Why the CSRD can be a good thing for your business and society

In our CSRD blog series we unravel the Corporate Sustainability Reporting Directive (CSRD) blog by blog. As you may recall from our previous blogs, the CSRD is the new EU legislation requiring all large companies to report at least annually on their environmental, social and governance (‘ESG’) activities and performance. In this blog, we will dive into why the CSRD was created in the first place, and why this new legislation can be more than a regulatory must for your company.

Why was the CSRD created in the first place?

The CSRD is part of a bigger regulatory puzzle that the European Commission has been working on for several years. Though this puzzle is quite complicated to explain in a few sentences, we’ll give it our best shot. Bear with us.

In 2020 the European Commission launched the European Green Deal, in which it has set the ambitious target to become the first climate-neutral continent by 2050. It also set the goal to significantly reduce Europe’s greenhouse gas emissions by 2030, together with several other sustainability goals. To achieve this sustainable transition, private financing is (urgently) needed: financial market participants are expected to play an important role in achieving the ambitious targets. This is why, related to the Green Deal, the ’Sustainable Finance Action Plan’ was adopted in 2018. This Action Plan contains the tools and legislation to make sure the euros of Europe’s financial market players flow into the direction of sustainable economic activities. However, to this day there are significant issues with the reliability and comparability of the sustainability information of companies to make well-informed investment decisions. Investors require a better understanding of sustainability risks and opportunities for their (potential) investments.

This is where the CSRD comes into play. The Corporate Sustainability Reporting Directive (CSRD) was born as a review and replacement of the Non-Financial Reporting Directive, which already obligated very large companies to report non-financial information, but failed to realize the comparability and reliability needed for investors. By providing a standardized and mandatory way to report E, S & G information (including on risks and opportunities) for all companies in scope, the CSRD is designed to increase transparency, reliability, and comparability of information among corporates for all of its stakeholders, but most importantly for the financial community.

How can the CSRD benefit my company?

Let’s not beat around the bush: if you are in the scope, compliance with the CSRD will require a significant amount of time and resource investment for your company in the coming years, especially if you are just starting on your ESG journey. However, aside from the risks of non-compliance (such as reputational issues and administrative penalties), we also see a number of benefits that these efforts will bring you. We would even recommend companies who are not within the scope, to already investigate the adoption of certain CSRD elements because of this. We’ll elaborate on a couple of these benefits below (though this is not an exhaustive list!).

1. Improved insights in company performance, risks, and opportunities

With the European Sustainability Reporting Standards (ESRS), the European Commission will provide concrete indicators and information to report on. Using these, companies can better understand their performance through gathering the required ESG data for their reporting, allowing them to identify developments and patterns. Furthermore, the ‘double materiality’ principle on which the CSRD is built, pushes companies to get a stronger hold on their impact on society (‘impact materiality’) and the impact of ESG topics on enterprise value (‘financial materiality’). This can provide new insights in risks and opportunities, as well as stir strategic redirection and innovation.

2. Attracting capital

Investors and financial institutions aim to minimize risk while maximizing return. To that end, most investors with a long-term horizon already use ESG information for decision making. The CSRD was designed to improve the consistency, reliability, and comparability of information on material ESG risks and opportunities, to make money flow towards sustainable activities. Being able to comply to the high demands of the CSRD increases transparency and trust in your company and shows investors that you are aware and in control of your risks. Therefore, the CSRD can enhance investors’ engagement in companies that do comply but could also exclude non-compliant companies from their investments.

3. Driver to take ESG (more) seriously

When the predecessor of the CSRD, the Non-Financial Reporting Directive (NFRD), was introduced, this legislation (though more limited than the CSRD) gave companies in scope the push many of them needed to look at ESG more seriously. Even though the starting point is compliance, we noticed with our clients and other companies that ESG does get more embedded in the company, and that it gives the people internally the leverage and support they need from higher up in the organization. As the information is published externally (and will also be subject to scrutiny by auditors), we see that companies really want to improve their performance, resulting in actual action.

4. Clarity on reporting obligations and reduction of unnecessary costs

The CSRD standardizes sustainability reporting, which prevents companies from having to make a choice in (voluntary) reporting frameworks (to name a few: GRI, SASB, TCFD, IIRC, SDGs, and the list goes on), as well as having to provide ad hoc ESG information to different parties. Although administrative costs might increase, according to EFRAG the average EU company will save tens of thousands of euros a year if the need for additional information requests is eliminated. With all data found in the same place, it will be clearer to external parties where all data is stored, meaning the number of requests for additional information will reduce over time.

5. Improved company image

Not only are investors more likely to invest in companies complying to the CSRD, it also can lead to a more favorable reputation. With the ESG data of companies being open for anyone who is interested, the reputation of companies is on the line. We see that customers (both B2B and B2C) are increasingly more appealed to doing business with companies that focus on ESG. This is expected to only grow as reporting on ESG in a company’s supply chain will also become mandatory soon (under the CSDDD). Companies taking ESG more into account, can gain a competitive advantage over those who tend to put it on a lower priority.

Time for you to explore the CSRD

As hopefully we have now made clear, there are many reasons to start diving into the obligations of the CSRD as soon as possible. Anticipating the CSRD on time can provide you with the needed space to develop a strategy that both complies with legal requirements, but also integrates ESG within your business. Having enough time allows you to make improvements along the way, before the regulations catch up with you.

Keep up with our blog series to diver deeper into the CSRD with us. You can follow the series through our website or social media, and, of course, can always reach out to us if you need help on this challenging (but rewarding) journey!

Authors

Fia Fuchs

Senior Consultant, Sustainalize

Johanna Haerens

Senior Consultant, Sustainalize

Samantha Gan Kristensen

Consultant, Sustainalize

Don’t hesitate to reach out to our colleagues if you need any help or assistance in the process.

Published on: 9 March 2023

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Why the CSRD can be a good thing for your business and society

Why was the CSRD created in the first place?

How can the CSRD benefit my company?