Sustainability

Stephen Prendiville explains how smart and responsible investment in infrastructure can have a transformative effect on societies With Ireland’s population set to swell to 5.7 million by 2040, we have a once-in-a-generation opportunity to use infrastructural planning to support a better future for all. So says Stephen Prendiville, FCA, Infrastructure and Real Estate Advisory Partner and Sustainable Infrastructure Leader at Deloitte Ireland. “New homes, jobs and amenities will be needed to meet both basic needs and deliver a good quality of life for all, and infrastructure is critical,” Prendiville says.  “We have a once-in-a-generation infrastructure investment requirement, and we need to deliver it in a manner aligned with criteria that will make it good for all.” As Prendiville sees it, smart and responsible investment in infrastructure can have a transformative effect on societies. “It’s about looking at infrastructural spend from the perspective of wider potential benefits, rather than just the ‘money lens’, and encouraging governments to improve how they prioritise infrastructure and support dialogue between key stakeholders to create a more sustainable economy and society,” he says. Sustainable infrastructure: early start In his work today with public and private sector clients, Prendiville’s focus is on ensuring we deliver our collective infrastructure requirements to reach climate neutrality by 2050 and improve society for future generations. His own interest in infrastructural planning emerged early in his career when he was training as a Chartered Accountant with KPMG in Dublin. “I owe my start to Michele Connolly at KPMG who gave me my first taste of infrastructure back in the 2000s,” Prendiville says. “I worked on some of the biggest projects in the country at the time, including our road network and the first iteration of Metro North. Then, like many towards the end of the noughties, we left Ireland after the financial crash and moved to Canada. It was there I got my first real experience of sustainable development in a live environment.”  Prendiville would remain in Canada for close to a decade, working with big cities, including Toronto, Vancouver, Edmonton and Montreal, to deliver sustainability and resilient infrastructure goals.  “I was working with cities and municipalities utilising public transport to improve citizens’ lives and livelihoods by creating opportunities to bolster economic development and tackle social deprivation,” he says. “A lot of professionals working in infrastructure are driven by the tangible impact they can have, whether that relates to hospitals, schools, renewable energy or transport, but it wasn’t until the introduction of the UN’s Sustainable Development Goals (SDGs) in 2016 that I really had a solid framework for understanding sustainability in the context of infrastructure.”  The United Nations’ 17 SDGs (see panel on pg. 43) form the framework for achieving a better and more sustainable future for all by 2030. The 17 goals are interconnected—one cannot be achieved at the expense of another. “Looked at in totality, the SDGs are about advancing a wider sustainable outcome from a societal perspective,” Prendiville says. “If we’re going to challenge ourselves to deliver sustainable infrastructure, we have to always ask ourselves, ‘what am I not thinking about here in the context of what this project is?’ “It’s very easy to look at a wind farm solely as a clean energy project, for example. More than likely, it could offer other opportunities linked to the SDGs in the context of jobs, skills, biodiversity and habitat. That’s really where the concept of ‘infrastructure for good’ comes in.”  Infrastructure for good The Infrastructure for Good report was published in 2023 by Economist Impact with support from Deloitte and Duke University’s Nicholas Institute for Energy, Environment and Sustainability in the US. The barometer benchmarked the capacity of 30 countries to sustainably deliver infrastructure addressing social, economic and environmental needs, across five pillars: Governance and planning. Sustainable financing and investment. Social and community impact. Economic benefits and empowerment. Environmental sustainability and resilience.  Among the 30 countries analysed, Canada and the UK performed best. The barometer revealed, however, that—while most countries prioritise governance and planning—the financing and execution of infrastructure projects is often insufficient to deliver positive social outcomes.  “Ireland placed sixth in the barometer, which is a good result, but we fell down in the area of community engagement and benefit realisation at a localised level,” Prendiville says. “This is really about the idea that a project is narrowly defined relatively early and, while the community is allowed to contribute to the public consultation, it is not necessarily involved in co-creating the solution, nor is the solution delivering additional community benefits.   “An example might be a new bypass delivered by a department: the benefits case for the bypass will be that it’s going to remove a certain number of vehicles from a town centre, improving quality of life for the community. “The flipside is that there will be no money for the town to actually grab the opportunity the new bypass presents and realise potential benefits. They will get the road, but their local authority will have to come up with the rest themselves. “That won’t necessarily happen though, because the local authority might have several other priorities they need to deliver. So, doing what’s needed to unlock those benefits might fall by the wayside.  “Put simply, when we define a project’s goals too early, and to the delivery agent’s mandate, we miss out on the opportunity to realise the full breadth of benefits that might exist. “The opportunity for Ireland is to be the standout country in getting this right and doing this better in the context of an infrastructure for good framework.” Once-in-a-generation opportunity The roll-out of Project Ireland 2040, the Government’s national planning and capital expenditure strategy, marked an important milestone in Ireland’s sustainable planning policy, Prendiville says.  Launched in 2018, Project Ireland committed €165 billion in capital investment to fund vital infrastructure in areas such as housing, transport, education, enterprise and climate action at a time of significant population growth. More recently, The Programme for Government 2025, published in January, recommitted to the Climate Action Plan goal of achieving net-zero greenhouse gas emissions by 2050, as well as fast-tracking planning for offshore wind development and increasing home retrofitting targets in the years ahead. “I take a lot of heart from the Programme for Government,” Prendiville says. “I think we have transitioned in terms of our thinking. We’re no longer asking, ‘what do we need to do?’ We know we need to act. “We know that, in the world around us, we have a fundamentally changing economy and disrupted economic model.  “As a country, we need to strengthen our infrastructure to support changes on the global stage and we have a social requirement to build sustainable infrastructure for a growing population. “We need to think in terms of proactive decarbonisation, housing and new communities, the new economic models, sectors and industries we need for our workforce, and our participation in Europe and on the global stage from the perspective of foreign direct investment. “We already know probably 90 percent of what we need to do, and now it’s about moving forward bravely with our execution–and the social license to undertake this generational build programme shouldn’t be taken for granted.   “We owe it to the future generations to get it done as fast as possible, but, ultimately, to get it done well so that it lasts the test of time.” Interview by Elaine O’Regan  

