you would see with financial audits.?Reasonable assurance, on the other hand, is more thorough—it’s the level we expect for financial reporting, where auditors are actively verifying the data and processes behind it.

The key to a?smooth transition?is preparation. Companies need to ensure that their?sustainability data?is just as robust and auditable as their financial data. This means having clear?documentation?and systems in place to track and verify the ESG metrics you’re reporting on. The more consistent and transparent your processes are now, the easier it will be to move toward reasonable assurance down the line.

It’s also a good idea to start?engaging with your auditors early. The sooner you involve them in your sustainability reporting process, the better they’ll understand your business and your approach to ESG. They can provide feedback on your systems and help you identify any gaps well before reasonable assurance becomes mandatory.

The transition won’t happen overnight, and companies shouldn’t expect perfection immediately. But by starting with?limited assurance, businesses can learn and improve, making that shift to reasonable assurance far smoother when the time comes.”

Subsidiaries can sometimes rely on their parent company’s sustainability reporting to avoid double reporting under the CSRD. What flexibility is allowed for subsidiaries, and when can they use consolidated group reports?

“That’s an important aspect of the CSRD because it recognizes the complexity of reporting for large groups, especially those with multiple subsidiaries spread across different countries. Under the CSRD, subsidiaries can indeed avoid?double reporting?in certain cases. If a subsidiary is part of a larger corporate group that already prepares a?consolidated sustainability report?in compliance with the CSRD, it may be exempt from preparing an individual sustainability report.

However, there are specific conditions for this. The?parent company?needs to meet the CSRD requirements at the group level, meaning the consolidated report has to follow the?European Sustainability Reporting Standards (ESRS). Also, the consolidated report must provide?comprehensive coverage?of the subsidiary’s activities and impacts. If the parent company’s report is incomplete or doesn’t address certain material issues relevant to the subsidiary, the exemption might not apply.

Additionally, the CSRD requires that subsidiaries provide a?link to the parent company’s report?within their own management report. This is to ensure that stakeholders, such as regulators or investors, can still access the necessary information. But it’s worth noting that?large listed subsidiaries?can’t simply opt out—they’re typically required to prepare their own reports even if their parent does consolidated reporting. It all comes down to ensuring that key sustainability information isn’t lost in the process.”

The CSRD is moving from limited to reasonable assurance for sustainability reporting. What challenges do businesses face during this shift, and how can they prepare for it?

“The shift from?limited assurance?to?reasonable assurance?is a big change, and it’s understandably causing some concern for businesses. The main challenge is that?reasonable assurance?requires a much deeper level of scrutiny. While limited assurance is more of a “check” to see if things seem accurate, reasonable assurance means auditors are really digging into the data, verifying it, and ensuring it’s consistent across the board. This can be tough for companies that haven’t traditionally had to audit non-financial data in the same way they do with financial information.

One challenge is ensuring that?internal data systems?are robust enough to support this level of scrutiny. For example, many companies are used to tracking?environmental metrics?like energy use, but they may not have detailed systems in place for?social or governance metrics. To get ahead of this, businesses need to start by?strengthening their internal data collection and validation processes. This might mean investing in better software or working closely with sustainability experts who can help refine their reporting systems.

Another challenge is?training and collaboration. Sustainability reporting often involves multiple departments—finance, operations, HR, and even IT. Ensuring all of these teams are on the same page and understand the importance of providing reliable data is critical. Early?engagement with assurance providers?is also key. If auditors are involved early in the process, they can offer valuable feedback on where there may be gaps in the data or processes, helping companies avoid surprises down the line.

It’s definitely a transition, but if businesses treat it as an opportunity to improve their reporting practices, they’ll find themselves in a much stronger position both in terms of compliance and credibility with their stakeholders.”

Non-compliance with the CSRD could have significant consequences. What are the legal and financial risks of inaccurate or incomplete sustainability disclosures, and how can businesses mitigate these risks?

“Non-compliance with the CSRD is not something any company should take lightly. The risks—both legal and financial—are very real. For starters, the?CSRD gives national regulators?across the EU the power to enforce compliance, and they can impose significant fines?for companies that fail to meet the reporting requirements or submit inaccurate or incomplete data. These fines are meant to be proportionate but also dissuasive, so they could be quite large, especially for bigger corporations.

But it’s not just about fines. There are also reputational risks. Sustainability reporting is increasingly important to?investors, customers, and regulators. If a company is found to have provided misleading information—whether it’s intentional or not—it could suffer severe reputational damage. In the era of social media, news about non-compliance can spread quickly, leading to a loss of stakeholder trust, which is hard to rebuild.

To mitigate these risks, companies should focus on?accuracy and transparency?in their reporting. This means implementing?strong internal controls?to verify data before it’s submitted and ensuring that the?sustainability reporting process?is integrated into the broader corporate governance structure. Additionally, engaging with third-party auditors for?assurance?early on can help identify any gaps or inaccuracies in the data.

It’s also worth noting that businesses should take advantage of the?three-year grace period?for certain types of reporting, such as value chain disclosures. This time can be used to strengthen their processes and systems, ensuring they’re fully compliant by the time the grace period ends. Being proactive is key here—waiting until the last minute is a recipe for trouble.”

How can businesses use CSRD compliance as an opportunity to enhance supply chain transparency and sustainability practices, especially when facing resistance from suppliers?

“That’s a great point because, while the?CSRD?is certainly a regulatory requirement, it also presents a major opportunity for businesses to improve their?supply chain transparency?and?sustainability practices—areas that can really set them apart from competitors. One of the key aspects of the CSRD is its focus on?value chain reporting, especially around?Scope 3 emissions?and?human rights?due diligence. For many companies, this has been a challenge, particularly when suppliers may not be willing or able to share the necessary data. But I see this challenge as an opportunity.

First, compliance with the CSRD pushes companies to really?map out their entire supply chain?in ways they might not have done before. By requiring companies to report on sustainability risks and impacts not just within their direct operations, but also in their upstream and downstream activities, it encourages businesses to take a closer look at who they’re partnering with and whether those partners align with their values. This kind of scrutiny can ultimately lead to?stronger, more resilient supply chains—ones that are better prepared for future regulatory changes, market pressures, and environmental challenges.

In terms of overcoming?supplier resistance, I think the key is collaboration?rather than compliance through force. Suppliers, particularly those in regions where sustainability regulations are less stringent, may not understand the importance of providing this data or may lack the infrastructure to track it. Here’s where companies can really step in and partner with suppliers?to improve their data collection and reporting capabilities. Some businesses are already working with their suppliers to offer training and resources that help them meet the reporting requirements. This not only strengthens the relationship but also builds a more transparent and sustainable supply chain in the long run.

Another important point is that businesses can use their CSRD compliance efforts to communicate their sustainability commitments to the public, investors, and other stakeholders. By demonstrating that they’re taking meaningful steps to improve supply chain transparency and sustainability—especially in difficult areas like Scope 3 emissions—companies can enhance their?corporate reputation. Investors are increasingly interested in businesses that have a solid understanding of their supply chain risks and are taking proactive steps to manage them. This can become a real?competitive advantage.

Finally, businesses should remember that they don’t have to go it alone. There are industry collaborations?and?partnerships?focused on improving sustainability across supply chains, such as initiatives within the?UN Global Compact?or?CDP Supply Chain?programs. By working together and learning from others, companies can find practical ways to enhance transparency, even when faced with challenges like supplier resistance.”

Thank you, Jaime, for shedding light on these critical issues. Your insights will certainly help businesses better navigate the challenges of the CSRD.

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