By Teresa Brose, ESG consultant. This article previously appeared on Duurzaam-Ondernemen.nl
A solid ESG strategy is necessary for companies that will have to report in accordance with the new EU Corporate Sustainability Reporting Directive (CSRD) from 2025. This is the case if your company meets two of the following three criteria: your organization has more than 250 employees, a balance sheet total of more than €20 million and/or generates more than €40 million in net sales.
This new reporting standard has the potential to become a gamechanger with respect to corporate transparency, comparability, relevance and accountability on environmental, social and governance (ESG) criteria. In this article, we take a brief look at the new CSRD framework, tell you what makes it so distinctive, and address the opportunities and implications for your organization.
The CSRD framework in a nutshell
The CSRD is an ESG reporting standard that will apply to some 49,000 companies in the EU. The goal of the new standard is to encourage companies to better understand, manage and improve their ESG performance.
The infographic below provides a rough overview of the reporting framework for the first set of targets, or environmental goals, which are expected to be fully published in October 2022:
source: Adapted from European Financial Reporting Advisory Group, Status Report of the Project Task Force on European Sustainability Reporting Standards (PTF-ESRS), and European Financial Reporting Advisory Group, “Climate standard prototype,” Working Paper
The CSRD reporting standard is designed according to the so-called rules of three. It connects the three reporting areas, the three layers of industry perspective and, of course, the three ESG themes; environmental, social and governance. The full reporting model is called ESG+ and serves as a blueprint for a report that will be called Sustainability Statement. This will become a mandatory part of the annual report of all (medium-sized) companies.
The innovation of this reporting framework is that a company must not only report on its ESG performance for the reporting period, but also develop a short-, medium- and long-term ESG strategy with associated milestones and targets. Executives must therefore create a strategic approach for (much) better ESG performance until at least 2030 and in some cases even 2050.
In the next step, companies should document how they are implementing this (ESG) strategy as part of policy and what concrete actions they are taking. The results of ESG efforts must then be quantified and reported – not only for their own activities, but for all links in the value chain. With this, lawmakers are thus holding EU companies accountable not only for their own activities, but also for the activities of their suppliers and the impact their products have on ESG criteria.
Another part of the sustainability statement requires companies to indicate what portion of their revenues, relevant operating costs and capital expenditures qualify and conform to the EU taxonomy classification. In addition, an ESG risk assessment analysis from both an inside-out and outside-in perspective (double materiality) must be included.
The above is only a very brief summary of the CSRD, as the framework is complex and detailed. Therefore, companies would do well to prepare for the CSRD better today than tomorrow, in part because the CSRDs require a limited third-party assurance for the sustainability statement.
Incidentally, this limited assurance will be expanded to reasonable assurance in the future. This means that companies must not only collect the data, compile it and develop a strategic planning, but also disclose how and by what processes this data was created. For a more comprehensive and detailed explanation of the new CSRD, please refer to Empact’s website.
The implications and opportunities of the CSRD
Many companies will view this new reporting standard as yet another compliance exercise imposed by the EU. A resource-intensive exercise that adds little or no value. A mandatory task that you must perform to avoid fines and maintain your good reputation. This is a shame, because the new regulations do offer opportunities (and not just for saving the planet). First, because of the standardized reporting scheme and the need for quantitative data. Secondly, because the data must also be compiled in the ESEF data tagging format, allowing data to be compared at a much higher speed. The content and format of this sustainability reporting has the following implications for companies:
- Interested stakeholders can use this accurate information to inform themselves about how green and sustainable a company really is, significantly reducing the chances of greenwashing.
- Even today, consumers and business customers demand this type of ESG information, as it has become an increasingly important criterion for their purchasing decision. Also, comparing a company’s ESG performance with industry peers can influence the purchasing decision in favor of the better-performing company.
- The same goes for potential employees (especially younger generations), who want to know if their future employer is an ESG-compliant or -focused company.
- Other and very powerful stakeholders in this type of information are capital providers. The EU regulatory regime directs and encourages investors to invest in ESG-enabled assets. Because these investors are also accountable for the ESG portion in their portfolios, they are actively seeking suitable ESG investment opportunities and related ESG information.
- Preparing a CSRD report requires the collaboration of interdisciplinary teams across the company to a much greater extent than current mandatory reporting standards. It needs input at least from the finance, CSR/ESG, operations, research and development, sales, and IT departments with the management ultimately responsible. It also requires collaboration with the company’s value chain partners.
Given these implications (and the fact that a company needs to dive deep into this issue internally and with its partners anyway), a cumbersome compliance exercise, can actually become a strategic and financial opportunity. If the new CSRD is seen as a starting signal and ESG efforts are implemented with a 360-degree approach, it is likely to not only create value for society, but also generate financial value for the company. This financial value is a logical consequence of a unique ESG-integrated proposition that encompasses ESG business models, products and services and respective cultures. We as a society are only at the beginning of this journey and we do not yet have best practices on a large scale, but some role model companies have already proven that it is possible.