Is the environmental, social and governance movement in decline? We ask three of our Chartered Stars, each recognised for their outstanding work in support of the United Nations’ Sustainable Development Goals, for their take on the future of ESG Evan O’Donnell Chartered Star 2024 Accountant with Avery Dennison   As a Chartered Accountant, I view the future of sustainability through both a financial and ethical lens.  Sustainability is increasingly becoming a key pillar of business strategies, and I believe that over the next decade, it will shift even more from a niche concern to a mainstream priority.  Companies and governments will need to integrate sustainability into their financial reporting, with transparent disclosures on environmental, social and governance (ESG) metrics becoming standard practice.  The rise of green bonds, sustainable investing and carbon accounting will drive capital towards businesses that align with sustainability goals, creating a clear incentive for corporations to adopt responsible practices. Looking ahead, I hope to see a world in which sustainability is embedded in every financial decision.  Businesses should not only focus on reducing their environmental footprint but also consider the social equity and long-term resilience of their operations.  This shift will require a redefinition of value, where profit is measured alongside positive social and environmental impact, creating a more balanced approach to growth. The current transitional period in geopolitics presents challenges, however. With some countries backtracking on sustainability efforts, there is a risk of fragmentation in global initiatives.  While international collaboration is essential, the rise of protectionist policies and divergent priorities may hinder the overall progress of global sustainability targets.  As a result, I expect businesses to face increasing pressure to navigate this geopolitical uncertainty, balancing national interests with global sustainability standards. In the future, we will likely see greater local innovation in sustainability, with businesses and governments in different regions leading by example.  While there are challenges ahead, however, the growing recognition of the financial value of sustainable practices gives me hope that we will continue to move towards a more sustainable and inclusive future. Peter Gillen Chartered Star 2023 Sustainability Reporting Manager with AIB   In the future, I hope to see further consolidation of global sustainability reporting standards to simplify implementation for companies. While progress is being made, however, challenges remain. Existing EU legislation, such as the Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence Directive (CSDDD) and EU taxonomy for sustainable activities, continue to evolve. At the same time, new measures are emerging, such as China’s recently introduced corporate sustainability reporting standards.  Continued global engagement on consolidating these is critical to encourage more companies to report against these standards. Given recent geopolitical shifts and the decision by some nations to scale back their sustainability efforts, I was initially concerned all the progress made would be undone.  However, European companies increasingly recognise the “business” rationale for sustainability, no longer viewing it simply as altruism.  Even companies outside the CSRD’s scope should still see the benefits of managing climate risks, such as rising temperatures and sea levels.  This isn’t about pandering to a “woke” environmental, social and governance (ESG) agenda, it is about ensuring the long-term viability of one’s business. Despite the recent wave of anti-ESG sentiment, there are some who are refusing to accept calls for ESG to be omitted from investment decision-making.  In the UK, for example, the People’s Pension (one of the UK’s largest pension funds) recently moved £28 billion in assets from the US asset manager, State Street, noting that it wished to prioritise sustainability, active stewardship and long-term value creation for its near seven million members.  It remains to be seen whether other funds will follow suit.  I hope funding for pro-ESG funds continues to grow; not for political reasons, but to protect the financial futures of those whose pensions and savings are managed through funds.  It will also be interesting to observe whether asset managers continue to support ESG publicly or remain silent to avoid criticism (i.e. greenhushing). Fiona Hanafin Chartered Star 2022 Associate Director, Sustainability Advisory, Grant Thornton Sustainability is evolving from being viewed merely as a compliance requirement or ‘tick box’ exercise to a strategic driver of long-term business success.  I believe businesses that are proactive in addressing sustainability-related risks will gain a competitive advantage and thrive in an uncertain world.  Climate change continues to intensify at home and abroad, and businesses need to identify and address their individual physical and transition risks.  We’ve seen how extreme weather and floods can damage infrastructure and disrupt supply chains while shifting regulations create uncertainty.  To address these risks and build resilience, companies should adopt sustainable practices within their operations and integrate sustainability into their core values and decision-making processes.  Future-focused businesses that adopt sustainability, including social considerations within their strategy, will benefit from greater appeal among talented employees and environmentally conscious consumers. I hope business leaders across Ireland and Europe continue to embrace sustainability as a driver of growth and innovation. There are opportunities to be seized by reducing carbon footprints, adopting green technologies, diversifying supply chains and prioritising responsible stewardship.  Despite all the noise (regulatory and political), the fundamentals of sustainability have not changed. We are living beyond our means; our society needs to change.  Although the sustainability agenda has faced setbacks in some regions due to regulatory and political backlash, the global trend towards adopting sustainability initiatives and reporting continues to progress.  Investment in the energy transition remains strong, cand despite the proposed delay to the introduction of the Corporate Sustainability Reporting Directive in the European Union, many companies are collecting data to ensure the availability of decision-making information.  Those aiming for long-term success will recognise that the broader global momentum driving sustainability is fuelled by market demand and risk mitigation.  With a well-informed sustainability strategy, businesses can protect their bottom line while making a positive global impact.

