Medium-Sized Business Heroes: Conquer CSRD and ESRS, and Stay Material!

Understanding New Materiality Requirements in CSDR and ESRS: A Guide for Private SMEs with 500-1000 Employees

As the world grapples with the urgent need for sustainability, the corporate reporting landscape is undergoing a profound transformation. The introduction of the Corporate Sustainability Directive Report (CSDR) and the European Sustainability Reporting Standards (ESRS) marks a pivotal moment for companies, especially those in Europe. For private businesses with 500 to 1000 employees, these new regulations present significant challenges and remarkable opportunities. Navigating them without the proper support, however, can feel overwhelming.

In this article, I'll briefly outline the standard requirements under these directives, particularly focusing on Materiality Assessments. I'll also share AdvantiKA’s distinctive approach for companies within this size bracket—an approach that transcends basic ESG compliance and embraces the regeneration and transformation of our economy. As the largest employers globally, SMEs play a crucial role in this shift. Along the way, I’ll show you how AdvantiKA’s methods help meet these new obligations and deeply connect your business to the well-being of communities and the practice of sustainable leadership.

What Are the CSDR and ESRS?

The Corporate Sustainability Directive Report (CSDR) is a cornerstone of the European Union's mission to foster sustainable business practices. It extends the responsibility for sustainability reporting beyond large, publicly listed companies to include private enterprises and SMEs. Meanwhile, the European Sustainability Reporting Standards (ESRS) provide the comprehensive guidelines companies must follow to report on their sustainability initiatives. Together, they aim to create a more transparent, accountable, and sustainable business environment across Europe.

Implementation Timeline for CSRD

The rollout of the CSRD is phased, with specific timelines depending on company size and type. For private companies with 500 to 1000 employees, the key dates are:

• Financial Year 2025: Companies in this size range will need to start reporting under the new CSRD framework beginning in the financial year 2025. This means their first sustainability reports, compliant with CSDR and ESRS standards, will be due in 2026.
• Preparatory Period: As 2025 approaches, it’s crucial for these companies to align their reporting processes, conduct thorough materiality assessments, and ensure that their data collection systems are up to the task. Understanding these timelines is essential for compliance and to avoid penalties. More importantly, this period offers SMEs a vital opportunity to rethink their approach to sustainability—an area where long-term planning can be incredibly challenging given limited resources.

Standard Requirements Under CSDR and ESRS

First, let’s clarify materiality. In the world of finance and business, materiality is the point at which information becomes so crucial that omitting, misstating, or inaccurately reporting it could influence the economic decisions of key stakeholders like investors, regulators, or management. When something is considered material, it carries significant weight and must be transparently disclosed in financial statements, sustainability reports, or other official documents.

The new materiality requirements under the CSDR and ESRS are designed to ensure that companies provide comprehensive and accurate information on their sustainability impacts. The standard requirements include:

• Materiality Assessments: Companies must assess both financial and impact materiality. Financial Materiality: This considers sustainability issues that could have a direct financial impact on the company. For example, how might climate change affect operations, supply chains, or regulatory compliance costs? Impact Materiality: This focuses on how the company’s activities impact society and the environment. It goes beyond traditional ESG (Environmental, Social, and Governance) criteria, urging companies to consider their broader role in transforming and regenerating the economy.
• Stakeholder Engagement: Engaging with stakeholders is essential, ensuring that a company’s sustainability efforts align with the needs and expectations of employees, customers, suppliers, and local communities. Addressing stakeholder concerns is a critical component of a robust materiality assessment.
• Detailed Reporting: Companies are required to report on a wide array of sustainability metrics, including environmental impact, social responsibility, and governance practices. This encompasses everything from carbon emissions and energy consumption to diversity and inclusion and supply chain transparency.

