With modern customers, investors, and other business stakeholders increasingly paying attention to companies’ sustainability practices, the Corporate Sustainability Reporting Directive (CSRD) has become a welcome solution for many organizations.
Introduced by the European Union (EU), this directive promotes transparency and consistency in environmental, social, and governance (ESG) reporting, allowing stakeholders to assess companies’ performance more effectively.
CSRD compliance involves various key steps, with one of the most important being gap analysis. Gap analysis highlights discrepancies between companies’ ESG disclosure and CSRD requirements, setting the stage for better alignment with the directive.
Here, we examine the value of a CSRD gap analysis and offer guidance on conducting one to promote regulatory compliance.
What is a CSRD gap analysis?
A CSRD gap analysis compares companies’ existing sustainability disclosures with CSRD requirements. Seeing as the CSRD directive is still somewhat unchartered territory for many businesses, this analysis is valuable as it reveals where companies are meeting requirements or falling short in their existing reporting.
By identifying gaps, organizations can feel confident in where they’re meeting requirements and focus on areas that need improvement.
Why companies need to conduct a CSRD gap analysis
While it may be tempting to dive straight into CSRD compliance, it’s important to first conduct a gap analysis. It’s one of the most crucial steps in preparing for the CSRD directive, as it reveals which disclosures already align with requirements and which don’t, effectively informing your reporting. It also allows you to build on existing sustainability information versus starting completely from scratch, which helps accelerate the process.
Here’s a deeper look at why CSRD gap analyses are so critical.
Navigating compliance with regulatory requirements
The CSRD directive is more extensive than sustainability frameworks like the Task Force on Climate-related Financial Disclosures (TCFD) and the Non-Financial Reporting Directive (NFRD). This means that companies in the European market have to comply with more obligations and familiarize themselves with new standards—processes that can be challenging.
A gap analysis makes it easier to understand the CSRD’s new standards by highlighting disclosures that require more work, or are missing altogether, to align with the directive. Identifying gaps can minimize the risk of non-compliance before the expected deadlines:
- 2025 for large EU companies previously subject to the NFRD directive
- 2026 for EU companies not subject to the directive
- 2029 for non-EU companies in the EU market
This helps organizations avoid potential fines and legal challenges, but it can also prevent reputational damage by ensuring that sustainability reports are accurate and verifiable.
Demonstrating transparency and accountability internally
Conducting a gap analysis demonstrates a company’s commitment to transparency and accountability in sustainability reporting, some of the elements at the core of the CSRD directive. It identifies shortcomings in existing disclosure practices, allowing for more transparent and comprehensive reporting accessible organization-wide.
A gap analysis also signals that the company is actively working toward complying with CSRD requirements, demonstrating accountability. This keeps employees and internal stakeholders informed and aligned on progress toward compliance initiatives.
Streamlining ESG reporting processes
You can only improve current reporting if you know where they’re falling short. That’s exactly what a CSRD gap analysis helps with: It identifies gaps in disclosures and reporting, allowing companies to focus their resources on areas that need improvement.
It also promotes consistency by ensuring reporting aligns with the European Sustainability Reporting Standards (ESRS). This can reduce the effort and time departments need to prepare and compile their reports.
Why conduct a double materiality assessment (DMA) before doing a gap analysis?
Just like you have to conduct a gap analysis before diving into CSRD compliance, you need to complete a DMA before doing a gap analysis. Starting with a DMA helps highlight the most relevant ESG issues from an impact and financial standpoint.
Identifying what is material to your organization clarifies focus areas, ensuring your gap analysis only addresses relevant topics rather than every data point in the CSRD. This can prevent resource waste and result in a more actionable compliance roadmap.
Streamlining the DMA process
The DMA helps organizations identify how their activities affect the environment and society (impact materiality) and how sustainability matters impact their financial performance (financial materiality).
To streamline the DMA process, start by conducting an assessment to determine all potential material sustainability issues. Then, identify potential impacts, risks, and opportunities (IROs) and analyze their likelihood of occurrence, severity, and extent of impact. When you’re done, engage stakeholders like employees, suppliers, managers, and business partners for further insights into material topics.
Based on the findings of the DMA process, you can then move on to gap analysis.
How to conduct a CSRD gap analysis: The 7 key steps
Now that you know the value of a CSRD gap analysis, how do you conduct it effectively? Here’s a step-by-step guide on how to help companies navigate ESG compliance.
1. Gather essential stakeholders
The first step is to identify who is responsible for ESG reporting at both the board and business unit levels—this could include company executives, compliance managers, and ESG officers. These parties will help you understand a company’s current systems and processes, promoting seamless alignment with your input.
Identifying pertinent stakeholders can also help you assign roles and responsibilities effectively, allowing for smooth processes and accountability throughout the gap analysis process.