The experiences of the first wave of entities preparing CSRD sustainability statements hold important lessons on the complexities of the double materiality assessment.  Gareth Martin, Jennie Kealey  and Luke Bisson delve into the details Some of the largest entities in Ireland are in the process of issuing their first mandatory sustainability statement under the EU’s Corporate Sustainability Reporting Directive (CSRD). They are part of the first wave of reporters following transposition of the CSRD into Irish law for accounting periods beginning on or after 1 January 2024.  To identify sustainability information for disclosure, an entity is first required to complete a double materiality assessment (DMA) to determine material impacts, risks and opportunities (IROs) in relation to environmental, social and governance (ESG) matters.   Double materiality is a new concept aimed at enhancing the existing understanding of financial materiality already familiar to accountants. It extends financial materiality considerations to encompass an understanding of both the entity’s impact on the environment and society, and the impact of sustainability matters on its own prospects, performance and position—i.e. double materiality considers both inside-out and outside-in perspectives.  The DMA process must comply with the requirements of the European Sustainability Reporting Standards (ESRS), as this is one of the components of a CSRD limited assurance report under International Standard on Assurance Engagements (Ireland) 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information - Assurance of Sustainability Reporting in Ireland (ISAE (Ireland) 3000). ISAE (Ireland) 3000 is the assurance standard that has been adopted in Ireland for sustainability statements prepared under the CSRD. An entity’s CSRD reporting is dependent on a robust DMA output. This is the foundation of the sustainability statement. Here, we offer some practical insights into completing an effective DMA, drawn from our experience supporting clients in this area. Overview of the DMA process  The ESRS do not mandate how to conduct a DMA and, accordingly, each entity should apply judgement to design a DMA process that complies with the ESRS. Figure 1. shows one potential approach to the DMA process. The DMA is comprised of the two interconnected assessments of impact materiality (ESRS 1 3.4) and financial materiality (ESRS 1 3.5). Figure 2 illustrates the double materiality concept. DMA: illustrative examples Some high-level illustrative examples of sustainability IROs are as follows: Impact (positive): Actual positive impact on the environment through adaptation of manufacturing facilities to use renewable energy sources. Impact (negative): Potential negative impact on the working conditions of workers in the value chain through contracting of suppliers in geographies with sub-standard labour laws. Risk: Risk of increased costs in the form of fines from non-compliance with wastewater disposal regulations. Opportunity: Opportunity to increase revenues from sustainability conscious customers through development of biodegradable products. Key practical DMA considerations Some practical considerations should be factored into the DMA process as required by the ESRS. 1. Disaggregation of the assessment The appropriate level of disaggregation must be determined before beginning the DMA process.  The assessment may be disaggregated by business division, country of operation, subsidiary, significant site or significant asset (depending on the nature of the entity) in order to effectively identify IROs at the correct level of granularity and assess their materiality.  For example, groups must consider whether the DMA should be performed centrally at the group level, or at a disaggregated level. 2. Stakeholder engagement approach Stakeholders include key actors in the value chain, such as suppliers, employees and customers, but can further comprise groups such as indigenous communities and silent stakeholders, such as nature. Therefore, while conventional methods of engagement like surveys, interviews and workshops are commonly used, it is also important to consider alternative approaches. This might include analyses of ecological, pollutant or geographical data. Engagement may also be indirect, through stakeholder representatives or subject matter experts. Stakeholders should only be engaged in the assessment of topics where they have the appropriate experience and/or expertise required to provide accurate and reliable input. They may be mapped to specific IROs on the longlist to facilitate the provision of IRO inputs, where appropriate, to their position in the value chain. 3. Value chain boundary When performing the value chain analysis step of the DMA process, management should determine the point or “boundary” in the value chain up to which information should be collected. If this boundary is not effectively defined during the DMA, there is a risk that IROs related to components of the value chain will not be identified. Consequently, value chain information may not be presented completely in the sustainability disclosures.  For example, if only first-tier suppliers are considered as part of the value chain, the impacts of second- or third-tier suppliers connected with the entity’s operations may be overlooked in the DMA, even though they are within the scope of impact materiality. 4. Material financial effects Sustainability risks and opportunities are often drafted without properly considering their material effects on financial position, financial performance, cash flows, access to finance or cost of capital—or evaluating their consistency with the information disclosed in the financial statements. Likewise, it is common for management to only consider and score the likelihood and magnitude of a risk or opportunity, even though ESRS 1 stipulates that it is the likelihood and magnitude of the financial effects that should be assessed. 5. Dependencies on natural, human and social resources Risks and opportunities derive not only from impacts, but also from an entity’s dependencies on natural, human and social resources. It is therefore important for management to consider dependencies as potential sources of risks and opportunities when assessing the financial effects triggered by sustainability matters. For example, a manufacturing entity should consider its dependencies on energy, raw materials, customer relationships and healthy and skilled workers, among others, when drafting and assessing the materiality of IROs on the longlist. Dependencies on biodiversity and ecosystems should also be identified and assessed under the ESRS 2 IRO-1 requirements of ESRS E4. This includes an assessment of sites located in or near biodiversity-sensitive areas.  