The CSRD: A new era of transparency and accountability for businesses?

How can companies navigate the turbulent waters of regulatory requirements? This is a question that many businesses are grappling with, as demand for transparency intensifies. An incremental approach, building on previous efforts each year is a realistic but still effective approach.?

Corporate reporting highlights vital ESG?issues. The Corporate Sustainability Reporting Directive (CSRD) enhances reporting, broadening its scope beyond finances, creating challenges and opportunities for companies to assess and disclose their impacts. ?

The CSRD mandates a double materiality assessment and introduces the European Sustainability Reporting Standards (ESRS). Yet compliance and implementation prove challenging. According to a recent VincíWorks survey, around 80% of respondents were as of yet unprepared, and only 23% had any preparatory measures in place for at least the next six months. Choosing and integrating frameworks is complex requiring compliance insights as well as a strategic vision.?

Compliance extends beyond legality; it shapes reputation and trust among the public and other stakeholders. The impending expansion of the German Supply Chain Act across the EU is a reminder of the growing focus on supply chain transparency and ethical corporate operations. Corporate reporting is not just an administrative duty; it is a tool for shaping stakeholder perceptions, building trust, and nurturing competitive advantage.?

Effectively engaging external stakeholders, who demand transparency and accountability is both a moral imperative and a strategic move for risk management and long-term business viability. True sustainability transcends a company’s internal operations extending to the entire value chain. It involves understanding customer needs, monitoring stakeholders’ actions and aligning this with existing processes.?

The CSRD promises to bring clarity and consistency to this process, balancing uniformity and depth. Given its inherent complexity however, organizations should consider the following for effective reporting:?

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Readability and Comparability of Reports?

To achieve transparency in sustainability reporting, companies need to produce structured and standardized reports. Creating a clear structure is essential to making these reports more understandable and comparable. As always, make use of the digital tools available to ease the burden.?

Measuring Financial Materiality?

Financial materiality is based on the concept of double materiality, which means that companies should consider both how ESG issues affect their financial performance and how their activities impact people and planet more broadly. To measure financial materiality, companies need to evaluate two key indicators: the magnitude and probability of occurrence. This is like a risk assessment, which involves analyzing how physical risks, such as extreme weather events or natural disasters, affect the company and which indicators can measure their impact effectively. Financial materiality is not a new topic, companies should already be well versed in undertaking assessments of this kind.?

Assessing Impact Materiality?

Impact materiality is a complex process that involves understanding the scale, significance, and scope of the company’s impact on ESG topics. It also involves calculating emissions generated, especially for scope three emissions, which include indirect emissions from the company’s value chain. This assessment requires input from all stakeholders and poses several hurdles. It should not be underestimated – the time and resources required are significant and the entire value chain needs to be included in the process, which requires buy in from all stakeholders.?

Engaging Stakeholders?

Engaging stakeholders and gaining their support is crucial for successful sustainability reporting. Stakeholders need to be aware that every department will need contribute to CSRD compliance efforts and align with the company’s approach. Benchmarking with other companies can also provide useful insights, looking left and right to see what industry peers are prioritizing offers good pointers. To prepare for the CSRD, organizations need to engage their employees, involve all stakeholders, obtain top-down buy-in, and transform their approach. Implementing KPIs will help focus efforts on fulfilling disclosure requirements.?

Ensuring Data Quality?

Ensuring quality of data becomes more difficult, the more complicated a supply chain is. Companies must check sources, identify gaps, and assign responsibility for delivering specific data points. This is especially important for scope three emissions, where comprehensive and detailed data is necessary. Adequate preparation for the CSRD is essential. It is advisable to start at least a year in advance and plan for continuous improvement in data quality and scope. Assurance requirements will soon evolve from limited to reasonable assurance: organizations will be required to provide reasonable assurance from the 6th year after their first required reporting year. So, if your first reporting year is 2024, your organization will be required to provide reasonable assurance for sustainability reporting from 2030 onwards.?

Separating Consultation and Auditing?

Within the context of the CSRD it is important to remember that the company’s own auditor cannot advise on the implementation of the CSRD. Consultation and auditing processes must be separated, in this regard external experts can be of value. This collaboration effort, distinct from the traditional role of internal auditors, can streamline the compliance process and contribute to achieving the directive’s objectives.?

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The CSRD marks a critical point in the evolution of corporate reporting standards. To succeed in sustainability reporting, especially considering the CSRD and double materiality, companies need a well-planned and collaborative approach. Engaging stakeholders, ensuring data quality, and embracing the alignment of financial and sustainability reporting are all essential elements in this transformative journey. It is a path that demands thorough preparation and a commitment to transparency and environmental responsibility. Of course, for many organizations, compliance is understandably the priority. Eventually however, stakeholders will question why KPIs are not being met, or why they lack ambition; they will begin to doubt sustainable progress, and credibility will be lost, customers too, and so on. An incremental approach, building year on year, adapting KPIs and targets, to move beyond simple compliance is a realistic approach – do what you can with what resources you have. Just don’t delay!?

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