The AdvantiKA Way: Adding Value Beyond Compliance

Meeting the standard requirements is essential, but it’s not enough. Companies—especially those in the SME category—have the potential to do so much more. The AdvantiKA approach leverages the new materiality requirements as a platform for more profound, more transformative change. Here’s how our approach adds value:

1. Regenerative Focus: Traditional ESG practices tend to emphasise harm reduction, but at AdvantiKA, we advocate for regeneration. This means actively restoring ecosystems, enhancing social well-being, and contributing to the transformation of economic structures. Instead of merely reducing carbon emissions, we guide companies toward initiatives that not only reduce emissions but also support carbon sequestration, biodiversity restoration, and the circular economy. This proactive stance fulfils regulatory requirements and positions your company as a sustainability leader.
2. Deep Community Connection: True sustainability is deeply rooted in the communities a company serves and connects to. While standard reporting might check the box on community impact, we go further by seeking ways to engage with and solve the pressing issues facing these communities. This could involve forming partnerships with local organisations, launching community-based regenerative projects, or initiating efforts that directly enhance the quality of life for those within your company’s sphere of influence. By embedding your business in the social fabric of its environment, you not only meet reporting obligations but also forge lasting relationships that strengthen both reputation and resilience.
3. Holistic Materiality Assessments: The CSDR’s standard approach requires companies to assess materiality through financial and impact lenses. However, AdvantiKA recommends a holistic materiality assessment that considers long-term systemic impacts. This involves evaluating how a company’s practices contribute to or detract from broader global goals, such as the UN Sustainable Development Goals (SDGs) or the Paris Agreement targets. We draw on our experience as a B Corp and utilise tools like the B Impact Assessment? to guide our analysis. This comprehensive view ensures that your sustainability efforts are not just reactive but strategically aligned with global priorities, offering long-term business resilience and reputational benefits.
4. Innovation in Reporting: Standard reporting under the CSDR focuses on compliance and transparency, but our approach encourages companies to use their sustainability reports as tools for innovation and storytelling. By highlighting how sustainability efforts drive innovation, create new business models, and foster a culture of continuous improvement, companies can differentiate themselves in a crowded market. This approach meets the reporting requirements and turns them into a strategic asset, enhancing your company’s brand and stakeholder trust.
5. Sustainable and Regenerative Leadership: At AdvantiKA, we understand that sustainability begins from within, with leadership that is both sustainable and regenerative. We uniquely connect the work in sustainability with leadership development by linking the Sustainable Development Goals (SDGs) with Inner Development Goals (IDGs) for leaders and teams. This approach ensures that the drive toward sustainability is not just about external metrics but also about cultivating leaders equipped to guide their organisations through the complexities of the modern sustainability landscape. This integration of SDGs and IDGs helps leaders develop the skills and mindset necessary to foster a regenerative business culture that is resilient, innovative, and deeply aligned with sustainability values.
6. Proactive Stakeholder Engagement: While standard requirements call for stakeholder engagement, our approach goes further by advocating for creating strategic partnerships that drive systemic change. This involves collaborating with NGOs, governments, and other businesses to develop and implement regenerative solutions that extend beyond the scope of your organisation. We also use creative tools like the Climate Fresk to engage stakeholders, such as suppliers or employees, on complex topics like climate change in an interactive and enjoyable way. This level of engagement not only meets regulatory demands but also builds a strong network of allies and advocates, amplifying your impact and influence.
7. Continuous Learning and Adaptation: The regulatory landscape is constantly evolving, and so should your sustainability strategy. The AdvantiKA way emphasises continuous learning and adaptation, ensuring that your company remains at the forefront of sustainability trends and innovations. This forward-thinking approach safeguards your company against future regulatory changes and positions it as a pioneer in sustainability, attracting investors, customers, and talent who value progressive, purpose-driven businesses.

