A ‘fundamental shift’ in sustainability reporting: the expected impact from the CSRD

“The big picture,” says Uta Jungermann, Director of Member Engagement and Global Networks at the World Business Council for Sustainable Development, which brings together more than 225 leading companies working towards a more sustainable future, “is that citizens and businesses have an increased understanding that we are experiencing a climate emergency, unprecedented nature loss, rising inequality - and businesses and business leaders increasingly recognise the need to work to reduce the negative impacts they make. Reporting is a huge part of helping that happen."

“It is a fundamental shift,” she continues. “It is an unprecedented push to put non-financial reporting on a more equal footing with financial reporting. It is a huge opportunity to create a new level playing field and make sustainability an integral part of business decision-making.”

But what does the CSRD involve? How does it differ from previous efforts at non-financial reporting? How are companies finding the new requirements? And how will it impact future decision-making for both businesses and investors?

The CSRD in a nutshell

Under the CSRD, in force since January 2023, companies must use the European Sustainability Reporting Standards (ESRS), which specify 82 disclosures and 1,144 data points – of which only some are mandatory.

The first affected businesses, required to comply in the current 2024 financial year, are those who were already subject to Non-Financial Reporting Directive (NFRD).

For these frontrunners, already reporting on social and environmental issues under the NFRD adopted a decade ago, what is really changing?

A key change is the introduction of “double materiality”, a mandatory exercise for companies to broaden their sustainability reporting to go beyond the “single materiality” of financial impacts. They now need to also include impacts from their own activities and from across their value chain on society and the environment. There are 10 reporting categories, ranging from biodiversity to affected communities and workers in the value chain, determined by the The European Sustainability Reporting Standards (ESRS), but it is for companies themselves to determine which of these categories are “material” to their operations.

“The CSRD aims to enhance the quality and the reliability of sustainability reporting,” explains Jungermann. “Key changes include increased scope. For example, companies will report on human rights and biodiversity, its newly designed reporting standards will be mandatory, and the requirement for digital reporting improves accessibility. Another crucial change is double materiality - basically, businesses must report on how they impact the environment and the world at large [inside-out] and also how sustainability-related events affect them [outside-in].”

“CSRD reporting will be more transparent and more credible than the previous regime,” says Katarzyna Salacinska, an ESG Specialist at Nordea, the financial services group headquartered in Helsinki, Finland. “Many EU companies had already started increasing transparency and accountability on environmental and social issues but there were several shortcomings,” she says. “Primarily, the lack of comparability and the relevance of information. Coverage will also now increase five-fold - from 12,500 companies to 50,000 under the CSRD when its rollout is complete in 2029.”

Indeed, the scope for CSRD is set to grow incrementally to include from next year all large organizations - defined as those with a net turnover in excess of €40m, with €20m in assets and with more than 250 employees. Eventually almost all businesses operating in the EU will be subject to this new style of ESG reporting.

CRSD: business and investor perspectives

Neste, the world's leading producer of sustainable aviation fuel (SAF) and renewable diesel, is one of the frontrunner businesses preparing to report in line with the CSRD at the beginning of 2025.

“At Neste, we have been reporting comprehensively on sustainability for many years, but CSRD is a stepchange in how it is done. While many of the indicators are familiar to Neste, the new regulatory framework requires sustainability reporting processes to be developed to match financial reporting processes”, says Päivi Makkonen, Vice President of Sustainability at Neste.

"The CSRD project includes multiple steps with many stakeholders internally and externally. We have been putting a lot of effort into building our capabilities in understanding new reporting requirements, defining what they mean for Neste, linking sustainability related topics even more tightly with financial reporting. This is a major effort and it is the first time for everybody, so we are all learning. It will take a couple of reporting rounds to really evaluate the effectiveness of new standards.”

Jungermann agrees that complying with the CSRD is a learning process. “Companies, auditors, consultants - nobody really knows yet what full compliance looks like,” she says. “The sheer complexity means it will be a year or two until everyone is up to speed. Everyone is in the same boat and learning how to row together.”

“What we see a lot is that companies are rethinking and reorganizing internally, including upskilling, increasing boardroom involvement, investing in data infrastructure, building relationships throughout the value chain and integrating across functions,” Jungermann adds.

Salacinska says that while the introduction of the CSRD will initially mean more work for companies, ultimately the information gathered and published will benefit not only the planet but also both businesses and investors.

“It will take time to bed in - but once this is done then companies should be on a clear course and sustainability reporting will be easier,” she says.

“This more reliable and easily comparable sustainability reporting through the CSRD will quickly benefit those investors who rely on third parties for information - and should improve more data-driven ESG investment strategies. Ultimately, I believe better reporting through the CSRD could further help drive investment towards companies that are more sustainable.”

On a practical level, Jungermann urges businesses not to lose sight of the bigger picture. “Businesses should not get bogged down by a compliance-only mindset,” she says. ”The CSRD is part of a comprehensive EU policy package in support of a transformation toward a modern and sustainable economy. The information gathered should enable investors and stakeholders to make better investment decisions and enhance transparency.”

Sustainability: The big picture impact of the CSRD

The CSRD will improve the quality and quantity of sustainability-related information available to investors, providing them with a more complete and trustworthy understanding of a company's sustainability performance and risk exposure. This will help investment funds build products aligned with the preferences of their clients.

Indeed, a recent survey found 90% of investors said CSRD and similar sustainability reporting rules would drive better investment decisions. This growing demand for transparency will mean the impacts of the legislation will reverberate to companies even if they are outside the CSRD’s scope, as they will come under increased pressure from investors and other stakeholders to publish similar information.

“The biggest benefits of the CSRD for promoting sustainable and circular economies will become clear in the long term,” says Salacinska. Double materiality and detailed reporting, for example, provide the opportunity for a deep dive into value chains, the workforce and products that could reduce inefficiency: “Beyond compliance we will see learning opportunities that could lead to improvements in operational performance.”

Alongside other new and in-coming regulations, Jungermann thinks the CSRD will “make greenwashing harder and harder” as non-financial reporting moves closer on a legal footing to financial reporting. “It brings accountability and it is a drive to push companies to measure their negative as well as positive impacts.” Meanwhile, taking account of possible future losses which could arise as a result of environmental issues - potential fines or taxation, for example - helps make the business case that sustainability builds a resilient operation.

“We’ve been saying for years that non-financial reporting needs to transform so that business decisions are based on what really matters. With the CSRD we are seeing that happening, and that is exciting,” Jungermann sums up.

Credits:

Nick van Mead, an award-winning city journalist with more than 20 years at the Guardian and the Associated Press, most recently as deputy editor of Guardian Cities.