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Sustainability
(?)

The CSRD: a new frontier in corporate reporting

The introduction of the Corporate Sustainability Reporting Directive marks a pivotal moment in the evolution of corporate reporting in the EU, but it will bring challenges for all involved, writes Daniel O’Donovan In an era where businesses are increasingly being scrutinised for their impact on the environment, society and their governance practices, the European Union (EU) has taken a leading role internationally by introducing the Corporate Sustainability Reporting Directive (CSRD).  The CSRD is due to be transposed into Irish law before mid-2024. Following its transposition, mandatory reporting requirements will become effective for, among others, financial years commencing on or after: 1 January 2024 for public interest entities in scope of EU non-financial reporting rules (with more than 500 employees); 1 January 2025 for other larger companies and public interest entities (with more than 250 employees); and 1 January 2026 for listed public interest SMEs, with ‘opt out’ possible until 2028. This is a pivotal moment in the evolution of corporate reporting across the EU, bringing with it significant challenges for all involved, not least for reporting entities, their audit committees and assurance providers. What are the key challenges?  While the CSRD is a welcome framework for enhancing transparency and accountability in corporate sustainability reporting – reflecting the EU’s commitment to fostering sustainable and responsible business practices – it introduces three significant challenges for business: First, the breadth of information that relevant businesses will be required to report under the 12 European Sustainability Reporting Standards (ESRS) introduced by the CSRD; Second, the need to implement the systems required to gather and record reliable sustainability data and information; and Third, the need to provide assurance over the sustainability reports required by the CSRD. Breadth of information to be reported The ESRS, developed by the European Financial Reporting Advisory Group (EFRAG), aim to enhance the consistency, comparability and reliability of sustainability reporting among European reporting entities.  The scope of the ESRS is expansive, encompassing various elements that collectively contribute to a comprehensive understanding of an organisation’s environmental, social and governance (ESG) performance.  The key components driving the breadth of information required in this reporting are the: sustainability topics;  reporting boundary; double materiality concept; and  number of datapoints for disclosure within the ESRS. Sustainability topics The ESRS require disclosures about the following topics: climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy, own workforce, workers in the value chain, affected communities, consumers and end-users, and business conduct. As can be seen from this list, these are broad topic areas. The ESRS standards for each of these topics specify further subtopics in respect of which disclosures must be given. Furthermore, in respect of each of the topics and subtopics, disclosure is required about aspects of the topics as shown in the table below.  Reporting boundary The reporting boundary required by the ESRS is in stark contrast to what reporting entities are familiar with in the context of the financial reporting boundary used to produce annual financial statements, being within the reporting entity or group. The ESRS, however, require a reporting boundary that considers the entire value chain, from suppliers to end consumers, as shown in the figure below: This inclusive perspective ensures that the environmental and social impacts of a business are accurately captured, providing stakeholders with a complete picture of the organisation’s sustainability efforts, but it places a demanding requirement on reporting entities from a data collection standpoint. Double materiality Reporting entities in scope of the CSRD will be required to report on a double materiality basis. This means that they will have to report on impacts on and risks to them from a changing climate and other ESG matters (referred to as “financial materiality” as it is consistent with what entities report in the financial statements). In addition, they will report on the impact the entity itself might have on climate and other ESG matters (referred to as “impact materiality”). When compared with reporting in the financial statements, this concept doubles the challenge for reporting entities as all ESG topics must be considered from both perspectives. Gathering and assessing information and data about the reporting entity’s impact on the breadth of ESG topics is a new frontier for corporate reporting and one that the majority in the corporate reporting ecosystem have no experience of. Datapoints for disclosure It is clear that the scope of the information to be disclosed under the ESRS is far broader than the information to be reported in the financial statements. However, to underline this, the ESRS outline specific datapoints that reporting entities should disclose to provide transparency and facilitate comparability. As recently as October, EFRAG released a draft List of ESRS datapoints – Implementation Guidance, which includes all 1,178 disclosure requirements in the sector-agnostic ESRS published to date. The datapoints are standardised metrics that allow for consistency in reporting and enable stakeholders to assess the sustainability performance of different reporting entities. For instance, in the environmental domain, entities may report on their carbon footprint, energy consumption and waste generation. Social datapoints could include diversity and inclusion metrics, employee turnover rates, and health and safety performance. This new frontier of corporate reporting will generate tangible benefits for society at large and result in greater public interest therein but will not be without data capture challenges in the near future.  