CSRD: No Time to Lose

CSRD: No Time to Lose! Exploration of the application of new sustainability regulations in the annual report (CSRD) for listed companies and accounting firms Read more

2 Contents Contents Summary 3 Key Concepts 7 01 Introduction 9 02 Sustainability reporting still has a long way to go in a short time 13 03 Available and reliable sustainability data still leaves much to be desired 19 04 Concerns about the understandability of the assurance statement 22 05 An impending shortage of capacity and expertise 25 06 Description of the research methodology 27

Summary 3 Summary Figure 1. Timeline: Implementation of the CSRD 2017 NFRD Regulation Applicable to: Large Organizations of Public Interest

500 employees (= Large OPIs) 2024 CSRD Regulation Applicable to: Large OPIs 2028 CSRD Regulation Applicable to: Non-EU companies with turnover > 150 million euros in the EU 2026 CSRD Regulation Applicable to: Medium and Small listed companies, with the exception of micro-enterprises 2025 CSRD Regulation Applicable to: All large companies Note, the last 9 months are running out! Good sustainability information in reporting is a key pillar in the sustainability transition The transition to a sustainable society is one of the most important challenges of our time. There is a lot of regulation coming, especially from Europe, to stimulate the transition to guide it in the right direction. The Corporate Sustainability Reporting Directive (CSRD) is an important example of this. The CSRD requires companies to report on more and more specific non-financial information (NFI) based on the European Sustainability Reporting Standards (ESRS). The CSRD also requires an external accountant/assurance provider to provide limited assurance on the non-financial information prepared on the basis of the ESRS.

Summary 4 In the AFM exploration: 27 listed companies and the four largest accounting firms We selected a number of sectors where climate impact, such as CO2 emissions, plays a major role. These are banks, oil and gas, manufacturing, food and technology. In total, the annual reports (fiscal year 2021) of 27 listed companies from these sectors were included. That is approximately one third of the companies on which the NFRD has been applicable since 2017 and which are under AFM reporting supervision. From 2024, 'limited assurance' by the external accountant on non-financial information will be mandatory. The assurance statements on the non-financial information of the selected listed companies were provided only by Big-4 accounting firms. Therefore, the exploration looked at how the four largest OPI accounting firms (Deloitte, EY, KPMG, PwC) handle this. Exploration focused on the application of the ESG theme 'climate' We limited our research to the application of 1 of the 6 environmental themes (E) from the ESRS, namely climate. 'Climate' is just one of the many ESG puzzle pieces, but it is one with a large and important impact on the sustainability transition. There is also a lot of societal attention for climate and most sustainability regulation monitors climate risks. Results of the exploration of the ESG theme 'climate': Companies still have a lot of homework to do Our exploration shows that half of the 27 listed companies do not or only partially explain the negative effects of companies on the environment and society. Furthermore, we see that the majority of the companies investigated are not sufficiently transparent about the (financial) impact of climate change and the energy transition on the company. In addition, it is striking that half of the 27 companies are not clear about how they intend to achieve their climate goals. Finally, we see that in some cases important sustainability topics for a company are not receiving sufficient attention in the annual report. Give priority to getting sustainability information in order throughout the entire chain Due to the CSRD, the number of companies dealing with the new reporting obligations will increase sharply from 2024. Companies, accounting firms and other chain parties face the same challenges. This means that they must prioritize getting sustainability reporting in order and must look for sufficient capacity and expertise for this. The fact that there is no time to lose is clearly shown in Figure 1. The CSRD goes into effect in 9 months and replaces the Non-Financial Reporting Directive (NFRD), the precursor to the CSRD which has been applicable since 2017. The CSRD will also be expanded after 2024 with, among other things, large non-OPIs (2025) and medium and small listed companies (2026). In anticipation of the CSRD: exploratory research into reporting and provided assurance on non-financial information The arrival of the CSRD and the concerns of investors and other users about the connection between non-financial information and financial information were the reason for the AFM to conduct an exploratory research in 2022 into non-financial information in the management report and the assurance provided with it. Results of the exploration and good examples to get started with, because the CSRD is coming With the research results, we want to encourage listed companies and accounting firms to improve NFI reporting and assurance. In the report we also share good examples (good practices) that we have seen. This way they are better prepared for the arrival of the CSRD and come meet the information needs of investors and other users. We emphasize that the path to a more sustainable society is not easy and that the urgency is high. Companies, investors, accountants, societal organizations, consumers and regulators are all parts of a complex whole. Everyone in the chain must move forward and take their responsibility to comply with the law and to achieve a sustainable society.

