How will corporate sustainability reporting change the role of the Board and audit committee?

The European Union has taken significant steps in sustainability legislation. A new era of sustainability reporting has begun as the legislative amendments to implement the Corporate Sustainability Reporting Directive (CSRD) entered into force at the end of last year. The amendments were made to the Accounting Act, Auditing Act and Limited Liability Companies Act, among other things. 

The regulations concerning sustainability reporting will be applied in the manner required by the Directive. This means that the obligations first concern large listed companies and other large public-interest companies and their information from the financial year 2024, which are to be published in 2025. In the coming years, sustainability reporting will extend to concern all large domestic companies and small and medium-sized companies listed on a stock exchange as well as certain companies outside the EEA.

The legislation concerning sustainability reporting will change the role of the Board of Directors and audit committee. In this blog, we cover three key changes.

Prepare a sustainability report

The CSRD requires that companies with the reporting obligation publish detailed sustainability information in compliance with European reporting standards. The standards will be issued as Regulations of the Commission, which means that they are directly applicable, and their national implementation does thus not require separate measures.

A sustainability report must include information on the sustainability factors that are material to the company, either because the company has or may have an impact on them or because they can impact the development, result and position of the company. In the Directive, this is called double materiality. If either one of these materiality criteria is met, the sustainability factor must be reported.

The sustainability report must be presented as part of the report of the Board of Directors, which is attached to the financial statements. As a result, the Board of Directors is responsible for the information in the report in a similar manner to other information in the financial statements and the report of the Board of Directors.

The sustainability report must also provide information on the value chain of the company with the reporting obligation. If the business of a company is based on long subcontracting chains, it needs to collect and verify more information than companies with shorter subcontracting chains. This will cause more work and costs – not only to the company with the reporting obligation but also to companies that are part of the value chain.

This means that sustainability reporting and its monitoring and evaluation will in future be added to the duties of the Board of Directors and the possible audit committee alongside financial reporting and its monitoring and evaluation.

Ensure assurance of the sustainability report

The Directive also requires that the information presented in the sustainability report is assured. The assurance may be carried out either by an auditor or an audit firm qualified for the assurance of sustainability reporting.

Companies with the reporting obligation must elect an assurance service provider for sustainability reporting in a general meeting. The company’s own auditor may be chosen for this task if the auditor fulfils the requirements. The company’s own auditor may carry out the assurance without a separate resolution by the general meeting during the financial period for which the company must prepare its first sustainability report, provided that the auditor or the responsible auditor of the company’s audit firm has the required special qualification or has acquired the necessary information on sustainability reporting and the assurance of sustainability reporting.

The Board of Directors or the possible audit committee is responsible for preparing the election of the assurance service provider.

Make sure you have the necessary competence

Sustainability reporting creates a completely new situation for companies: they must adjust their reporting systems as an increased amount of non-financial information outside the accounting is required in addition to the financial information.

Companies may decide whether they prepare the sustainability report internally or whether they use external experts. Particularly at the early stage, there will certainly be need for external assistance, but it is clear that the company’s internal understanding of its business and its connections to sustainability factors plays a key role in preparing the report. The Board of Directors should ensure in good time that there is enough expertise on sustainability matters in the company.

On the other hand, the Board members themselves may in future also be required to have better knowledge of and expertise in sustainability matters. At the latest at this point, it is clear that sustainability matters have a significant role on the agenda of the Board of Directors and audit committee.

The Directive emphasises sustainability as one element in the company’s strategy. A sustainability report should, among other things, state a position on how resilient the company’s business model and strategy are with respect to sustainability related risks. It should also describe the company’s plans to make sure that the company’s business model and strategy are compatible with the transition to sustainable economy and the aim to limit the global warming to 1.5 degrees in accordance with the Paris Agreement and make the European Union climate neutral by year 2050.

Sustainability reporting provides company Boards with an excellent opportunity to put the report data into use and assess how the business operations could promote sustainability targets while also accounting for growth and profitability.