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  • Writer's pictureDaniel Goelzer

PwC Explains Audit Committee Responsibilities under the E.U.’s CSRD

The European Union’s Corporate Sustainability Reporting Directive (CSRD) will directly impact many U.S.-based companies.  According to The audit committee has specific responsibilities under the EU’s CSRD, a publication of PwC’s Governance Insights Center, those impacts will include new audit committee responsibilities.  For companies subject to its requirements, the CSRD “explicitly puts audit committees of the reporting entities on the spot as it relates to sustainability reporting.”


In broad terms, the CSRD will apply to “large” (as defined) non-E.U. companies (including subsidiaries of non-E.U. parents) with securities listed on an E.U.-regulated market and to certain companies based outside of the E.U. that generate “net turnover” in the EU exceeding specified thresholds.  See E.U. ESG Disclosure Requirements Will Affect Many U.S. Companies, October 2023 Update.  The application of the CSRD to any specific non-E.U. company is likely to be a complex question that management should explore with the assistance of legal counsel. 

 

For those companies that are within its scope, PwC lists several ways in which the CSRD incorporates sustainability into the audit committee’s work.  Audit committee responsibilities will include informing the board of the outcome of sustainability reporting assurance and explaining how assurance contributed to the integrity of sustainability reporting.  In addition, audit committees will need to monitor the sustainability reporting process, including identification of the information that must be reported, and to make recommendations to ensure the integrity of these processes.

 

PwC suggests eight questions audit committees should ask as companies prepare for CSRD reporting: 


  • How does the board’s governance structure align sustainability and strategy?

  • Does management’s presentation and reporting of sustainability-related information allow the board and the audit committee to adequately understand the company’s risks and opportunities?

  •  What framework does management have in place for coordinating sustainability reporting across geographies and business units and for maintaining a holistic view across topics?

  • To what extent are the company’s finance function, internal audit and other reporting units involved in creating and/or strengthening the control environment for the sustainability disclosures?

  • What is the disclosure committee’s role, and do the members have the necessary expertise for the new disclosures? Should new members be added?

  • How far in advance of the required disclosure date will the audit committee receive draft disclosures?  This is usually an iterative process and may need revisions. The sooner the audit committee can review draft disclosures, the better.

  • Which sustainability reporting requirements is the company subject to globally? Has the company done a gap analysis to identify where investment is needed to meet the requirements? How is the company collecting data in an accurate, cost-efficient manner that recognizes the limited interoperability?

  • How has management assessed the material short, medium, and long-term risks? What methodologies were used to assess those risks?

 

The PwC paper also lists audit committee action items.  The list includes such things as “Develop a plan for new audit committee activities related to sustainability reporting, such as reviewing the materiality assessment periodically and overseeing the sustainability assurance provider;” “Understand the outcome of management’s materiality assessment;” and “Update the charter to reflect these new responsibilities.”

 

Audit committees of companies with any level of contact with the E.U. should make sure that management is considering how the CSDR may affect the company.  For those companies that will be subject to CSRD reporting, the audit committee should understand how the Directive will affect its responsibilities. PwC’s paper provides a good introduction to the CSRD’s impact on audit committees

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