Advisory Recommendations for SMEs

To navigate these changes effectively, SMEs should consider the following steps:

• Conduct a Materiality Assessment: Identify and understand the most relevant real sustainability connections to your business and stakeholders, considering positive and negative relationships. When well done, this will help prioritise efforts and ensure compliance with the new requirements.
• Integrate Sustainability into Business Strategy: Align your business strategy with sustainability goals. Consider how your operations, products, and services can contribute to a regenerative economy.
• Enhance Stakeholder Engagement: Develop strategies to engage with key stakeholders and incorporate their feedback into your sustainability initiatives.
• Invest in Sustainable Innovation: Explore opportunities to innovate in ways that support sustainability and regeneration. This could involve adopting new technologies, processes, or business models.
• Commit to Continuous Improvement: Sustainability is a journey, not a destination. Regularly review and update your sustainability practices to stay ahead of regulatory requirements and market expectations.

Conclusion

The new materiality requirements defined by the CSDR and ESRS represent a significant shift in how companies approach sustainability. This is a moment of challenge and opportunity for private SMEs with 500 to 1000 employees. While compliance with these regulations is essential, my approach—The AdvantiKA Way—offers a path beyond mere compliance. It empowers companies to play a vital role in the regeneration and transformation of the economy, turning sustainability from a regulatory burden into a strategic advantage. This is not just about meeting new regulations—it's about leading the way toward a more sustainable and equitable future. By adopting this approach, your company can not only navigate the complexities of the new sustainability landscape but also thrive in it.

Addendum: Key Differences for Companies with 1000 to 2000 Employees

1. Earlier Implementation Timeline: Financial Year 2024: Companies with 1000 to 2000 employees are required to start reporting under the new CSRD framework one year earlier, beginning in the financial year 2024. This means that the first sustainability reports that are compliant with the CSDR and ESRS standards for these companies will be due in 2025. Preparatory Period: Leading up to 2024, companies in this size bracket should be even more proactive, ensuring that their sustainability reporting processes, materiality assessments, and data collection systems are fully aligned with the new requirements. The earlier deadline means less time to prepare, making early action crucial.
2. Increased Reporting Complexity: Companies in this larger category may face more complex reporting requirements due to their broader operational scope and potentially more significant environmental and social impacts. This could involve more detailed disclosures, a more comprehensive array of metrics to report on, and possibly additional scrutiny from regulators and stakeholders.
3. Greater Expectations for Impact: With more resources and a larger workforce, companies with 1000 to 2000 employees might be expected to have a more significant impact on sustainability issues. This could lead to higher expectations for compliance and leadership in areas such as climate action, social responsibility, and governance practices. These companies may also need to show a deeper engagement with their supply chains, ensuring that sustainability practices are upheld across all levels of their operations.

How AdvantiKA’s Approach Applies to Larger SMEs

For companies with 1000 to 2000 employees, AdvantiKA’s approach remains highly relevant but with a stronger emphasis on scaling sustainability efforts:

• Scaling Regenerative Focus: Larger companies have the capacity to implement more ambitious regenerative initiatives, such as extensive carbon offset programs, significant investments in renewable energy, and large-scale community projects. AdvantiKA would help these companies leverage their size to drive broader systemic change.
• Deep Community and Stakeholder Engagement: With a larger footprint, these companies have a greater influence on the communities they operate in. AdvantiKA would facilitate deeper and more impactful community engagements, ensuring that these companies are meeting their obligations and contributing meaningfully to local development and well-being.
• Leadership in Sustainability: Companies with 1000 to 2000 employees are often seen as industry leaders. AdvantiKA would work closely with these companies to develop sustainable and regenerative leadership practices, connecting SDG goals with IDG frameworks at a larger scale, fostering a culture of sustainability permeating every level of the organisation.

In conclusion, while the CSDR and AdvantiKA’s core principles apply across different company sizes, companies with 1000 to 2000 employees would need to prepare earlier, manage more complex reporting, and potentially take on a more prominent leadership role in sustainability initiatives. The AdvantiKA Way would help these larger SMEs meet and exceed these requirements, positioning themselves as industry leaders in sustainability and regeneration.

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*Author: Karime Brecailo Abib , founder and senior sustainability advisor at AdvantiKA GmbH - Responsible Results , founder and co-coordinator of the IDG Swiss Business-Fit Hub