6. IRO scoring approach The ESRS do not define an IRO scoring approach. However, the factors for scoring are outlined in ESRS 1 and elaborated on in European Financial Reporting Advisory Group Implementation Guidance 1 (EFRAG IG 1) Material Assessment. Scoring should also align with the entity’s existing risk management framework where possible. ESRS 1 does prescribe the use of an appropriate quantitative and/or qualitative threshold to determine which IROs are material.  EFRAG IG 1 provides graphical representations of such materiality thresholds in both columnar and matrix formats. It is important to note that this guidance is purely illustrative. Management should document the rationale supporting their choice of scoring scales and thresholds—and ensure that these decisions have undergone robust review and validation. 7. Entity-specific disclosures When an entity concludes that an IRO is either not covered or not covered with sufficient granularity by an ESRS—yet is material due to its specific facts and circumstances—additional entity-specific disclosures must be provided to enable users to understand the sustainability-related IROs. Given that sector-specific standards have not yet been incorporated into the ESRS, it is paramount that management implements robust processes to assess potential IROs to identify any that are not aligned to the ESRS topical standards. For such topics, entity-specific disclosures should be drafted which adhere to the general disclosure requirements set out in ESRS 2 and meet the qualitative characteristics of information in accordance with ESRS 1. DMA: useful insights Here are eight insights that can be applied to support the DMA process: 1. The DMA process requires detailed step-by-step planning. Often, input is needed from across the organisation, particularly where a materiality assessment of sustainability information is being carried out for the first time. 2. Before beginning the DMA, an entity’s organisational structure should be appropriate for management to effectively lead and oversee the DMA process, and sufficient training should be provided. Identifying key internal stakeholders, such as members of the sustainability, environmental and financial reporting functions, will facilitate an effective assessment, as will forming a working group to co-ordinate day-to-day aspects of the DMA. 3. Validation roles for key decisions at each stage of the DMA should be clearly defined and documented. A board level steering committee could be formed for the purpose of reviewing and validating key decisions before the working group proceeds to the next stage of the process. 4. Documentation of the DMA process should begin at the inception of the assessment. This documentation should be clear, specific and detailed enough to enable assurance practitioners to understand and assess each stage of the DMA process. A centralised change log should be maintained to provide a clear and traceable trail of amendments and judgements, including their supporting rationale, over the course of the DMA. 5. Methods of engagement likely to garner the most effective coverage of views across all affected stakeholder groups should be considered. These might include surveys, interviews and workshops. A first step here might involve mapping affected stakeholder categories to sustainability matters, and prioritising different categories for engagement purposes. 6. Management should gain an understanding of the ESRS disclosure requirements, datapoints and transitional reliefs early on in the DMA process so they can effectively map material IROs to disclosure requirements and implement interconnectivity between the DMA process and disclosures. 7. When drafting the longlist of IROs and determining material sustainability matters, it is important to benchmark against disclosures prepared by peers and early reporters. This is especially pertinent in the first year of reporting, in order to effectively compare the information that is being disclosed within sectors and industries. 8. A plan for the refresh of the DMA should be agreed on from the outset. Management should implement an annual review of the DMA, comprising procedures such as a landscape review and revalidation of the DMA results. The circumstances requiring a full refresh of the DMA should be defined in accordance with the requirements of ESRS 1 and EFRAG IG 1. The frequency at which a full refresh should be performed regardless of change events must also be considered. Planning for quality and efficiency The DMA is a complex exercise, and each organisation will encounter its own challenges when preparing for the first year of CSRD reporting.  Despite this, there are learning points that can be applied broadly to the DMA in order to improve the quality and efficiency of the process.  Planning each step of the DMA and establishing a process compliant with the requirements of the ESRS will allow entities to develop and perform a robust DMA. Gareth Martin is a Managing Director in  Deloitte’s Sustainability Reporting and Assurance team Jennie Kealey is a Manager in Deloitte’s Sustainability Reporting and Assurance team Luke Bisson is a Senior in Deloitte’s Sustainability Reporting and Assurance team  

Accountants will play a critical role in helping SMEs manage the impact of new sustainability reporting requirements on their supply chains. Niamh Brennan, Louise Gorman and Seán O’Reilly explain why The EU’s Corporate Sustainability Reporting Directive (CSRD) was transposed into Irish law in July 2024. Those in management and accounting functions in some of Ireland’s large companies have struggled to interpret the Directive’s requirements.  The legislation will require reports under European Sustainability Reporting Standards (ESRS) from 1 January 2025 for the 2024 financial reporting year.  In recent years, many large companies have voluntarily reported sustainability information under the Global Reporting Initiative (GRI) and the Taskforce for Climate-related Financial Disclosures (TCFD) frameworks.  Moreover, the environmental topics covered by the ESRS are derived from the EU Green Taxonomy, with which large entities in certain sectors have already reported alignment. This alignment prepares them for the CSRD requirements to some extent.  Listed SMEs will not come within the scope of the CSRD until 2027 (for the 2026 financial year), with an opt-out for two further years to 2029 (for the 2028 financial year).  