The EU has strengthened its regulations on sustainability reporting and introduced a new directive, the Corporate Sustainability Reporting Directives (CSRD), which requires companies to disclose detailed information on environmental, social and governance (ESG) issues. CSRD), which requires companies to disclose detailed information on environmental, social and governance (ESG) issues. This article summarises the latest developments as a continuation of the previously posted commentary on the Directive.

Commentary] CSRD: The EU version of the Sustainability Reporting Standard just before it comes into force - the impact on Japanese companies.
https://aiesg.co.jp/report/2301120_csrd/

Table of Contents
CSRD overview and update
Current situation on the part of companies regarding the adoption of the CSRD
　Momentum that CSRD application brings business benefits.
　Organisational structure of the company to which it applies
　Challenges for application
What action should Japanese companies take?

CSRD overview and update

The CSRD (Corporate Sustainability Reporting Directive) significantly extends the existing Non-Financial Reporting Directive (NFRD), expanding the scope and reporting content of companies subject to reporting. The Sustainability Reporting Directive was adopted by the European Parliament and the European Commission in 2022 and has been issued since January 2023; some large groups of companies from Europe that have been subject to the NFRD are now obliged to report on sustainability under the CSRD for the financial year starting January 2024. and will submit those reports for the first time in the financial year 2025.

The Directive sets out detailed disclosure requirements, supported by the ESRS (European Sustainability Reporting Standards), which comprises two cross-cutting standards and ten topical standards covering specific reporting requirements on various environmental, social and governance matters.

　- Further information on ESRS is summarised in the following report.

[Commentary] ESRS (European Sustainability Reporting Standard).
https://aiesg.co.jp/report/2301208_esrs/

An important deadline for EU Member States at the moment is 6 July 2024, when they will have to approve by national law the content of the Directive as set out in the CSRD (Anthesis). France was the earliest country to start developing national legislation and had enacted legislation as of December 2023.

In terms of the obligation for companies adapting the NFRD to report on sustainability in a CSRD-compliant manner by 2025, it is expected that many companies are currently being forced to comply. The general consulting firmPwCsurveyed 547 senior executives and senior professionals in more than 30 countries and territories between April and May 2024. The survey is aimed at 57% of all respondents, with PwC surveying them about their challenges and expectations for the first application of CSRD in financial year 2025.

Non-EU companies that meet the requirements within the EU, including Japanese companies, must report from financial years beginning on or after 1 January 2028. With this in mind, the next section analyses the issues related to the adoption of the CSRD that will affect Japanese companies through the results of PwC's survey.

Current situation on the part of companies regarding the adoption of the CSRD

Momentum that CSRD application brings business benefits.

Many companies already produce annual sustainability reports and report against other sustainability standards, but these need to be generally extended and enhanced to meet the requirements of the CSRD.

The research conducted by PwC captures the context in which perceptions are being formed that the application of CSRD has benefits for a company's business. Expectations are being developed not only for indirect benefits, such as improved environmental performance, better cooperation with stakeholders and risk mitigation, but also for direct benefits and cost reductions through the integration of sustainability-related knowledge into corporate decision-making processes. This is particularly the case for the group of companies that are actively engaged in the application of CSRD (reported as of financial year 2025) (Figure 1).

Figure 1: Perceived benefits for companies in introducing CSRD (Author's translation based on PwC survey)


The fact that companies that have made progress in their CSRD initiatives show a positive attitude towards the Directive can be considered to reflect the fact that internal corporate governance has become more efficient. Japanese companies are also required to understand a wide range of internal information when applying the Directive. Those factors can be said to have a positive effect in this study, leading to the recall of the possibility of economic benefits for companies.

Organisational structure of the company to which it applies

Tackling the broad and complex challenges of CSRD requires a large scale cross-functional effort within companies. The survey found that, on average, an average of eight business functions and departments are involved, including sustainability, finance, operations, procurement, technology and legal.

The CSRD has over 1,000 data points for disclosure requirements, and senior management must determine which disclosure requirements are material and need to be included in the report. As well as confirming the requirements, qualitative reports on the assessment and the corresponding plans need to be provided. In addition, all this information needs to be assured by an independent third party on reasonable assurance (the first step starts with limited assurance) Strong top-led governance is expected to be a key factor in preventing stalled CSRD implementation.

Management committees or directors are involved in CSRD practices in more than 70% of companies, rising to nearly 80% in those planning to report in 2025. Chief Financial Officers (CFOs) and Chief Information Officers (CIOs) should support the Chief Sustainability Officer (CSO) with financial reporting and technology expertise to ensure effective sustainability reporting and the realisation of sustainability-led opportunities, PwC summarises.

Challenges for application

Throughout the PwC survey, many survey respondents expressed a high level of confidence. On the other hand, potential challenges have also been identified, including low completion rates of some early-stage activities, lack of senior stakeholder engagement in some companies and low adoption of technology to support effective ongoing reporting.

The majority of respondents (97% for companies reporting for the financial year 2025) stated that they are confident about the likelihood of completing the preparation of their reports in accordance with the CSRD. However, there are varying degrees of confidence in its readiness according to the disclosure requirements of the ESRS.

Figure 2: Level of confidence in reporting realisation against the topic-specific requirements specified by the ESRS (Author's translation based on PwC survey)


While they report a high degree of confidence in topics commonly included in existing disclosures - such as labour, corporate behaviour and climate change - many are less confident about their ability to meet reporting requirements on less familiar topics such as biodiversity, circularity, pollution and workers in the value chain. on less familiar topics such as biodiversity, circularity, pollution and workers in the value chain.

