The transformative power of the CSRD - Part 1: The regulation itself
One cannot understand the purpose and spirit of the Corporate Sustainability Reporting Directive (CSRD) without knowing the context in which it was created. As part of its European Green Deal sustainable economic growth strategy, the European Union (EU) has developed a comprehensive policy agenda on sustainable finance called the EU Sustainable Finance Action Plan. Recognizing the power of finance to change behaviour, outcomes, and ultimately impacts, this action plan articulates a series of regulatory measures designed to (i) reorient capital allocation towards a more sustainable economy, (ii) mainstream sustainability into risk management, and (iii) foster transparency and long-termism. These measures include the Sustainable Finance Disclosure Regulation (SFDR), the EU Taxonomy, the Low Carbon Benchmark Regulation… and of course, the Corporate Sustainability Reporting Directive.
The CSRD is a policy directive adopted by the European Union to strengthen sustainability disclosure and accounting rule making, in order to foster greater transparency and long-termism. It amends existing requirements under the Non-Financial Reporting Directive (NFRD) in order to address deficiencies in current corporate sustainability disclosures to make them widely available, comparable, and reliable and therefore better meet the needs of investors and other users of this information.
It’s a step change
In a nutshell, the CSRD epitomizes the transformation of corporate sustainability reporting we are witnessing to mandatory, standardized, audited, and digitized disclosures. With it, the scale and scope of transformation in corporate sustainability reporting practices is reaching unprecedented levels.
- Mandatory – It makes disclosures widely available by applying to more than 45,000 companies both public and private, large and small, including roughly 10,000 non-EU companies that have operations or revenues in the European Union; all these companies will be legally obligated to publicly disclose sustainability information.
- Standardized – It makes disclosures comparable by making it compulsory for all these companies to use the same specific set of reporting standards.
- Audited – It makes disclosures reliable by making it compulsory for all these companies to have their standardized disclosures externally assured.
- Digitized – It makes disclosures discoverable and shareable by making it compulsory for disclosures to be delivered in a digitized and XBRL-tagged format, so that they are readable by both humans and machines.
While much attention is currently given to compliance with the requirements of the European Sustainability Reporting Standards (ESRS), which prescribes the information that companies need to disclose, one should not underestimate the challenges associated with achieving external assurance of those disclosures, which promises to be equally comprehensive, because it will include the process by which material issues are determined, the level of application of the standards, the digitization of the disclosures, and even compliance with reporting requirements under Article 8 of the EU’s Taxonomy Regulation.
One of the key objectives of the CSRD is to bring sustainability-related reporting to the same level of detail, rigour, and reliability as financial reporting. It creates a whole new set of obligations for in-scope companies, one that we expect will force a major overhaul of their existing sustainability reporting practices that includes identifying a broader scope of material issues, building new processes, collecting more and new data, and producing new sustainability disclosures — all of which require developing new capabilities, roles, and skill sets.
In Part 2 of The transformative power of the CSRD, we explore the expanded scope of disclosures required.
The contents of this article are inspired by the Seizing the Corporate Sustainability Reporting Directive (CSRD) opportunity white paper, which provides companies with practical guidance on how to identify compliance gaps and build a roadmap to fill them and take control of their CSRD journey to achieve lasting sustainability leadership.