Nonetheless, many SMEs, both listed and unlisted, will experience the effects of sustainability reporting requirements before these dates. Significance of the value chain The ESRS require disclosures on material environmental, social and governance topics. Such disclosures must detail the undertakings’ own operations as well as those throughout their value chain.  The value chain refers to the full range of activities, resources and relationships related to the undertakings’ business model and the external environment in which they operate.  In Ireland, many large companies’ activities, resources and relationships involve SMEs. Examples include financial services institutions with SME customers, and food and beverage producers with SME suppliers.  The implication of such relationships, in ESRS terms, is that large companies must gather sustainability information from SME value chain partners. Reporting challenges for SMEs  We have conducted two research studies on sustainability reporting for Irish SMEs. Our first study employed the GRI framework, and our second used the EU Green Taxonomy, to assess SMEs’ reporting preparedness.  Mindful of SMEs’ strong reliance on their Chartered Accountants for reporting and advisory needs, we engaged with professional Irish accounting practitioners to gain insights into the challenges they face.  Both studies were conducted in 2022 in anticipation of the publication of the ESRS by the European Financial Reporting Advisory Group (EFRAG). Our findings are highly relevant now that sustainability reporting is legally mandated. The findings of both studies indicate that cost is the greatest barrier encountered by SMEs.  In particular, set-up costs, ongoing data management expenses and potential operational changes, are likely to prevent the average SME from collecting and reporting accurate and reliable sustainability data.  Resources, particularly human resources and associated training costs, also pose a substantial impediment to implementing a sustainability reporting system. Related to this, both studies identify a significant sustainability knowledge gap within SMEs.  While an implicit understanding of the importance of environmental and social sustainability exists, many SME managers and employees have not received education on the necessary topics or metrics which must be disclosed, many of which are scientific or highly specialist in nature.   Finally, access to the necessary technology to manage and report sustainability information is limited. Appropriate data management and reporting systems have only recently become available, at a price point that typically only large companies can currently afford.  With these issues in mind, future problems are envisaged as large undertakings request sustainability data from SME customers and suppliers for ESRS reporting. Supports for SMEs Supports could help to alleviate the challenges facing SMEs over the coming years. Our research found that national or EU governmental grants, tax incentives or carbon credits may assist SMEs in overcoming cost-related challenges.  The accounting practitioners in our studies also recognised that education and training in sustainability reporting for SME management and relevant employees may need to be subsidised.  Beyond financial supports, participants in our study indicated that simplified disclosure requirements would be appropriate for SMEs.  Since we reported these opinions from our study, EFRAG has published an exposure draft of Voluntary SME (VSME) sustainability reporting standards for small non-listed enterprises.  The exposure draft presents a modular approach that SMEs can adopt on a phased basis.  Alongside simplified reporting requirements, another non-financial support deemed suitable by our respondents was the establishment of a state-sponsored or equivalent body to provide SMEs with consultancy, resources and tools for sustainability reporting.  The Department of Enterprise Trade and Employment’s recently established National Enterprise Hub represents a valuable opportunity to aid Irish SMEs in meeting sustainability data demands from larger companies. The path ahead for SMEs In the immediate term, large undertakings collecting sustainability data from smaller value chain parties can avail of transitional provisions when data is not available in the first two to three years of reporting.  Nonetheless, such reliefs are limited amidst a strong impetus across Europe to set and achieve Greenhouse Gas emissions’ reduction targets in line with the Paris Agreement.  Without data from value chain parties, measures of Scope 3 emissions reported by large undertakings under the climate change standard, ESRS E1 Climate Change, will be inaccurate and misleading.  At a time when greenwashing is considered almost akin to financial fraud by the general public, large undertakings may impose pressures on small enterprises to produce relevant measurements, even if regulators do not.  Failure to do so may cost SMEs valuable business relationships. Disclosures required under ESRS E4 Biodiversity and Ecosystems will also impact Irish SMEs in value chains in sectors such as agri-food. With the Circular Economy Act signed into Irish law in 2022, reporting on the circular economy under ESRS E5 Resource Use and Circular Economy may be deemed a material topic for many companies.  ESRS E5 requires extensive discloses on product lifecycles and may well also necessitate data collection from SME suppliers as well as from SME consumers.  In fact, it is important not to consider SMEs solely from a supplier perspective. In terms of social sustainability, ESRS S4 Consumers and End-Users sets out reporting requirements on consumers’ use of goods and services, with a particular emphasis on health and safety.  SMEs intermediating between large companies and end-consumers will also be required to report upstream to larger companies in value chains.  Additionally, ESRS S2 Workers in the Value Chain requires large undertakings to report on the composition of suppliers’ and customers’ workforces, as well as their working conditions. Sources of support Our research findings, coupled with an analysis of the ESRS requirements, clearly indicate that support for SMEs is vital to ensure they retain strong positions within value chains in Ireland and across the EU.  Prompt development of the VSME standards is essential. Without standardisation, SMEs face requests from multiple supply chain stakeholders to provide various types of data in different formats.  The introduction of the VSME standards in a manner that encompasses guidance to larger firms on best practice in data collection from smaller value chain partners may ease the reporting challenges for undertakings of all sizes.  The role the accounting profession will play is integral, as smaller entities will need sustainability reporting alongside traditional accounting services.  Chartered Accountants Ireland offers advice, education and representation for members in the area of sustainability reporting.  As these requirements becomes a priority for SMEs, the Institute will continue to provide support to Chartered Accountants navigating the nuances of this major development in accounting and reporting. Niamh Brennan is Michael MacCormac Professor of Management at University College Dublin Louise Gorman is Assistant Professor at Trinity College Dublin  Seán O’Reilly is Assistant Professor at University College Dublin