Sustainability information systems Given the significance of the breadth of sustainability information to be reported, the transposition of the CSRD into Irish law will have a profound impact on the information systems of entities within its scope. Moreover, the scale of the endeavour for those entities that will be required to report in early 2025 on the calendar year ended 31 December 2024 is enormous in terms of what must be achieved within a timeframe that is less than 18 months away.  Such entities need to determine what sustainability matters are material using the double materiality concept and are therefore required to be included in their sustainability report and start gathering, collating, aggregating and sorting the data in relation to 2024, which will be reported in early 2025.  Reporting entities will need to establish or enhance integrated data systems that allow for the collection and management of sustainability data. This could involve integrating sustainability data within existing enterprise resource planning (ERP) systems to ensure data consistency and accuracy. Additionally, tools may be needed, such as a materiality assessment tool to help systematically evaluate the importance of various sustainability information.  As stakeholder engagement is a crucial part of a materiality assessment, systems or tools that can help track and manage interactions with stakeholders, ensuring that their perspectives and concerns are considered in the reporting process, will be necessary. Developing or strengthening internal controls and policies related to sustainability reporting information systems will be essential. Reporting entities will need to create processes and controls to ensure the accuracy, completeness and reliability of sustainability data, which will be sourced from all areas of the organisation and well beyond the finance function.  Reporting entities that are successful in achieving this will be better positioned to facilitate an independent assurance provider’s examination of their sustainability report. Assurance over sustainability reports Initially, the CSRD requires an independent assurance provider to express an opinion based on a limited assurance engagement as regards the compliance of the sustainability reporting with the requirements of this Directive, including compliance with the ESRS, the process carried out by the undertaking to identify the information reported pursuant to the ESRS, and compliance with the requirement to electronically tag the sustainability report. In later years, after an initial period, reasonable assurance over the sustainability report may be required. For reporting entities, facilitating a limited assurance engagement in the year of implementation of such a significant suite of sustainability reporting standards will require additional resources and does not come without the increased possibility of qualification given the complexity of the ESRS and the potential immaturity of reporting systems. The challenge for independent assurance providers is that at present no assurance standard is in existence that governs the performance of such an engagement.  The International Audit and Assurance Standards Board (IAASB) is developing a standard and has released an exposure draft – International Standard on Sustainability Assurance 5000 – that seeks to address the performance of limited and reasonable assurance engagements over sustainability information.  The exposure daft is open for comment at present and a final standard is not expected until the second half of 2024.  While the development of the standard is welcome, the timeframe is extremely tight, and it is widely acknowledged that the exposure draft does not provide sufficient clarity in relation to the performance expectation of an independent assurance practitioner when performing a limited assurance engagement compared with a reasonable assurance engagement.  In the face of such unprecedented uncertainty, independent assurance providers may struggle to deliver high quality limited assurance engagements.  Challenges ahead The rate of recent extreme weather events in Ireland and elsewhere in Europe, and their impact on supply chains, provides a clear mandate to take better care of our environment. Most people are therefore likely to welcome the intent behind the CSRD’s introduction of sustainability reporting.  Sustainability reporting by entities will be on a basis far broader than financial statements. Additional resources will be needed to address the challenges outlined in this article, but time is running out fast; the time to act on these challenges is now.  Furthermore, the successful implementation of the CSRD regime in Ireland and across the EU requires considerable pragmatism and support from policymakers, standard-setters and regulators.  The new “gold rush” in which companies will seek to lead will be a race to capture data, integrate systems and assure sustainability reports. Undoubtedly, this marks a new frontier in corporate reporting – the ESG Rush! Daniel O’Donovan is a partner with KPMG and leads the firm’s Audit and Assurance Methodology team. He is also Chair of the Chartered Accountants Ireland Assurance and Audit Technical Committee

