CSRD Compliance: A Stitch in Time Will Save Nine

Key Takeaways

• Many U.S. companies with subsidiaries in the EU will be subject to reporting requirements[1] in 2026 based on fiscal year 2025, leaving around 13 months to assess gaps and implement proper processes and controls to track new metrics beginning in 2025.
• In contrast to publicly listed companies, privately held firms may be less familiar with ESG reporting and related data collection and may face an uphill battle in terms of compliance.
• Although many professional services firms may be equipped to provide clients with a checklist of the CSRD’s requirements, fewer will have wide-ranging experience across ESRS topics, strategy, audit and controls, financial reporting and data management and analytics. Now is the time for companies to start considering what the CSRD will mean for their operations, reporting processes and reputations.

CSRD: A Quick Primer

The EU’s Corporate Sustainability Reporting Directive (“the CSRD”) may not be familiar to everyone, especially those in the U.S., but it’s worth keeping on your radar. Estimated to affect at least 50,000 companies in the EU and 10,000 foreign companies[2] with EU operations—including some based in the U.S.—the CSRD will mandate reporting of wide-ranging environmental, social and governance (“ESG”) data. Potentially affected companies should waste no time in considering their exposure to the CSRD and how it could impact their internal data collection and reporting processes. Failure to do so could lead to financial penalties[3] and reputational risks.

Complying with the CSRD will be a learning experience for all involved. Many U.S. companies with subsidiaries in the EU will be subject to reporting requirements in 2026 based on fiscal year 2025.[4], [5]That means they have around 13 months to prepare so that they will have full-year 2025 data to report in 2026. While this may sound like a fair amount of time, the process will be complex and require lots of preparation. Affected companies will be required to report on matters ranging from pollution to biodiversity, business conduct and climate change. Some companies will need to first determine whether they are exposed to the CSRD, and if so, understand to what extent and how.

Assessments Core to CSRD Preparedness & Compliance

Double Materiality Assessment

A materiality assessment will be key to this process. Companies will need to account for the CSRD’s double materiality[6] framework, meaning they will need to review impacts from a financial materiality perspective as well as their organization’s impacts on the outside world (sometimes referred to as an “inside-out” perspective). While some companies might have prior experience with voluntary reporting, the CSRD will be a whole different ballgame, requiring nuanced and detailed accounting. Companies will be subject to assurance, and if they don’t meet requirements, they may face fines. In contrast to publicly listed companies, privately held firms may be less familiar with ESG reporting and related data collection and may face an uphill battle in terms of compliance. Unlike many other mandatory disclosures, the CSRD will apply to many privately held companies with EU operations or subsidiaries. It will also be crucial for companies to understand materiality thresholds, or at what point their impacts are significant enough to be reported according to the CSRD’s standards. To ensure compliance, companies will need to understand who collects the relevant data, how it’s reviewed for completeness and accuracy and quickly address any gaps in content or quality.

Gap Analysis

Performing a gap analysis will also prove helpful ahead of a compliance buildout. Companies will need to know whether their current processes are airtight and the extent to which they’ll stand up to limited and then reasonable assurance. Material gaps in data availability and related processes are all but certain. For some, the CSRD may represent a major shift in expectations and stakes for ESG reporting, involving significant or first-time considerations around timing, applicability, what to report, strategic decision making and how to advance operations to a place where they can reliably provide information required for financial reporting. Companies will need an extensive, end-to-end solution resembling business transformation or process improvement in scope.

The above assessments are highly complex, prescriptive and could reasonably take up to a year to conduct. A trusted partner can help in this incredibly challenging process, engaging functions across the company to quantify progress to date, provide education and establish internal consensus around necessary next steps. Although many professional services firms may be equipped to provide clients with a checklist of the CSRD’s requirements, fewer will have wide-ranging experience across ESRS topics, strategy, audit and controls, financial reporting and data management and analytics. Extensive experience in these areas, along with a global perspective, will be crucial for building an effective compliance structure.

Are You Prepared? The Stakes Are Getting Higher for ESG Reporting Compliance

As this article illustrates, becoming CSRD-compliant is not a casual, voluntary exercise, but a highly detailed and sophisticated exercise of compliance that requires significant preparation and ongoing maintenance. But the challenges don’t end there. Although the CSRD’s standards and requirements may be highly defined, how they will translate into public reporting remains to be seen. And with other ESG standards emerging from the State of California and potentially the SEC,[7] companies will need to consider future developments in the regulatory pipeline.

Even if they are not directly exposed to the CSRD, C-suite executives and general counsel will face myriad questions from investors about their ESG reporting and stakeholders worldwide will watch what they say and do. They may face pressure from customers and supply-chain partners. Stepping up to the plate and taking initiative could help strengthen one’s license to operate, demonstrate their sophistication and credibility of management and ultimately help ensure favorable treatment within the capital markets. For this reason, companies who are not affected but whose peers are should closely examine how to safeguard their reputations and maintain appeal to investors.

Preparedness & Compliance – A Stitch in Time…

Many companies may not yet be sure if the CSRD applies to them—and that’s okay. If they are exposed to the CSRD, they must secure the advisory and underlying analysis to make necessary disclosures. Those who are not directly impacted would be wise to consider coming evolutions in investor perception and the regulatory landscape. For example, it’s possible that some companies that are not subject to CSRD compliance may decide to undertake ESG-related operational and reporting changes to remain competitive among peers and safeguard their ability to attract capital. And finally, even organizations well-versed in the CSRD will need to optimize their approaches; a one-size-fits-all approach simply does not exist. For instance, with different phase-in periods to choose from, some companies may decide to comply earlier, while others may take more time.

As complying with the CSRD becomes a fact of operating a business in the EU, those directly affected and their peers alike will face myriad questions and challenges around ESG, data collection and reporting. So now is the time for companies to start taking the CSRD seriously. Those who ignore it do so at their own peril, and if they take too long to act, they may struggle to collect the necessary data for compliance or face reputational risks. A stitch in time will save nine.

Endnotes