Companies complying with the Corporate Sustainability Reporting Directive could see real business benefits, but the right mindset is crucial, write David Connolly and Alba Boshnjaku At its core the Corporate Sustainability Reporting Directive (CSRD) is a reporting requirement, but it should not be viewed merely as a compliance exercise.  Companies within the scope of the Directive will be reporting in a standardised way. This means that sustainability statements could become a powerful tool for communicating more effectively with their stakeholders.  The CSRD could potentially enable these companies to build trust, enhance their reputation and strengthen their accountability.  This scenario is not dissimilar to existing accounting standards, whereby the requirement for companies to report financial information to investors, lenders and other stakeholders, has facilitated better and more transparent comparability between businesses operating in the same industry. Ignoring sustainability is no longer an option. Companies must be aware of, and report on, the impacts they have on people and the environment, as well as the sustainability-related risks and opportunities they face in the short, medium and long term.  Therefore, the CSRD gives companies an opportunity to understand what matters to them and their stakeholders. It allows them to re-evaluate their business to gain a competitive edge and potentially attract new customers, talent and capital, thereby strengthening their strategic resilience.   C-suite executives should recognise the potential the CSRD has to help steer their organisation towards a future that balances profitability with environmental and social responsibility governed by robust control frameworks.  Before exploring the potential benefits, however, let’s first revisit some of the key concepts of the CSRD. Europe: leading the way in sustainability reporting  An estimated 40,000 companies based in the European Union will be brought within scope of the CSRD on a phased basis, starting this year and continuing through 2028. Reporting obligations apply to all large and listed companies, including small and medium sized entities (SMEs), except for listed micro-enterprises. The size category into which an undertaking or group falls is defined by establishing thresholds in relation to net turnover, gross value and average number of employees during the financial year.  A large undertaking or a large group will, for example, exceed at least two of the three following criteria: balance sheet totalling €25 million; net turnover of €50 million; an average of 250 employees.  These criteria, including the ones for SMEs, are established in the Accounting Directive at EU level and transposed in national legislation, which companies must consult to determine whether they are captured within the scope of the CSRD. Certain non-EU companies with listed subsidiaries or significant operations in the EU market are also required to report. Non-EU companies that fall under the scope of the CSRD need to have: Net turnover of more than €150 million in the EU for each of the last two consecutive financial years;  A large or listed EU subsidiary, or EU branch, generating over €40 million in the EU. The requirement for certain non-EU companies to report will impact some companies established in Northern Ireland where they meet the relevant threshold criteria.  Ireland transposed the CSRD in the Companies Act in July 2024. Companies should carefully consider the relevant provisions to determine whether they fall within scope. The first wave of companies (large, listed companies with over 500 employees) have already mobilised their teams to get disclosure ready as they will be publishing their sustainability statements in the first quarter of 2025 for the current financial year.  Companies within the scope of the Directive must prepare their sustainability statements in line with the European Sustainability Reporting Standards (ESRS). The first set of twelve sector-agnostic standards have been adopted by the European Commission and are directly applicable to all EU member states.  Sector-specific standards are under development and proportionate standards for listed small and medium-sized entities are also expected.  Two of the standards – ESRS 1 and ESRS 2 – are cross-cutting and mandatory for all. The remainder, structured under Environmental, Social and Governance (ESG) pillars, are subject to the outcome of the materiality assessment. Companies will need to undertake a double materiality assessment to decide what they will need to report on.  They will have to identify and assess the impacts of their business on people and the environment (impact materiality) and the risks and opportunities the outside world poses to their business (financial materiality).  As part of this process, companies will need to understand the business and regulatory environment in which they operate and map their value chain. The value chain is defined as the full range of activities, resources and relationships related to the undertaking’s business model and the external environment in which it operates.  The value chain encompasses the activities, resources and relationships the undertaking uses and relies on to create its products or services from conception to delivery, consumption and end-of-life.  As part of their double materiality risk assessment, companies will also need to identify material- and sustainability-related impacts, risks or opportunities relating to their value chain across time horizons.  Once they have identified their material matters, they will then need to identify the material disclosures and data points to be reported in the sustainability statement.  