The Corporate Sustainability Reporting Directive (CSRD) came into force in January 2023 after the draft European Sustainability Reporting Standards (ESRS) were signed and published by the European Council in November 2022. The ESRS will then go through a period of consultation with member states and relevant EU bodies before being adopted as Delegated Acts in the Summer of 2023. The directive calls for transparent, reliable and comparable information on material matters of environmental, social and governance (ESG) from companies that fall into scope. [i] Corporate Sustainability reporting is here and businesses need to prepare for the changes associated with updated standards and be clear on how they are impacted.
Who is in scope and when?
What does this mean for businesses?
While sustainability-related reporting directives, regulations and frameworks are leading the way for economic and financial system change, reporting is an output of the wider transition to a greener economy that we all need to be part of. The CSRD places Environmental, Social and Governance issues on the same playing field as financial reporting which means businesses will need to integrate sustainability into their core operations and business strategy. This is a significant change to how the economy currently operates and these alterations to a business’ structure will bring about a profound change in design, production, services, consumption, and investment that will be impossible to achieve without skilled people. [ii]
Sustainability reporting standards are expected to transform how companies manage their operations. A prime example of this is Double Materiality which is a foundational principle of the CSRD. In simple terms, double materiality expands on the concept of materiality and introduces a requirement for companies to report both on how sustainability issues affect their performance, position and development (the ‘outside-in’ perspective), and on their impact on people and the environment (the ‘inside-out’ perspective). This will require companies to engage widely and extensively with their stakeholders to develop a clear understanding of their internal and external risks and impacts.
The impact of the CSRD is also expected to extend beyond just in-scope companies because a company that is not in-scope could still be required to provide relevant information if they are a part of an in-scope company’s value chain. Additionally, there are advantages to embedding climate-related risks and opportunities into strategic thinking and many out-of-scope companies may decide it makes business sense to report voluntarily. It is clear CSRD’s impact is likely to be far reaching and the challenge it presents is something all businesses should be considering now.
The steps businesses should be taking now to prepare for sustainability reporting
All companies, whether they are in scope or not, should be familiarising themselves with these reporting standards and there are steps that can be taken now to start preparing.
- Understand the CSRD scoping criteria. Companies need to be clear on how they will be impacted and if they fall within the requirements for in-scope organisations. Equally, companies need to consider if they are part of the value chain of a company that is in-scope and understand how that will impact them.
- Conduct a skills gap analysis. The next step will be to familiarise themselves with the content of the draft standards and start identifying knowledge and skills gaps. The draft standards contain cross-cutting standards which include general requirements and disclosures as well as topical standards that cover all Environmental, Social and Government requirements. [iii] Sustainability reporting will require input from all departments and individuals not previously associated with financial reporting and they will need the knowledge and skills to report on sustainability topics. [iv] The standards are very detailed, the Environmental Standards for example, require companies to disclose on targets for climate change adaption and mitigation and provide measurable quantitative and qualitative targets for pollution, water and marine resources, biodiversity and ecosystems and resource use and circular economy. Leading companies are recognising that skills shortages can be a barrier to change and are placing a priority on on-going training and development to ensure all employees have the skills and capabilities to adapt to new ways of working.
- Conduct a data gap analysis. Getting to grips with the data collecting process is critical. It is important to understand what data is required, how it will be collated and managed and who will be responsible for it. This is related to the skills issue and the time and cost for collecting data was identified as one of the major concerns for businesses during the open consultancy phase. [v]
- Develop an Action Plan. The ESRS can provide a framework for highlighting your sustainability risks and impacts which will help in setting measurable targets that are aligned to the organisation’s strategy. Assessing the skills and knowledge gaps in your organisation will help identify what on-going support and upskilling will be required to help navigate the challenges ahead and develop actions that will transition your organisation in a way that is meaningful and long lasting.
Meeting our overall climate goals will inevitably involve change and disruption but there are also numerous benefits associated with the transition and businesses are a fundamental part of this. The transition to a green economy will create new jobs and require new skills and this in turn benefits society as we build resilience into our economy to withstand the shock that will come. The regulatory environment that will enable businesses to lead out on the change is coming and those that are prepared for this are the ones that will benefit the most.