Dec 06, 2023
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Personal Impact
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“Philanthropy provides the risk capital for projects and initiatives that benefit society”

The publication of the National Philanthropy Policy will mark an important milestone in the evolution of this type of proactive giving in Irish society With a new National Philanthropy Policy due to be published later this month, the Department of Rural and Community Development will set out plans to create an ‘enabling environment’ for philanthropy in Ireland. For Philanthropy Ireland (PI), the representative body for the sector here, the policy’s publication marks a very important milestone in the evolution and perception of this type of proactive giving in Irish society on the cusp of the New Year. PI defines philanthropy as the act of giving money, goods, time or effort to support a charitable cause, usually over an extended period of time and in regard to a defined objective. “Irish philanthropy comes in different shapes and sizes, from small community grants to men’s sheds and new mothers’ groups to larger advocacy projects with a national remit,” explains Eilis Murray, Chief Executive of Philanthropy Ireland. “No matter what it looks like, philanthropy has touched every corner of Ireland, but it is still a relatively new concept here because our wealth is relatively new.  “Irish people are generous and support many social causes, but compared to the UK and Europe, philanthropy here is underdeveloped. Greater support from the State and public awareness can change that. “For context, there are about 8,000 grant-making organisations in the UK whereas, in Ireland, there are only around 100.” For Philanthropy Ireland, which has been working with Minister Joe O’Brien and the Department of Rural and Community Development to create the new National Policy on Philanthropy, its publication will be a welcome development. “We hope it will encourage more people with wealth to give and, equally, encourage those advising them to consider the potential of philanthropic giving or leaving a legacy,” says Murray.  For Liam Lynch, Tax Partner with KPMG and past President of Chartered Accountants Ireland, one of the biggest benefits of philanthropy is its potential to bring about positive change with real and lasting social impact. “Philanthropy provides the critical risk capital for projects and initiatives that benefit society and improve opportunities and outcomes for those who are disadvantaged in various ways,” Lynch says. “Some people are of the view that philanthropy shouldn’t exist and, instead, the State should administer all the money needed to fund good causes through the tax system. I don’t agree.  “There is a point of view and perspective philanthropy brings to the table that promotes innovation in a way the State and local government are just not set up to do. “There are services the State should be providing as standard to support social good. Philanthropy is about building on this in a strategic, outcome-driven way that can have a very positive impact on society.” For those who decide to become involved in philanthropic giving, it is often a deeply personal endeavour and one that reflects their personal convictions and values, according to PI. “Philanthropy can make a difference in so many areas, from tackling educational disadvantage and supporting employment opportunities, to health-focused initiatives – mental health, children’s or older people’s health, for example,” says Lynch. “Philanthropic giving can go towards promoting sustainability and the environment or protecting Irish culture and the arts. This is just the tip of the iceberg. The potential is enormous.  “That is why I would like to see more awareness and discussion of philanthropy, and philanthropists, in Ireland. I think we are generally very aware of the role of philanthropy internationally.  “My question is, why don’t we celebrate our own philanthropists as much and make a concerted effort to recognise the goodwill they are putting into doing good in society?” Frank Gannon – Lynch’s colleague at KPMG Ireland and a Partner in the firm’s Financial Services Group – sees similar benefits in philanthropic giving.  “For me, philanthropy means fulfilling the wish to give something meaningful to those who will benefit,” he explains. “Many people associate philanthropy with monetary donations, but there is much more to it than that.” Chartered Accountants Ireland’s members and trainees are well-placed to get involved in different types of philanthropic giving, Gannon says.  “Our members and trainees have all been educated to a certain level. Sharing our knowledge, information and know-how with those who have not had the same opportunities – and, in particular, those in socially deprived areas – can be a powerful tool,” he says.   “Social capital matters and a lot of Chartered Accountants have large networks of contacts. These networks can be leveraged to transform lives. Giving someone from a deprived area the opportunity to interview for a job could change the trajectory of their life with the positive knock-on effect extending to their family and wider community.”  For those whose philanthropic interest lies in monetary giving, meanwhile, Philanthropy Ireland offers a wealth of advice and information on what you need to know to get started. “There are many forms of monetary philanthropy, which is often considered within the overall context of wealth management and estate planning,” it advises. “Individuals, families and corporates often set up their own foundation or they link in with an intermediary philanthropic organisation that can support them in their grant-making decisions and provide governance and compliance support.” To find out more about Philanthropy Ireland, the organisations and initiatives it supports and the different philanthropic options on offer, log on to philanthropy.ie

