Key Insights & Lessons Learned for Navigating Upcoming Requirements

As sustainability reporting gains momentum across the globe, U.S. companies are finding themselves increasingly affected by regulations that extend beyond national borders. The European Union’s Corporate Sustainability Reporting Directive (CSRD) is one such regulation that’s making waves, not just for European businesses, but for thousands of U.S.-based companies as well. With the CSRD’s broad scope and stringent requirements, many American entities with European operations, supply chains, or parents are feeling the pressure to adapt.

Navigating the complexities of the CSRD, particularly in light of evolving ESG frameworks and global reporting standards, has become a pressing concern for companies worldwide. A recent study by the European Financial Reporting Advisory Group (EFRAG) sheds light on how organizations are preparing for these challenges. Whether headquartered in Europe or the U.S., companies are grappling with the new requirements and the sheer scale of the reporting involved.

Let’s take a closer look at the key takeaways from the EFRAG study, alongside key considerations and best practices U.S. companies should keep in mind as they, too, work toward compliance with the CSRD.

A Deep Dive into the EFRAG Study

Conducted with 28 large European companies from a diverse array of industries, EFRAG’s study offers invaluable insights into how organizations are adapting to the CSRD. These companies—half from financial sectors, half from non-financial—participated in a mix of surveys and in-depth interviews. Their advanced sustainability practices make them ideal candidates for understanding the road ahead for businesses at varying stages of maturity.

The study hones in on four major areas:

• Double Materiality Assessment
• Data Points and Gap Analysis
• Value Chain Analysis
• Reporting Organizational Approaches

Each of these categories provides a window into the evolving landscape of sustainability reporting, illustrating both the strides made and the challenges still looming. Importantly, these insights are highly relevant to U.S. companies as they navigate the global implications of the CSRD.

Double Materiality Assessment: Beyond Compliance

One of the cornerstone concepts of the CSRD is the Double Materiality Assessment (DMA), a significant departure from other regulatory frameworks. Double materiality requires companies to evaluate sustainability topics through two lenses:

1. Financial materiality: The impact of sustainability on a company’s financial performance.
2. Impact materiality: The company’s impact on people, the environment, and society at large.

The EFRAG study shows that companies are increasingly using a more evidence-based approach to DMA. About 70% of those surveyed now lean heavily on internal data, third-party research, and stakeholder insights. This reflects a shift from viewing DMA as a mere compliance exercise to a more integrated part of strategic decision-making. Rather than relying solely on qualitative judgments, companies are using data to drive these assessments, demonstrating a commitment to providing a balanced and accurate evaluation. This is a significant change in how businesses tackle DMA, indicating a maturing approach to reporting.

In fact, nearly 85% of companies indicated plans to use DMA insights to inform their broader business strategy, showing that ESG information is becoming more than just a regulatory requirement—it’s a core element of long-term business planning.

While financial materiality is more familiar and straightforward for most organizations, impact materiality presents unique challenges. Gathering the necessary data for impact materiality is often difficult, especially when sector-specific methodologies and thresholds are limited or underdeveloped. Despite these obstacles, stakeholder engagement is becoming more sophisticated, with over 65% of companies in the study now using two or more channels—such as interviews, workshops, and surveys—to gather insights. Importantly, reliance on traditional surveys is decreasing, with only 5% of companies still depending on them as their sole method, reflecting the growing preference for more in-depth and interactive methods like interviews and stakeholder workshops.

Data Points and Gap Analysis: Avoiding Data Overload

One of the more surprising findings in the study relates to data points and gap analysis. Many companies are reporting more data than the European Sustainability Reporting Standards (ESRS) actually require. This tendency often results from companies not fully integrating the results of their DMA into their reporting processes. Without a clear focus on what’s truly material, they risk overwhelming stakeholders and creating inefficiencies in the reporting process. This kind of data overload not only dilutes focus but can make it difficult for companies to communicate their most important ESG & sustainability priorities effectively.

Instead of reporting on everything, companies should aim to streamline their disclosures by focusing on what’s most material to their operations and stakeholders. This is where a strong DMA process proves invaluable, helping businesses zero in on the data points that matter most and align with their strategic goals.

Moreover, 80% of companies reported difficulties in accessing and retrieving the necessary data for reporting. The challenge isn’t just about gathering the data; it’s also about ensuring its accuracy and consistency across different departments, systems, and sometimes even countries. These logistical issues highlight the need for a structured approach to gap analysis, which many companies are addressing through EFRAG’s Implementation Guidance 3 (IG 3). This guidance helps organizations assess where they stand in relation to ESRS requirements and provides a clear path forward for closing any gaps.

Value Chain Analysis: A Work in Progress

Value chain analysis is another critical, yet underdeveloped area of sustainability reporting. The study found that this is the least mature aspect of companies’ CSRD preparations. The complexity of value chains—spanning upstream and downstream operations—makes it challenging to map and analyze them effectively. Companies are still refining their approaches, with 90% focusing on achieving the right level of detail without becoming overly bogged down in complexity.

Most companies are adopting a simplified aggregated mapping approach to value chain reporting, grouping similar elements of their value chains to make the process more manageable. However, this simplified approach must be carefully managed to ensure that important details aren’t lost in the aggregation. The study showed that nearly half of the companies are moving beyond broad value chain mapping to a more detailed view. This approach is particularly useful for identifying key risks, opportunities, and impacts (IROs) within their operations and supply chains.

The level of detail in value chain reporting should strike a balance between being comprehensive and practical. Too much detail can lead to data overload, while too little may obscure critical risks and opportunities.

Reporting Organizational Approaches: Breaking Down Silos

The CSRD is not only changing what companies report but how they organize their reporting efforts. The study found that CSRD is acting as a catalyst for companies to rethink their broader reporting strategies. Many organizations are breaking down internal silos, fostering greater collaboration between departments like sustainability, finance, IT, and risk management to ensure their ESG reporting is robust, accurate, and reflective of their overall strategy.

Interestingly, the study revealed that five or more departments are often involved in the CSRD implementation process, emphasizing the interdisciplinary nature of ESG reporting. This cross-departmental collaboration is crucial to ensure data quality, consistency, and alignment with broader business objectives. In some companies, this collaboration is being formalized, with sustainability reporting teams becoming increasingly integrated into their organizational structures.

Furthermore, around 85% of companies are recognizing the need for IT transformations to manage the scale and complexity of ESG data. New systems are being implemented, but the pace of adoption varies across organizations. IT upgrades are essential for managing data efficiently, ensuring accuracy, and meeting increasing assurance requirements.

In many cases, companies are also supplementing their internal efforts by working with external consultants who can provide the expertise or capacity needed to meet the growing demands of CSRD compliance.

Navigating Next Steps in Your CSRD Journey

The EFRAG study offers a glimpse into the future of sustainability reporting, and the road ahead is both challenging and full of opportunity. As companies continue to refine their approaches to DMA, gap analysis, value chain reporting, and organizational structures, one thing is clear: Sustainability is no longer a regulatory afterthought. It’s a central part of business strategy, and those that embrace it will be well-positioned to thrive in an increasingly sustainability-conscious world.

At Embark, we understand the complexities that come with the CSRD and broader ESG & sustainability reporting initiatives. Whether your company is just beginning its journey or already deep into implementation, our team of skilled advisors can provide the guidance and support needed to navigate these challenges. From DMAs to gap analysis and reporting strategies and support, we’re here to help you not only meet regulatory demands but also position your business for long-term success.

Reach out today to learn how we can help guide your sustainability reporting efforts and ensure your company is prepared for the road ahead.