Summary 5 Available and reliable sustainability data still leaves much to be desired, actions:

1. Accelerate investment in IT systems and processes around sustainability data;
2. Report more on scope-3 emissions;
3. Call on the chain: your customers and suppliers are also responsible. Figure 2. The chain Raw Materials Consumer Suppliers Distribution Company Explanation It is important for companies to determine what data they need from both internal and external parties in the chain to report in accordance with the CSRD. In connection with this, they must invest timely (further) in IT systems and processes around sustainability data, so that the systems and processes are set up for providing available and reliable data. We currently see a number of significant challenges in collecting and registering this data. For example, much more and specific data will need to be collected than is currently reported. Also, non-financial data is often not as reliable as financial data, and NFI data is often not available from the existing (financial) administration. As a result, too little is reported on scope-3 emissions. Companies must therefore accelerate investment in IT systems and processes around sustainability data and point out their role to their chain partners to collect and register data in the same way. Sustainability reporting of large companies still has a long way to go in a short time, actions:
4. Bring the most important sustainability topics more prominently to the fore in the annual report;
5. Report better on the negative effects of business operations;
6. Be more transparent about the (financial) impact of climate change and the energy transition on the company;
7. Create more clarity on how climate goals are achieved and what dilemmas are experienced in this regard;
8. Involve the accountant from his role in assessing the balanced image of sustainability reporting. Explanation Companies must be transparent about their impact on the environment, their employees, society and about the financial impact of ESG factors on the company. Investors and other users, such as governments and NGOs, demand this more and more. They must pay sufficient attention to both favorable/positive aspects as well as unfavorable/negative aspects of business activities. Also, greenwashing must be prevented. Furthermore, for users of the annual report, a good connection between financial and non-financial reporting is important. Finally, there must be a logical and coherent connection between the different parts of the management report relating to ESG, such as strategy, objectives, risk paragraph and performance and the dividend and remuneration policy. A good example of an important step yet to be taken is the reporting of double materiality. This means that companies must report on both the (financial) impact of the environment, for example climate change, on the company (outside-in) as well as on their positive and negative impact on the environment and society (inside-out). In our research, companies state that double materiality is one of the challenges of the CSRD. Translating environmental aspects into financial impact is particularly complex. Our research also shows that the negative effects of companies on the environment and society are not or only very limitedly explained.

Summary 6 Concerns about the understandability of the assurance statement by the external accountant, actions:

1. Ensure more clarity on the nature and depth of the assurance activities;
2. Make challenges and dilemmas in the assurance statement transparent. Explanation The non-financial information that companies include in their annual report must be provided with an assurance statement after the CSRD enters into force in 2024. The understandability of the current assurance statements on NFI of the selected listed companies leaves much to be desired on a number of points. As a result, users may attach more value to the statement than is justified. For example, scope limitations in the assurance statement cause confusion, and combinations of 'reasonable assurance' and 'limited assurance' in a statement are confusing. The CSRD excludes 'cherry picking' and ensures one 'limited-assurance' statement according to the same standards. Impending shortage of capacity and expertise, actions:
3. Companies must determine what capacity and expertise is required for the implementation of the CSRD;
4. Look at the organization of the accounting firm and what is needed in terms of capacity and expertise to grow rapidly with the expected surge in assurance assignments. Explanation Significant steps are still needed in capacity and expertise at both the companies and the accounting firms. In addition, the organization of accounting firms must grow rapidly with the expected surge in assurance assignments.