The sustainability statement will be subject to limited assurance, with added responsibilities for audit board committees. Companies will need to implement robust control frameworks that ensure high quality, reliable and comparable sustainability information. The CSRD: a competitive edge  The CSRD offers an opportunity for companies to gain a competitive edge, because it requires that they report, not only on the material impacts they have on people and the environment, but also on the potential risks and opportunities they face.  For example, supply chain disruptions caused by climate change or dependencies on scarce natural resources could lead to operational risks for companies, which could then take the form of credit risks for financial institutions. Similarly, negative impacts on employees or affected communities could lead to litigation and reputational damage. On the flipside, investment in green technology or innovation could generate profit and add shareholder value.  By treating double materiality assessments as a box-ticking exercise, companies will miss the opportunity to better understand their business and make more informed strategic decisions.  A thorough, data-driven assessment should take into consideration value chain relationships, sector and geographical exposures. Supported by stakeholder insights, this approach can help a company to identify the existing and anticipated effects of sustainability on its business model and strategy, including risks or opportunities related to its financial position, cash flow and access to capital.  The double materiality assessment is dynamic and requires companies to think and assess what is material, not only this year, but in the medium to long term – and how this will impact its wider business plans and strategy.  For C-Suite executives, the results of the double materiality assessment could yield insights that enhance efficiency, improve performance and help them set realistic targets, all while demonstrating their company’s commitment to transparency. Opportunity for increased internal accountability  Under the CSRD, companies will need to report on the processes they have in place to identify and manage material sustainability matters. The preparation process will trigger important internal questions that require owners and demand accountability.  Are our policies and actions effective? How are we tracking the effectiveness of our targets? Is our data accurate? How robust is our internal control framework? Is sustainability integrated into our risk management process? What is the role of the Board in sustainability reporting?  These are only a small fraction of the questions companies will need to ask themselves to ensure that their reports are CSRD-compliant. These are also questions that could help companies become efficient and foster a transparent and risk-focused culture.  Further, reported sustainability information, such as financial reporting, will need to be reliable, accurate and comparable. What gets measured gets done.  By having to define baselines and measure progress from year to year, companies must ensure that time and resources are adequately allocated to set the business up for success.  Communicating what matters to stay ahead  Companies will have to report on what is material and relevant to stakeholders and, with stakeholder expectations evolving, ongoing engagement will be key.  Investors, employees, customers, suppliers and the public at large are becoming more aware of the sustainability impacts of companies, so they can make informed, ethical decisions.  Some stakeholders will be more interested in the sustainability credentials of companies than others. While customers and employees will take account of sustainability when deciding where they spend their money or where they work, funders and regulators will have more than a passing interest.  In 2023, according to the latest World Investment Report, the value of sustainable investment products, both bond and equity, reached more than $7 trillion, up 20 per cent on the previous year. Both investors and lenders rely on accurate and transparent information to make informed decisions, meet their own reporting requirements, and mitigate greenwashing risks. C-suite executives should be prepared to answer their questions. Regulatory requirements are becoming increasingly onerous across industries and regulatory bodies worldwide are pushing for uniformity and transparency in sustainability reporting.  While climate change has dominated the regulatory agenda in recent years, other environmental and social issues are also coming into focus, including human rights and labour practices within supply chains.  As new requirements are introduced globally – for example, IFRS sustainability disclosures –businesses operating across jurisdictions will need to think about interoperability to ensure consistent messaging and compliance.  By understanding who the users of the sustainability information are, and what they need to know, companies have scope to build trustworthy relationships that could benefit their market position, value and access to capital, while also ensuring compliance. Cultivating a winning mindset With the right mindset, companies complying with the CSRD could see real business benefits. The CSRD is a function of the European Union’s wider Green Deal, designed to revitalise and transform the European economy by decoupling economic growth from resource use to ensure long-term sustainability.  This will require a focus on innovation, new technology, sustainable products and services, responsible and sustainable business practices, employment and supply chains.  So, while companies prepare for their first year of CSRD reporting, C-suite executives should be thinking about potential opportunities and risks, emerging material sustainability issues, and how they can use sustainability reporting to improve their strategic resilience and business value.  David Connolly, FCA, is a Director in EY Financial Services Climate Change and Sustainability Services (CCaSS) Alba Boshnjaku is a Manager in EY Financial Services CCaSS, specialising in ESG reporting

