Why should you consider CSRD an enabler, rather than a barrier?

6 benefits of CSRD for companies

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With the growing momentum of ESG (Environmental, Social & Governance), the lack of quality and reliable sustainability data has caused a lot of suffering for all stakeholders. Investors find it difficult to see the true picture of companies’ ESG performance, which endangers the aims of the European Green Deal to transform the European Union into a sustainable economy. Such transformation would mean a big advantage in fighting climate change and ecological crisis.

The huge number of standards makes it extremely difficult for companies to know what information they should report. Many companies receive requests for sustainability information from their stakeholders on a daily basis. This generates unnecessary business costs. On the other hand, wider stakeholder groups, like local communities, NGOs are unable to hold businesses accountable for their impact on people and the environment. This creates an accountability deficit.

CSRD will pose significant challenges, and create new demands and extra work for companies, as they will need to implement robust processes and quality data in a timely manner. However, it can be used as a cornerstone of the ESG strategy and has many other benefits, which we summarise below:

1. Attracting investment based on ESG reporting

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Currently, investors and asset managers purchase ESG information from third-party data providers, which creates confusion and contradictory ratings. In addition, investors are unable to properly measure companies’ resilience to long-term, financial ESG risks. This has the potential to cause systemic risks to the European economy.

On the other hand, the gap means that investors cannot channel financial resources to companies with front-runner sustainable business models and activities. CSRD will enable investments to be directed to businesses that meet the high standard of ESG requirements.

CSRD, together with other regulations, such as the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation, are the main pillars of the European ESG reporting requirements. These regulations together make it possible that ESG information leads the investment decision of the whole financial value chain, down to the very last-end investor.

2. CSRD – the framework on the sustainable path

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CSRD offers knowledge and structure to improve your business on ESG requirements. It will accelerate how companies understand and answer the environmental, social and governance challenges and speed up the competition within the growing green industrial revolution.

It provides a framework that you can use to identify your sustainability topic, create an ESG strategy and take measures. Through the data reported from year to year, you will be able to check your progress, find your weaknesses and the details that need improvement. Identifying corporate Achilles heels in terms of ESG makes companies more resilient to future crises. If you start earlier, you can get ahead of your competitors.

3. Reduced cost of ESG reporting, and fewer data requests

There is a growing demand for sustainability information, and it will continue to expand in the future. As society’s understanding of sustainability issues is growing, the information required from businesses will become more and more complex (e.g., companies’ effect on biodiversity, Scope 4 and 5, etc. ).

CSRD will bring clarity and certainty on what sustainability information to report that will decrease unnecessary costs of ESG reporting. It will also reduce the number of demands businesses receive for sustainability information in addition to the information they publish on the EU-wide digital access platform, European Single Access Point (ESAP).

According to the Sustainability Institute of ERM, it is estimated that the use of standards could lead to annual savings of 24 200 – 41 700 EUR per company if standards completely eliminate the need for additional information requests for report- preparers. (https://data.europa.eu/doi/10.2874/14850)

4. Leading position in the global competition through common reporting standard across the EU

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Without common rules, member states will sooner or later introduce specific regulations. A good example is the German Supply Chain Act (Supply Chain Due Diligence Act – German: Lieferkettensorgfalts­pflichtengesetz), which is effective as of 1 January 2023. This will include environmental and social reporting of German companies and their involved entities in the supply chain throughout the whole European Union.

Common rules are in the interest of European companies and the single market. Divergent regulations imply additional costs and unpredictable risks in closely interlinked economic spheres of the European Union. Member states acting alone are not able to ensure the consistency and comparability of sustainability reporting requirements across the EU. In addition, only EU intervention can ensure that rules on sustainability reporting are consistent with other EU laws. This is vitally important through globally interlinked crises, like climate breakdown or plastic pollution.

Companies currently apply several international standards (GRI, SASB, etc.). The legislators’ aim is to achieve the worldwide convergence and harmonisation of sustainability reporting standards.  This will help to ensure that in the long term, not only in the EU, but also in the world, sustainability reporting will be more harmonised and consistent.

5. CSRD makes it easier to understand the ESG impacts of the supply chain

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Every corporate sustainability professional knows how difficult it is to ensure subcontractor compliance and collect good quality data – like scope 3  – from the abundant and diverse subcontractors. CSRD will make it obvious and accepted that supply chain members should provide transparent data, not only from top-tier suppliers but also lower down in the supply chain. This will reduce the enormous and invisible environmental and social harm of the supply chains. It will also accelerate the transition to sustainability globally, ensuring a fair redistribution of economic benefits. Therefore, CSRD will have a ripple effect beyond European borders.

6. Prevents greenwashing and voices sustainability results

Companies’ false sustainability claims negatively impact how society perceives sustainability efforts. Companies that achieve sustainable results are increasingly reluctant to communicate their achievements for fear of being blamed for greenwashing by consumers. This phenomenon is called “green hushing”. It has a damaging effect on companies that try to make their products and services aligned with the ESG principles.

CSRD, through transparent information, will strengthen relations between society and sustainable businesses. The Taxonomy Regulation supporting the CSRD,  sets up a classification system for sustainable economic activities to combat greenwashing of companies.

It will also help companies stand out in their industry by making it easier and more transparent to compare performance with their competitors. Furthermore, it can be a tool for communicating intangibles, which are under-reported, despite them accounting for an increasing value.

Let’s get started with CSRD!

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To derive the benefits listed above, you need to get started and define action plans as soon as possible. There is a lot to do to meet the CSRD requirements in a short time, so it is crucial to find the best tools and the best consultancy partners. Use the requirements of CSRD as an opportunity to improve your company!

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Author: Mária Farkas – Senior Sustainability & CSRD expert at denxpert
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Sources:

Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL – as regards corporate sustainability reporting: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52021PC0189