Key Concepts 7 Below is an overview of key concepts included to provide context for reading this report. Key Concepts Explanation Scope 1, 2 and 3 Scope 1: direct emissions from sources that the reporting entity owns or controls. Scope 2: indirect greenhouse gas emissions from purchased energy, such as electricity, heat or cooling, generated outside the reporting entity and consumed by the reporting entity. Scope 3: includes all indirect emissions that occur in the value chain of a reporting entity. Accounting firms with an OPI license Accounting firms with a license from the AFM to perform statutory audits for clients that are an organization of public interest and statutory audits for clients that are not an organization of public interest. Accounting firms with a regular license Accounting firms with a license from the AFM to perform statutory audits for clients that are not an organization of public interest. Assurance assignment An assurance assignment is a professional service where an accountant seeks to obtain sufficient and appropriate assurance information to express a conclusion to enhance the level of confidence of the intended users, other than the responsible party, in the outcome of the measurement or evaluation of the subject matter against criteria. Qualified opinion An unqualified opinion with the exception of a part of the reporting. Assurance statement with limited assurance ("limited assurance") In a statement with a limited level of assurance, the external accountant declares that nothing has come to their attention that causes them to believe that the information they have reviewed contains material misstatements ('negative assurance'). Assurance statement with reasonable assurance In a statement with a reasonable level of assurance, the external accountant declares that the information they have audited is accurate and complete ('positive assurance'). Carbon Credits A tradable certificate or permit that enables organizations and individuals to offset their CO2 emissions by reducing CO2 emissions elsewhere. Corporate Sustainability Reporting Directive (CSRD) New European directive that requires companies to report on sustainability from fiscal year 2024. Key Concepts

Key Concepts 8 Key Concepts Explanation European Sustainability Reporting Standards (ESRS) European reporting rules that companies must apply for their sustainability reporting under the CSRD. Greenwashing The improper labeling of 'sustainable' on products or the greener presentation of performance by companies than they actually are. Quality Assurances Quality assurances are working methods, procedures and measures included in the quality management system of an accounting firm. These are intended to ensure that the external accountant who issues the audit or review report can do so in a competent, independent, honest and recognizable manner. Non-financial information (NFI) In the context of this research, NFI refers to: environment, social and governance related information (ESG). Non-Financial Reporting Directive (NFRD) The precursor to the CSRD. Assignment-based Quality Assessment (OKB) A quality assurance aimed at preventing serious deficiencies in the quality of statutory audits for the issuance of the audit report. Sustainable Finance Disclosure Regulation (SFDR) European regulation regarding information provision on sustainability in the financial sector. Quality Management System The quality management system contains, among other things, procedures, descriptions and standards, which aim to ensure compliance by the accounting firm with the rules laid down by and pursuant to the law. Statutory Audit A statutory audit is an audit of a company's financial statements for the benefit of the public which is specifically designated as a statutory audit in the Act on supervision of accounting organizations. This concerns, for example, the audits of annual accounts of medium and large companies, municipalities, provinces and various financial companies.

01 Introduction 9 The transition to a sustainable society is one of the most important challenges of our time. We expect market parties to be transparent about their sustainability impact and risks, and that they enable investors to make the right decisions based on that. Good sustainability information is the key pillar in this, and thus a priority for the AFM. A priority that fits into the AFM strategy 2023-2026, in which sustainability has special attention alongside digitalization and internationalization.1 There is a lot of regulation coming, especially from Europe, to stimulate the sustainability transition to guide it in the right direction. We encourage parties to apply this new regulation on sustainability correctly and in a timely manner. 1 Strategy 2023-2026 (afm.nl) Figure 3. Timeline: Implementation of the CSRD 2017 NFRD Regulation Applicable to: Large Organizations of Public Interest

500 employees (= Large OPIs) 2024 CSRD Regulation Applicable to: Large OPIs 2028 CSRD Regulation Applicable to: Non-EU companies with turnover > 150 million euros in the EU 2026 CSRD Regulation Applicable to: Medium and Small listed companies, with the exception of micro-enterprises 2025 CSRD Regulation Applicable to: All large companies Note, the last 9 months are running out! 01 Introduction