This difference can be considered as the reason why 'data availability and quality' is the biggest obstacle to implementation: the breadth and depth of CSRD reporting poses a major challenge for company departments to collect, verify and integrate new types of data. There is no such thing as a central information system to manage the large amount of information, especially information on supply/value chains. This decentralised collection of information demands inefficient work on the part of companies. Unless companies pay close attention to the fundamentals of their data strategy, they will be prone to errors.

The CSRD's requirement to look across the entire value chain presents new challenges in relation to data. Companies are expected to use data from suppliers, customers and third-party data providers, but need to assess the reliability of the information. The basic premise is that the initial step of understanding and defining the value chain will take a lot of time. From this point of view, the complexity of the value chain is identified as the second major obstacle to implementation.

Figure 3: Difficult factors in CSRD adoption(Author's translation based on PwC survey)

The difficulties related to data processing are also exposed by the survey on organisational structures. While most respondents plan to involve the technology department, only around 60% have already integrated it into their reporting team. Investing in and building an in-house technology department for complex sustainability analysis is an important option for achieving efficient continuous reporting. Note that PwC expects the integration of technology departments to accelerate in many companies over time, and the use of AI tools will also become more widespread, as revealed through the survey. Currently, spreadsheets are found to be the most used means.

Figure 4: Technologies and tools used by companies(Author's translation based on PwC survey)

What action should Japanese companies take?

What has been found through the survey of a group of companies that are currently accelerating their preparations for CSRD adaptation is that leader-led decision-making with a long-term perspective will become increasingly important. Instead of traditional compliance-oriented management, value-creating management based on active collection, analysis and consideration of sustainability information is expected through the adoption of CSRD reporting.

The following flowchart can be considered for the main response flowchart that Japanese companies should take.

(*): all classes of securities (e.g. shares, bonds) transferable on the capital market. If only debt securities are issued, the nominal value per unit must be less than EUR 100 000. Otherwise, answer 'no' to this question.
(**): in this case, the sustainability report is prepared at the level of the non-EU parent company excluding subsidiaries (i.e. on a stand-alone basis rather than on a consolidated basis).
¹: 2 out of 3: average of at least 250 employees, net turnover of at least EUR 40 million, balance sheet total of at least EUR 20 million
²: 2 out of 3: 10 < average number of employees ≤ 250, EUR 700 000 < turnover ≤ EUR 40 million, EUR 350 000 < balance sheet total ≤ EUR 20 million

Figure 5: Main response flowchart for companies to take (Author's translation of material from mazars).
(https://www.mazars.com/content/download/1151519/58967343/version//file/Mazars%20CSRD[%E2%80%A6]%20for%20non-EU%20groups%20and%20EU%20subsidiaries%202023.pdf )

Deloitte Tohmatsu Ltd.The participant questionnaires from the CSRD/ESRS seminar (13 September 2023) and the IFRS Sustainability Disclosure Standards seminar (9 November 2023), conducted by the Sustainability Disclosure Standards Association of Japan (SSAJ), confirm how Japanese companies are responding to current sustainability regulations (number of responses: 1116).

To begin with, it can be confirmed that most Japanese companies are led by a 'Sustaina CSR department', followed by 'Corporate Planning/IR' and 'Financial Management', which are responsible for the coordination of sustainability reporting (Figure 6). In addition, the majority of respondents feel that there is a need for awareness surveys to address CSRD (Figure 7). It should also be noted that, as an issue identified in the survey, just under 80% of participants were 'considering or unsure' about setting up a third-party guarantor (Fig. 8), as CSRD requires a third-party guarantee, there is a need to co-ordinate the relevant responsible body/person within Japan.

Figure 6: Sectoral affiliations of seminar participants (Prepared by the author with reference to Deloitte Tohmatsu survey).

Figure 7: Awareness of ESRS compliance (Prepared by the author with reference to Deloitte Tohmatsu survey).

Figure 8: Current status of third-party assurance of sustainability reporting (Prepared by the author with reference to Deloitte Tohmatsu survey).

PwC has identified the following actions towards CSRD that companies should take

Main actions.	Detail.	Implementation examples
Recognising progress and understanding scope	Understand the scope of your company and move now to comply with the CSRD and ESRS. Many companies have already been disclosing sustainability information for years, based on regulatory obligations and voluntary standards.	Stakeholder engagement and materiality analysis and data collection processes.
Accelerated determination of CSRD requirements	Companies that have not completed a requirements assessment should accelerate this initiative. This will enable them to fully understand the challenges and develop a concrete plan.	Interact with industry peers and partners to understand the importance of the dual and other aspects of the industry.
Building long-term data processes and systems.	Investment in central systems for sustainability information is required. Investment in data and systems equivalent to financial reporting is required.	System investments to ensure data accuracy, availability and auditing systems
Participation of top management	A trio of CFOs, CIOs and CSOs are given responsibility for CSRD implementation and promote cross-departmental collaboration.	CFOs provide information management, CIOs provide data systems and CSOs provide sustainability expertise

Table 1: Actions to be taken by companies and examples (Author's translation based on PwC survey)

The key is how to secure specialist personnel to analyse company activities from a bird's eye view and to ensure third-party assurance.

Japanese companies are expected to start reporting from the 2028 point in time, but it will take a great deal of time and money to create the soil for data analytics within their own companies.

In such cases, outsourcing the analysis institute to a third party is likely to be considered as an option. In this case, as mentioned above, it is important to cooperate with an analysis institute that has ensured reliability.

We are the first company in Japan to develop a sustainability analysis tool, and we can offer a close examination of a company's activities from the supply chain/value chain up to the product production stage. If you have any questions about CSRD compliance, please contact us.


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