2. Align on ESG reporting goal
Next, collaborate with stakeholders to set a clear ESG reporting objective. Depending on your client’s needs, the objective could be strictly compliance-driven or aimed at leveraging reporting to drive organizational change.
Setting a clear reporting goal provides clarity for the subsequent action plan and helps you focus resources on the right areas.
3. Evaluate reporting requirements
The CSRD directive is relatively new. Therefore, some organizations may not be fully aware of their reporting obligations. That’s where you come in to help your client understand:
- The general requirements of CSRD
- Its phased applicability for different types of businesses
- Applicable transitional reliefs (e.g., some SMBs can defer first-time reporting by two years)
It’s also important to identify material topics (impact materiality and financial materiality) by evaluating the company’s activities and how they intersect with social and environmental matters. You can also engage stakeholders, such as investors and management, to prioritize material issues.
4. Establish a timeline for reporting processes
With CSRD reporting deadlines just around the corner for many EU companies, you may not have a lot of time to conduct a gap analysis. So create a detailed, conservative, and realistic timeline to guide your action plan. A timeline can help you avoid delays by planning for the complexities of data collection, auditor engagement, and report drafting.
For smooth execution, break down the process into small, manageable stages. For example, you can break it into data collection, materiality evaluation, auditing, and drafting.
Plan effectively by assigning roles and responsibilities, allocating the relevant budget, and choosing the right tools for each stage. It’s also important to incorporate contingencies in your timeline in case you encounter unexpected setbacks.
5. Evaluate current reporting practices
This is where you assess a company’s baseline performance and evaluate how the organization currently reports ESG data. Some companies already make voluntary reports, and others have to comply with frameworks like International Sustainability Standards Board (ISSB) reporting requirements, so you’ll likely have a baseline for your assessment.
For a more streamlined process, leverage tools like Manifest Climate for your evaluation. Manifest Climate can conduct a rapid gap assessment on all existing disclosures to help you understand exactly where your client stands in terms of compliance.
6. Conduct the gap analysis
Armed with an organization’s baseline performance, you can then compare current reports to CSRD requirements. This will highlight areas where they fall short and help you identify the effort needed to achieve compliance—the essence of a CSRD gap analysis.
This step requires an efficient feedback loop to adjust timelines and workflows to account for missing data or other gaps in reporting readiness. So be sure to leverage solutions like Manifest Climate to lighten the load and streamline the process.
7. Develop a refined work plan
To close out the gap analysis process, consolidate all your findings into a comprehensive roadmap and engage stakeholders to get their feedback on remediation efforts.
Include timelines and responsibilities for every party involved and prioritize high-impact remediation efforts, such as improving data quality, to promote quick compliance with CSRD requirements.
Challenges of conducting a CSRD gap analysis
Conducting a CSRD gap analysis can be challenging, thanks to high data volumes, fragmented data sources, and workflow inefficiencies. The good news is that these barriers are manageable, so let’s look at how.
High volume of data
A CSRD gap analysis requires extensive information on a company’s environmental, social, and governance fronts. Unfortunately, managing and analyzing this massive volume of information (especially manually) can be overwhelming, making it difficult to identify gaps.
To effectively assess CSRD compliance, use AI-focused tools like Manifest Climate to aggregate and review sustainability reports. You can also break down large datasets into more manageable categories and focus primarily on material topics on the CSRD.
Fragmented data sources
Organizations typically collect and store CSRD reporting information across different departments and systems. This can result in inconsistent formats, data duplication, and missing information, leading to an incohesive and inaccurate picture for the gap analysis.
You can solve this challenge by leveraging ESG software to collect and consolidate data from different departments and systems into a centralized single source of truth.
Manual processes and inefficient workflows
While manual processes like creating and assessing spreadsheets may seem effective, they are not ideal for CSRD gap analysis. They’re prone to errors and likely to slow down the process, potentially impacting your compliance timeline.
To promote efficient workflows, automate first-pass gap assessments by leveraging tools like Manifest Climate. And remember to train stakeholders on how to use your chosen tool for efficient reporting.
Conduct thorough CSRD gap analyses for clients with Manifest Climate
A CSRD gap analysis is vital for companies impacted by the EU regulation, as it highlights areas that need improvement to ensure compliance. But with compliance deadlines looming, there’s not much time left to manually conduct a full gap analysis and implement the necessary changes.
Manifest Climate can streamline the gap analysis process by compiling data from multiple sources and assessing compliance in a matter of minutes. But that’s not all—our AI-driven software can also serve as your own personal AI-powered ESG Analyst by highlighting discrepancies and potential problem areas in your clients’ CSRD compliance efforts.
Need assistance with CSRD gap analyses for your clients? Schedule a demo with Manifest Climate today to see how we can help!
