Opportunity or challenge: What is the board experience of the Corporate Sustainability Reporting Directive?

Over the past few months, we have held roundtable discussions on the Corporate Sustainability Reporting Directive (CSRD) with board members across Europe. We wanted to learn about boards’ experiences of helping their companies to comply with the directive, the issues they’re facing and how they’re capitalizing on the opportunities that sustainability reporting presents.

?The findings of these discussions, together with insights provided by EY audit and sustainability professionals, are presented in a new EY report titled: How can European boards steer sustainability reporting?, which I co-authored with Martijn de Jong . The report reveals how boards are supporting their companies to assess the strategic, operational and financial implications of the CSRD. It also makes some valuable observations and recommendations for all boards to consider.?

Here are my top five takeaways:?

1. Sustainability reporting can be a catalyst for business model transformation: Forward-looking boards recognize that sustainability reporting should not be treated as an end in itself. Instead, it should be the output of a powerful framework that enables business model transformation through the process of setting sustainability-related targets, taking appropriate action, measuring performance, and identifying and managing risks and opportunities. High-quality reporting is made possible when sustainability is firmly embedded within every aspect of corporate strategy. Its purpose is to communicate what’s happening in practice so the company can engage with stakeholders, including investors and financial institutions that can provide cost-efficient capital that has been committed to funding the green transition.
2. Sustainability reporting is both a risk and a tool for managing other risks: The high levels of transparency required by the CSRD are presenting boards with new risks to manage. These risks include how they set and communicate strategic goals, including plans to evolve their business models in line with limiting global warming to 1.5°C. The detailed reporting demanded by the CSRD means that greenwashing will be quickly called out by stakeholders, so companies must be able to substantiate their plans. Yet, while sustainability reporting presents risks, it is also an invaluable risk management tool. For that reason, boards and management teams are using their company’s sustainability reporting to inform their ongoing assessment of the sustainability-related risks facing the business, as well as the impacts of those risks on risk management and internal control systems (RMICs). Reporting also enables boards to track the return on the investment their companies are making in sustainability initiatives.
3. Data is key to success: As the EY Europe Long-Term Value and Corporate Governance Survey 2024 shows, an absence of high-quality data is hindering companies from building a robust business case for unlocking value through sustainability. At present, data is a major challenge for companies preparing to comply with the CSRD since the quality of data available to them, and the processes in place for gathering and analyzing that data, are currently far less mature than the data and processes that exist for financial information. Hence, the report recommends that audit committees assess their company’s current capabilities around collecting and analyzing data for sustainability reporting, including the associated internal controls, and identify areas for improvement.
4. Audit committees should hold early conversations with their assurance providers: Under the CSRD, a company’s sustainability reporting must be subject to limited assurance. Audit committees should therefore hold an early and thorough conversation with their assurance provider to minimize potential issues, such as non-compliance with the European Sustainability Reporting Standards. This conversation should cover the likely format of the company’s sustainability report, as well as the principal disclosures it plans to make. Audit committees should discuss key points of judgment with the assurance provider, with these likely to relate to the double materiality assessment and the gap analysis that identified the disclosure gaps between what the company was reporting previously and how it needs to report under the CSRD.?
5. Boards are on a major learning curve: Compliance with the CSRD is a monumental shift in corporate reporting that will have widespread implications for both corporate strategy and how companies engage with their stakeholders. The directive also confers very specific responsibilities on audit committees, who are charged with monitoring their company’s overall sustainability reporting process and fulfilling numerous related obligations. Accordingly, boards are having to develop an understanding of the specific challenges their companies face as they look to comply with the directive, to manage the expectations of external stakeholders. More broadly, boards are upskilling themselves on the topic of sustainability in general, including how they can embed sustainability into the decision-making process for new investment projects.

Long-term value creation

While the CSRD is undoubtedly presenting challenges to boards and their companies, it is also presenting them with huge opportunities. Companies can use their sustainability reporting to inform their internal reporting, enabling them to better measure their progress against key performance indicators, assess the broader performance of the business and determine future strategy. Boards should therefore encourage their companies to use the insights from the reporting to identify potential new markets and create new products and services. In this way, they will accelerate their transition to more sustainable business models and set themselves up for long-term success.

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The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.