15 Nov The global impact of CSRD – are businesses prepared?
ESG reporting experienced a significant transformation in 2022 with the announcement of new proposals in the EU, the US, and global plans released by the International Sustainability Standards Board (ISSB). While these proposals can influence large businesses, the EU Corporate Sustainability Reporting Directive (CSRD) likely requires the most immediate recognition.
The final reporting directive was published at the end of 2022, setting the sustainability reporting requirements expected to impact businesses worldwide. The associated European Sustainability Reporting Standards (ESRS) were adopted by the European Commission this year, adding further clarity to the expectations of the required reporting. While there is still discussion surrounding the scope of CSRD about companies impacted by the new requirements, it’s clear that this reporting will likely commence in 2024 for some businesses, and the reporting requirements are extensive. Those who fail to recognise the impact of the requirements will find themselves under mourning pressure to comply. While some may regard this as a compliance process, there is an opportunity for innovative businesses to share their sustainability plans with investors and other associated stakeholders.
The CSRD was, to some extent, powered by the European Green Deal, a set of policy plans focused on climate neutrality by 2050 and the protection of regional natural habitats. The CSRD goes beyond the existing EU Non-Financial Reporting Directive (NFRD), implicating requirements on selected businesses to disclose a portion of their environmental and social impacts from 2017. The CSRD intends to influence company behaviour and align sustainability reporting with financial reporting by making disclosures concerning environmental, social and governance issues mandatory.
The CSRD began in January 2023, and EU members have until July 2024 to incorporate its measures into national law. The CSRD will require detailed and structured disclosures, incorporating the complete field of sustainability, from climate change and biodiversity to human rights and ethical standards in business.
The scope provisions of the CSRD are expansive and intend to apply to many businesses operating across Europe, believed to be approximately 50,000. Companies will report on environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery, and diversity on company boards (covering age, gender, education and professional background).
Preparing and delivering an ESG report that satisfies the requirements of the CSRD will bring challenges and opportunities. The double materiality assessment is critical in CSRD reporting and will influence the reporting scope. The assessment will be more complex than most businesses are used to as it requires companies to determine their impacts on people and the environment (impact materiality) and the sustainability aspects that financially impact the undertaking (financial materiality).
Furthermore, aside from disclosing information on policies and plans, the CSRD requires businesses to set targets, create a baseline and report progress towards achieving these goals. The information to disclose should consist of forward-looking details.
Companies will have to disclose information by the TCFD, on the transition to a sustainable economy, limiting global warming to 1.5C and achieving climate neutrality by 2050. Companies will be requested to accumulate and embed sustainability knowledge in their organisation to ensure the smooth implementation of all CSRD requirements.
Complying with CSRD sooner rather than later offers several advantages. These benefits include recognising new insights once businesses understand the non-financial indicators associated with corporate activities i.e. opportunities to save money through energy reduction and innovations in production.
With climate goals becoming more predominant, the EU will inevitably introduce stricter rulings on ESG in the coming year, impacting large and small businesses. Recognising the implications of how these measures will impact corporate activities and creating strategic plans to reduce impacts will ensure your organisation is more agile and resilient to face new challenges. Focusing on ESG gives companies a competitive advantage over others facing no reporting obligation.
Furthermore, early compliance with ESG reporting provides an opportunity to streamline production and the supply chain from a sustainability perspective.
Implementing the appropriate ESG reporting is a challenge for many companies. The abundance of ESG metrics is apparent and differs by industry, company size and complexity. There are also varied measurement and reporting frameworks used globally. While the specifics of the CSRD could change during the onboarding of CSRD into national law, businesses should prepare for their reporting requirements. Assessing the scope, the key dates and the compliance level with the measures required to lay the foundations for a smoother implementation phase.
Understanding the broad range of disclosure requirements and the effort needed to obtain information and implement reporting systems is a critical first step in delivering an implementation plan. Furthermore, this knowledge will create valuable insights that support future decisions. While some may consider this a compliance exercise, the CSRD is more than mandating sustainability disclosures and focuses on driving behavioural change. Businesses can adapt their purpose and business model by sustainability and create opportunities for value creation. It may be a challenge, but businesses can position themselves for success through active engagement.
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