Dec 06, 2023
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Member Profile
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“Change continues at a relentless pace – we must pause, embrace and adapt”

As Chartered Accountants prepare for 2024, Ross Boyd outlines key measures to stay one step ahead in a challenging climate Whilst the dawn of a New Year brings with it a sense of hope and often optimism, accountants across the world should brace for a difficult 2024.  I established my practice over a decade ago, having earned my stripes for about 15 years before that, but in all that time I’ve never experienced such volatility and uncertainty.  The year that’s gone has presented the most complex economic test of a generation with the impact of two wars, Brexit and the pandemic completely transforming the business landscape.  I commend my fellow Chartered Accountants for powering through and continuing to do their best for their clients, and their own teams.  Chartered Accountants across the island will already be preparing for a tough 2024, aware of the implications of the current economic climate. The accountancy sector faces additional hurdles, including a skills shortage, retention issues, the continued rise of artificial intelligence and digital tools, and ongoing consolidation across the sector.  While changing business taxation is a big issue in the North, talent and technology are two common themes facing businesses across the island on the cusp of the New Year. Change continues at a relentless pace, and we must pause, embrace and adapt to remain relevant. Here are the key areas I recommend you focus on now, so that you can grow your business and continue to provide trusted and expert counsel to your clients.  Talent Labour shortages, paired with the capacity pressures these shortages cause, are likely to be the most pressing issues restricting growth across many sectors in 2024. Unfortunately, the war on talent is a trend our own sector will continue to battle too.  To put it bluntly, the sector’s image needs reinvention if it’s to continue attracting and retaining talent.  And to put it even more bluntly, investing in human capital is non-negotiable – after all, talent and growth are entirely correlated. As employers, we must adopt a two-pronged approach here.  First, we must invest in existing employees to support their continued contribution to the sector. I would advise any practice to objectively assess their employees’ skill sets and put the necessary plans in place to help them develop.  These development plans should look beyond ‘number crunching’ and financial recording to include a broader set of responsibilities, such as analysing forecasts, identifying emerging trends and networking.  It is crucial we ensure that the role of the Chartered Accountant isn’t limited or constrained, and that it is clearly positioned as that of strategic advisor. Second, we must focus on creating the type of organisation – and providing the kind of leadership – people want today.  Organisations that prioritise diversity, inclusion and flexibility are proven to have higher employee retention, and this is becoming even clearer post-pandemic as Gen Z becomes more present in the workplace.  Now aged between 11 and 26, this generation will account for 27 percent of the workforce by 2025.  At RBCA, we have spent a lot of time developing our graduate programme so that we can give our trainee recruits every opportunity to thrive, including supporting their interpersonal development. We also recently invested in a new office in Belfast to provide a physical environment that supports productivity and learning, and our annual Away Days continue to be invaluable to the culture of RBCA.  Technology  We have all come to understand the importance of digital tools in recent years and it is critical that, in 2024, we continue to use technology to improve both efficiency and security.  At RBCA, we moved to cloud computing in 2011 and we recently invested in new cloud technology, successfully tackling our tech stack. Some ill-advised pundits would argue that accountancy’s future is limited in our increasingly digital world, but our experience is that new accounting technologies have been complementary to our work.  Technology will never replace our profession, however. Why? Because, in my opinion, people will always buy into people.  Relationships and quality communications are the greatest tools at the disposal of today’s Chartered Accountant, providing that crucial competitive edge.  Often, we are so focused on our clients’ businesses and their success that we don’t focus enough on the resilience of our own, but it’s vital that we harness the passion and commitment that exists across the sector to thrive in the New Year.  Ross Boyd is founder and director of RBCA, a Belfast-based Chartered Accountancy 

Dec 06, 2023
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