Climbing the CSRD mountain
<div class="insights_cta-component">This is the first article in our new series covering Sustainability Transformation. See the full series below.</div>
Ask business leaders what is keeping them from sleeping at night, and there is one response that often pops up: the European Union’s Corporate Sustainability Reporting Directive (CSRD). For a long time, the CSRD seemed like a distant mountain on the horizon, a challenge to be tackled someday in the future. But that "someday" has now arrived, and the mountain seems even larger and more daunting up close.
In our opinion, businesses indeed need to take proactive measures – but there is nothing to fear. In this article, we aim to demystify the ‘CSRD mountain’ and provide guidance on the journey ahead. Time for paralysis is over, let’s instead get into action.
CSRD demystified
To conquer any mountain, you first need to have a clear view of what is in front of you. So let’s start with: What does the CSRD actually entail?
The Corporate Sustainability Reporting Directive (CSRD) was introduced by the European Union in April 2021 as part of a broader set of measures aimed at advancing sustainable finance and achieving the EU's sustainability goals. This directive is set to replace the existing Non-Financial Reporting Directive (NFRD) when its reporting standards take effect per January 1st, 2024.
The main goal of the CSRD is to improve the quality and consistency of corporate sustainability reporting within the EU. It aims to make sustainability reporting by companies more comprehensive, consistent, and transparent. The CSRD is designed to apply to a much wider range of companies than its predecessor NFRD, and it sets out specific reporting requirements regarding environmental, social, and governance (ESG)matters. The CSRD aligns with the EU's commitment to becoming climate-neutral by 2050.
The CSRD requires companies to annually publish a sustainability report. Before companies get there, there are various preceding steps. The starting point is a Double Materiality Assessment. ‘Double’ refers to the two types of assessed materialities: outward impact of the company on the environment and society, and inward impact of environment and society on the company. The assessment of both materialities has the main goal to define on which sustainability topics there is a material (inward or outward) impact and should therefore be included in the sustainability report.
The report needs to adhere to the European Sustainability Reporting Standards (ESRS). The final version of these standards has been published in July 2023 by the European Financial Reporting Advisory Group. They consist of 12 different documents: ESRS 1 outlines general reporting requirements, ESRS 2 specifies the general disclosures that every company must make, and the remaining 10 standards focus on specific topics within the realms of environmental, social, or governance issues (see image below).
CSRD will be implemented in the EU in four waves:
• Wave 1 (first report in 2025, on 2024 data): Listed companies with an average number of employees during the fiscal year > 500;
• Wave 2 (first report in 2026, on 2025 data): Companies that meet 2/3requirements from: total assets > EUR 20 MM, net revenue > EUR 40 MM and an average number of employees during the fiscal year >250;
• Wave 3 (first report in 2027, on 2026 data) - companies that meet 2/3requirements from: total assets > EUR 350k, net revenue > EUR 750k,average number of employees during the fiscal year > 10 up to 250;
• Wave 4 (first report in 2029, on 2028 data) - non-EU companies that meet both following requirements: net turnover > EUR 150 MM and at least one subsidiary or branch in the EU.
Through these four waves the number of companies affected by CSRD will grow from ~12kin 2024, to ~50k by 2028.
Shift your mindset and prepare for a continuous journey
Now that we've outlined the details of the CSRD, the next question is how you can actually get started on the journey to the mountain summit. And the answer is about shifting your mindset. When you are preparing for your first CSRD-compliant sustainability report you need to realize that in the end, the report itself serves as an enabler for the transformation of your business' sustainability practices - instead of it being the business objective in itself. If you take a closer look, regulations from the European Union intentionally leave room for flexibility, allowing companies to craft meaningful documentation that suits their unique circumstances. For instance, while "reporting gasoline consumption per kilometer" may be a reasonable topic to report on for a transportation company, it might appear absurd for a construction company.
So, instead of seeing the CSRD compliance journey as a problem, look at it as an opportunity. An opportunity to make sure that your reporting is useful and that it helps to focus the business on topics where your company can make an impact. Just see the CSRD your helping hand for distilling these individual sustainability topics by performing the materiality and gap analyses. You can’t manage what you can’t measure, so let your sustainability report be a starting point for your sustainability business transition.
Furthermore, prepare yourself that sustainability reporting is a continuous journey of incremental improvements. Many business leaders may breathe a sigh of relief after their first CSRD-compliant report is published. However, this will be just the starting point of their way to sustainable reporting. Your reporting won’t be perfect yet after the first report and you know what? It doesn’t need to be because this is how you learn as a company. Year after year, your reporting will improve, accumulating more valuable insights to steer the business transformation. Also, honesty about the data delivered and the gaps that remain is key. Take for example Ørsted, a sustainability frontrunner, that clearly states for certain aspired KPIs that they are not there yet: “targets are currently being developed”.
So, when preparing for the first CSRD-deadline, it is perfectly fine to start with measuring the least amount of data on the most important topics.
Build capabilities and evolve towards Finance 2.0
Finally, you cannot climb the CSRD mountain without having the right capabilities in place. Some companies try to solve this by setting up a completely new department which is responsible for sustainability reporting. Such players then forget that they often already have these required skills in-house – namely in their finance department! And this is why: Your finance department is already capable of setting long-term goals, designing KPI’s, measuring progress and creating valuable reports across business lines and geographies. The only difference is the topic they will additionally report on: sustainability on top of finance. So, just leverage the pre-existing capabilities of your finance department for the sake of sustainability reporting, and see it as an opportunity to evolve towards “Finance 2.0” instead of building something new next to your finance function.
It is important to note that we don't claim that your finance department will seamlessly transition to reporting on sustainability overnight; of course, it requires training and the potential hiring of external experts. However, reporting on finance and sustainability fundamentally aligns, making this transition a natural one.
You will be surprised, but including sustainability reporting in finance is actually a big advantage for being present with sustainability in all your local markets. Like finance reporting is a collaboration between your headquarters and local departments, sustainability reporting should be as well. By letting finance just extend their established interaction with local departments on finance topics to sustainability topics, your local departments are part of the collective sustainability transition and reporting is well-aligned with local regulations.
Conclusion: it is time to act
As we've guided you through our journey of conquering the summit of CSRD, by now you should be more convinced of the following: The time for inaction has ended; it is now your time to act. Embrace sustainability reporting as a kick-start to your sustainability business transformation instead of having nightmares about new regulations.
The EU's regulations offer strategic flexibility, allowing you to craft a report tailored to your organization's unique needs while concentrating on the areas where your impact truly matters. Keep in mind that your initial report is just the beginning of a series of improvements which you can easily develop on your way on the mountain ridge. Just start with measuring the least amount of data of the most important topics. Lastly, make sure that you don't underestimate the capabilities you already have in-house and fully leverage them towards your sustainability transformation. Exemplarily, make sustainability reporting a responsibility of your existing finance department.
This way, the once-daunting CSRD mountain will no longer be as intimidating, but instead your ticket to a flourishing and more sustainable future!
THE FULL ARTICLE SERIES
• A Lighthouse approach to guide your organization’s Sustainability Transition
• Sustainable product launch: Bridging consumer's ‘say-do gap’
<div class="insights_cta-component">Questions? Comments? Want to have a conversation with our experts about the contents of this article? Get in touch with our team now!</div>
