Linking the CSRD and financial report

The EFRAG Connectivity Project

The EFRAG Connectivity project represents an innovative approach to linking the sustainability report in accordance with the CSRD and financial reporting. The introduction of the Corporate Sustainability Reporting Directive (CSRD) increases the need for companies in the EU to expand their financial reporting to include sustainability components and to make it more transparent.

The main objective of the EFRAG Connectivity project is to create a clear link between the financial and sustainability reports. In the report ‘Considerations on connectivity and the boundaries of the different sections of the annual report‘, EFRAG addresses this issue in detail. The CSRD requires companies to provide sustainability information that is not only complete, but also comparable, reliable and comprehensive. This project supports companies in meeting these requirements through improved linkage.

Advantages of the connectivity of the CSRD and financial report

The advantages of connectivity can be summarized as follows:

Improved credibility: By coordinating the financial reporting (FR) and sustainability reporting (SR) teams, a more accurate and trustworthy presentation of the company’s performance is achieved.
Building a bridge between the CSRD and financial reports: The link enables a closer connection between the financial and sustainability-related parts of the report, which leads to a more holistic understanding of the company’s performance.
Promoting complementarity and value communication: By combining different types of reporting, the value that the company creates is presented more comprehensively and from different perspectives.
Avoidance of information gaps: Connectivity helps to avoid potential gaps and duplications in the reported information and promotes a uniform presentation of information.
Stakeholder benefit: The combination of financial and sustainability reports improves the relevance, credibility, comprehensibility, comparability and verifiability of the information, which supports stakeholder decision-making.
Links between financial and sustainability-related information: Stakeholders can better understand the links between financial results and sustainability performance.
Expansion of use: Financial reports are not only used by investors, but also by other stakeholders, while sustainability reports are of interest to numerous stakeholders and are increasingly being used by investors for their decisions.
Reducing the expectation gap: Connectivity helps explain why certain information cannot be connected, which clarifies stakeholder understanding and expectations.
Avoidance of greenwashing: The transparent and verifiable presentation of sustainability performance prevents misleading or inaccurate representations of environmental and social performance. The Green Claims Directive specifies which environmental claims are permitted for consumers.

Differences between CSRD and financial report

Purpose and content of the report

Financial reporting: Focuses on the presentation of the company’s financial performance and position, including the income statement, balance sheet and cash flow statement. The information is primarily of a quantitative nature and is intended to help investors make economic decisions.
CSRD (sustainability reporting): The aim is to inform a broader range of stakeholders about the company’s impact on the environment and society. This includes topics such as environmental responsibility, social justice and corporate governance (ESG). The report contains both quantitative and qualitative data and aims to create transparency about non-financial aspects of the company’s performance.

Regulatory framework and standards

Financial reporting Subject to strict accounting standards such as IFRS or US GAAP, which provide clear guidelines for the measurement, presentation and disclosure of financial information.
CSRD: While the CSRD prescribes clear guidelines for reporting on sustainability aspects, the standards (e.g. the European Sustainability Reporting Standards, ESRS) are often less rigid with regard to the exact assessment and measurement methods compared to financial standards. The CSRD requires a description of policies, risks and outcomes related to sustainable practices.

Addressees

Financial reporting: Mainly aimed at investors, lenders and other financial stakeholders.
CSRD: Targets a broader stakeholder group, including customers, employees, non-governmental organizations, regulators and the general public, who have an interest in the broader social and environmental impacts of the company.

Similarities between CSRD and financial report

Transparency and accountability: Both types of report strive for a high level of transparency and accountability in order to strengthen stakeholder confidence and support informed decision-making.
Periodicity and comparability: Both financial and sustainability reporting require regular updates (usually annually) to ensure the continuity and comparability of the information presented.
Assurance requirements: Under the CSRD, sustainability reports, similar to financial reports, are subject to an audit to confirm the reliability of the reported information. This increases the credibility of the reports.
Risk management: Both types of reporting include an assessment and disclosure of risks and how the company manages these risks. However, sustainability reporting places greater emphasis on how these risks relate to social or environmental factors.

Integration of CSRD and financial report

The CSRD aims to integrate sustainability reporting more closely with financial reporting by requiring companies to report on the interactions between their environmental and social practices and their financial performance. This encourages the development of integrated reporting that combines financial and non-financial elements to provide a holistic picture of corporate performance. Such integration helps to demonstrate long-term value creation and risk management, which is of particular interest to investors who increasingly value sustainable business models.

EFRAG has published a video presenting the key findings from the recently published EFRAG Connectivity Report.

Schematic representation of connectivity

The diagram can be divided into three main categories that represent different aspects of connectivity in the context of corporate reporting.

1. comprehensive integration of information for value creation

Communicate/describe the effects of strategic responses on opportunities, risks and performance factors, both financially and operationally.
Explanation of how an entity’s business models, opportunities and risks are linked to its financial performance and long-term objectives, including short- and medium-term metrics (in accordance with ESRS 1.123 and IFRS S1.35 and IFRS S1.B44).
Presentation of the trade-offs between risks and opportunities in strategy development (IFRS S1.B44).
Link the disclosures on risks affecting the company to its strategies for mitigating these risks and the associated strategic and financial implications (ESRS 1.123 and IFRS S1.B43).

2. combination of quantitative and narrative information

Linking of quantitative information via cross-references in accordance with ESRS (ESRS 1.124-125).
Linking quantitative information through reconciliation (indirect connectivity in accordance with ESRS and IFRS S1.124-125).
Qualitative disclosures that describe how the financial risks and opportunities are linked to sustainability performance and include both current and future financial effects (IFRS S1.B40).
Non-mandatory elements: It is not required, but explanations as to why certain related information was not proposed, for example due to different levels of aggregation, could be useful.
Correlation and cause-effect relationships, which are voluntary, e.g. in SAP business reports.

3. other overarching aspects of connectivity

Consistency: Consistent data, narrative/qualitative disclosures, assumptions and units of measurement (e.g. currencies) across different sections of the report (ESRS 1.127-128 and IFRS S1.23).
Coherence: Presentation and disclosure of information within and across different company reports to ensure a complete view of value creation while presenting the interconnectedness of all reported information (derived from IASB 2021 MCPS ED)

Notes on double materiality

Dual materiality is a key concept in reporting that serves as a filter to determine the type, size and aggregation level of information in different sections of the annual report (AR). This property, which is crucial for the relevance of information, defines the boundaries and influences the links between the report sections both statically and dynamically. The implementation of the double materiality assessment is a core element of CSRD sustainability reporting.

Practical tips for implementation

Based on the EFRAG report on the connectivity of financial and sustainability reporting (CSRD), some specific practical tips can be derived:

Link strategy information effectively:

Financial report: The company’s strategic objectives, financial implications and risk management strategies should be described in detail.
Sustainability report: Reference should be made to the strategy described in the financial report, supplemented by information on how this strategy supports or influences sustainability goals.

Clearly present risk management:

Financial report: focus on financial risks and their management.
Sustainability report: Presentation of sustainability risks that may have a financial impact and explanation of how these are integrated into the company’s general risk management.

performance indicators:

Financial report: focus on key financial figures.
Sustainability report: supplement with sustainability indicators that could influence or reflect the financial results.

Use cross-referencing:

Information should not appear redundantly in both reports. Instead, reference should be made to the corresponding sections in other parts of the report in order to avoid duplication and increase clarity.

These practical tips are intended to help companies design their reports in such a way that both financial and sustainability-related aspects are communicated clearly and effectively, which increases transparency and understanding for stakeholders.