Investors have said they are not concerned about the quality of disclosures under the Corporate Sustainability Reporting Directive (CSRD), despite auditors warning that stakeholders are likely underprepared for the assurance outcomes in the first year of reporting.

The big four accounting firms – Deloitte, EY, KPMG and PwC – each told Responsible Investor that neither corporates nor investors are prepared for the reality that many companies will fail their assurance engagements in the first few reporting cycles.

As part of CSRD reporting, companies will be required to obtain limited assurance from 2024, and reasonable assurance from 2028.

Matthew Bell, global leader of EY’s climate change and sustainability practice, told RI that companies and stakeholders are not ready for the disclosure requirements or for the consequences this might have on reporting quality.

“EY is nervous that important stakeholders, like investors, are not properly prepared for the number of qualified opinions that are likely to be issued as companies undertake CSRD assurance for the first time,” he said.

A qualified opinion is where reporting contains material misstatements or omissions, which indicates a lack of confidence in some of the reporting.

Alan McGill, global head of sustainability reporting and assurance at PwC, echoed this. “The speed of the implementation of CSRD is unbelievably fast for corporates. I think there will be a significant proportion of opinions issued that will be qualified, because the corporate will not be in a state where they are ready for assurance.”

‘Not a big problem’

But while qualified opinions on financial statements represent an issue for companies, this will initially not be a big problem in CSRD reporting or for investors assessing their reports, according to Sycomore’s head of ESG and stewardship, Anne-Claire Imperiale.

“We are aware of the pressure all parties are under,” she told RI. “It is not as big a deal to have a qualified opinion on sustainability reporting as it is on financial reporting, depending on the maturity of the indicator.”

She added that, when it comes to external assurance, Sycomore will take qualified opinions into consideration, and will always ask the company for more information to understand the underlying reasons and ensure it is taking steps to resolve them.

“But as investors, we are aware some data is hard to collect and consolidate rigorously, so we understand there will be some qualified opinions – and that won’t be such a big deal for a company’s first few reporting cycles.”

A spokesperson for BNP Paribas Asset Management said CSRD reporting would still mark a step forward, given that investors are currently analysing and acting on “completely unaudited” and estimated data.

“Obtaining data from companies that has received some limited assurance would be an improvement,” they said.

BNP Paribas AM is considering using limited assurance reported company data in its data feeds, instead of existing unassured disclosures or estimates.

As an example of where problems may arise, Imperiale posited a situation where a company has been publishing a greenhouse gas statement for 10 years, and then receives a qualified opinion. “That would be a red flag,” she said.

She stressed that materiality will be the most important factor for companies in the first instance, adding that investors should ensure the materiality analysis has been properly verified and the company is disclosing the correct KPIs for materiality.

If a qualified opinion is issued on the materiality analysis, “this might present a challenge”, she said. At the same time, she noted, investors can also make their own judgement. “The ultimate question will be, are there any material negative ESG impacts which follow this qualified opinion?”

While the quality of data may not improve overnight, investors say they are treating the initial reporting cycles as only a first step in the context of a longer-term market shift.

Thomas Roulland, head of sustainability standards and analytics at Allianz Global Investors, said CSRD reporting “should extend and improve reported data from companies”. He added that it was too early to assess how investors will tackle qualified opinions and whether these would impact portfolio construction and reporting.

“We think CSRD will significantly contribute to the standardisation process of ESG data, which will ultimately benefit market participants,” he said.

Messy data and reporting

Deloitte and KPMG also flagged as a potential problem the limited time and resources that companies have to prepare for CSRD reporting and assurance.

“It may result in weaknesses in internal controls and processes,” said Deloitte’s head of ESG assurance, Steve Farrell, “which could in turn lead to a high number of assurance reports containing modified conclusions, including qualified conclusions or disclaimers of opinion.”

Nasrin Moola, director of ESG reporting and assurance at KPMG, said: “We anticipate challenges in obtaining evidence to support all material metrics and disclosures, which may result in more modifications to opinions than previously.”

She noted that the European Sustainability Reporting Standards (ESRS) leaves room for interpretation, so there is a risk that entities will apply incorrect or inconsistent interpretations of the requirements, resulting in “inadequate responses and disclosures”.

“Organisations will need to prepare extensive documentation to substantiate the interpretation of the ESRS and demonstrate how their understanding addresses the substance of the standards, which will be complex and time-consuming.”

But Imperiale said investors will wait for companies to have the necessary budget, resources and time to be able to “unqualify” opinions, and explain why data might be missing.

“There will be progress in terms of the robustness and quality of the data,” she said, “but if we get too distracted by this, we will push companies to focus on the most common KPIs, rather than on those which are the most accurate.”