Daniel O’Donovan considers the urgent need to resolve interpretative questions that have emerged following the transposition of the Corporate Sustainability Reporting Directive into Irish law The European Union (Corporate Sustainability Reporting) Regulations 2024 (the Regulations), also known as S.I. No. 336 of 2024, transposes the Corporate Sustainability Reporting Directive (CSRD) into Irish law.  This legislation marks a significant step in aligning Ireland’s corporate reporting framework with the EU’s broader sustainability goals, as outlined in the European Green Deal and the EU Action Plan for Financing Sustainable Growth. The Regulations were signed into law during the summer and came into effect on 6 July 2024. Their principal objective is to integrate the new corporate sustainability reporting obligations with Ireland’s existing financial reporting framework.  It is estimated that about 1,000 Irish companies will fall into the scope of these Regulations. The Regulations will be phased in over the next few years and will generally apply to public interest entities and companies qualifying as large under section 280H of Companies Act 2014.  Companies regulated by the Central Bank of Ireland qualify as large under this section, for example. It is welcome to see the implementing legislation. Ireland is among the first countries in the European Union to have implemented the CSRD, thus giving businesses in Ireland as much time as possible in the circumstances to assess its impact.   The impacted entities have been assessing the obligations in the legislation since it came into effect.  As with any implementation of such a complex European directive, some interpretative questions in relation to the implementing legislation have emerged. What follows are some of the key interpretative questions that have emerged to date. The definition of “Applicable Company” Several questions arise from the definition of “applicable company” in Section 1586 of the Regulations.  The definition refers to a provision contained in Part 6 of Companies Act 2014 to define its boundaries and, in particular, draws on the definition of a large company in section 280H of the Companies Act 2014.  This appears to have unintended consequences because an ineligible entity is a large company.  For example, certain small and medium entities and micro-entities that fall within the definition of an ineligible entity may be included in year two of reporting pursuant to section 1587(1)(b), reporting on 2025 sustainability information, rather than being in year three of reporting pursuant to section 1587(1)(c), reporting on 2026 sustainability information.  Exemptions for certain subsidiaries Section 1594 of the Regulations provides an exemption for certain subsidiaries. However, the exemption appears to be more restrictive than the equivalent in the CSRD, because it appears to be limited to Irish subsidiaries of Irish holding companies and excludes Irish subsidiaries of EU holding companies. See first table below.  In addition, it appears that all subsidiaries that are themselves large public-interest entities (listed and non-listed entities) are precluded from taking the exemption – whereas the CSRD only excludes large subsidiaries listed on an EU-regulated market. Exemptions for certain holding companies that are subsidiaries Section 1598 of the Regulations provides an exemption for holding companies that are themselves subsidiaries, where: a higher parent undertaking prepares a directors’ report under Part 6; or  a non-EU higher parent provides a group report either in accordance with the sustainability standards or in a manner recognised as equivalent to them.  However, as “third country” in the Regulations is defined to exclude Member States, it appears that there is no exemption for holding companies that are subsidiaries of an EU parent. See second table below.  Further, this exemption appears to be restricted further than the CSRD, because all large public-interest entities are prohibited from availing of the exemption, whereas the CSRD only excludes large public-interest entities that are listed on an EU-regulated market. Transitional provisions for consolidated reporting The Regulations permits, in section 1607, a subsidiarity of a third country undertaking to report on a consolidated basis on behalf of a group until 2030 (artificial consolidation).  However, it appears that this provision only applies to financial years commencing on or after 1 January 2028 by virtue of its placement in Chapter 3 of the Regulations.  As such, companies that wish to avail of this provision may be unable to do so during a significant portion of the transitional period. Supporting sustainability ambitions The EU and Ireland’s shared ambition to lead in sustainability reporting, transitioning to a sustainable economy and economic model, it comes with an ambitious timeline.  For example, the period between the effective date of the Regulations and the end of the first period on which year one companies will report on sustainability, in accordance with the European Sustainability Reporting Standards, is just six months.  We believe that a stable and clear legal framework is essential for businesses to thrive in Ireland.  Ensuring that outstanding CSRD transposition matters are resolved promptly will help maintain Ireland’s strong reputation as an excellent place to do business.  It is in the public interest to provide companies with the clarity they need to comply with new laws effectively. We welcome The European Union (Corporate Sustainability Reporting)(No.2) Regulations 2024 (S.I. No. 498 of 2024) signed into law on 1 October. S.I. 498 of 2024 resolves some of the interpretative questions set out above, aligning: The exemption for subsidiaries that are themselves large public-interest entities with the CSRD, which only excludes large subsidiaries listed on an EU-regulated market from the exemption; The exemption for holding companies that are subsidiaries, with the CSRD, which only excludes large public-interest entities listed on an EU-regulated market from the exemption; and The commencement of the transitional provision regarding artificial consolidation with the CSRD, now available immediately. Significant questions remain to be resolved, however.  Accountants are committed to meeting the new sustainability reporting requirements, but we recognise that implementing the CSRD into Irish law is complex and that the necessary resources and expertise to prepare detailed and complex reports, and to obtain assurance on those reports, are still developing in the Irish market. By working together, we can ensure businesses have the support they need to meet these sustainability ambitions, aligning with the CSRD’s goals for 2024 and beyond. Time is running short. As the clock strikes the 11th hour, companies need to have clarity on the interpretative questions discussed in this article as a matter of urgency. Continued imminent engagement between the legislators and the legislates is critical to resolving these matters and ensuring our sustainability reporting ambitions are successfully achieved. Daniel O’Donovan is a Partner with KPMG and leads the firm’s Audit and Assurance Methodology Team