01 Introduction 10 1.1 Our research AFM conducts exploratory research on non-financial information in the management report and the assurance provided with it. The arrival of the CSRD and the concerns of investors and other users about the connection between non-financial information and financial information were the reason for the AFM to conduct an exploratory research in 2022 into non-financial information in the management report and the assurance provided with it. The research focuses on climate and is primarily of an exploratory nature. The research questions focus on:

1. The extent of the coherence between non-financial and financial reporting;
2. The extent to which accounting firms and external accountants fulfill their role in providing assurance on non-financial information and the manner in which accounting firms support the external accountant in providing assurance regarding non-financial information. 27 listed companies and the four largest OPI accounting firms involved in the research We identified a number of sectors where climate aspects and risks, such as CO2 emissions, play a major role: banks, oil and gas, manufacturing, food and technology. For each sector, the annual reports of most companies in that sector were selected. In total, the annual reports of 27 listed companies for fiscal year 2021 were included. We involved four OPI accounting firms (Deloitte, EY, KPMG and PwC) in our research. The CSRD affects not only the listed companies investigated and the 4 OPI accounting firms The CSRD applies to all large companies, medium and small listed companies and non-EU companies with a turnover of more than €150 million in the EU. It is also expected that due to the arrival of the CSRD, the other OPI accounting firms and accounting firms with a regular license will provide assurance on NFI for more companies. Reporting and assurance of non-financial information mandatory for an increasing number of companies An important step towards better sustainability reporting is the new EU directive for the reporting on the sustainability of companies: the 'CSRD' (Corporate Sustainability Reporting Directive). The CSRD is mandatory from fiscal year 2024 for large organizations of public interest (OPIs).2 Thereafter, the remaining large companies will follow (fiscal year 2025), medium and small listed companies from fiscal year 20263 (with the exception of micro-enterprises) and from fiscal year 2028 non-EU companies with a turnover of more than €150 million in the EU. The CSRD requires these companies to report on more and more specific non-financial information based on the European reporting rules on sustainability (ESRS).4 Reporting on sustainability is still very much in motion. In the coming years, the ESRS will be further developed. For example, sector-specific standards are being developed, the first proposals for which will be published in 2023, and standards for SMEs will emerge. At the global level, the International Sustainability Standards Board (ISSB) of the IFRS Foundation published concept international standards for sustainability reporting in 2022. These rules must improve the relevance and comparability of sustainability reporting internationally.5 Publication of the first two definitive standards is expected in mid-2023. 2 These are organizations within the meaning of Article 2:398 paragraph 7 of the Dutch Civil Code. 3 Medium and small listed companies may choose to let the CSRD enter into force only from fiscal year 2028 (two-year opt-out period). 4 The European Financial Reporting Advisory Group has drawn up the European Sustainability Reporting Standards (ESRS) that companies must apply for their sustainability reporting under the CSRD. These ESRS relate to various ESG topics, including climate. These standards for European sustainability reporting were published in concept in November 2022. The ESRS must be approved by the European Commission no later than June 30, 2023. 5 AFM advocates for more clarity and operability of international standards for sustainability reporting

01 Introduction 11 Not only financially, but also for their internal IT systems and processes and the way companies must report on ESG aspects and external accountants must issue an assurance statement. Transparency required on green goals, their realization and the financial consequences For example, investors, governments and other users want companies to be transparent in their reporting about goals in the field of climate. They also want transparency on how companies intend to achieve these goals and when and how far companies have progressed in achieving these goals. Furthermore, investors want to know what financial consequences (in the long term) are associated with the climate strategy of companies. Translated into the (annual) reporting of companies, this means that there must be consistency and connection between financial and non-financial reporting. Concerns have been raised in various reports about the lack of connectivity.6 By including non-financial information (NFI) well7 in the annual reporting and linking the relationship with financial consequences in both the short and long term, stakeholders such as investors can make better informed choices. New legislation must lead to more transparency about how sustainable a business model is The CSRD replaces the current NFRD directive (Non-financial Reporting Directive, implemented in the Netherlands in the 'BNFI', the Decision on disclosure of non-financial information) from 2017 which applies to large organizations of public interest with more than 500 employees. The Sustainable Finance Disclosure Regulation (SFDR), applicable since 2021, also contributes to more transparency on sustainability. This regulation