CSRD: Strategic Sustainability Implications

Earlier this year, on 5 January 2023, the Corporate Sustainability Reporting Directive (CSRD) entered into force. The CSRD will cause a major shift in the field of sustainability reporting. Listed and large non-listed companies will have to report on a wide range of ESG (Environmental, Social and Governance) topics, including:

• a transition plan to ensure that the business model and strategy of the company are compatible with the transition to a sustainable economy (including the limiting of global warming to 1.5 °C in line with the Paris Agreement);
• main features of the company's internal control and risk management systems, in relation to the sustainability reporting and decision-making process; and
• the role of the management board and supervisory board with regard to sustainability matters, and of their expertise and skills in relation to fulfilling that role or the access they have to such expertise and skills.

The CSRD is a key initiative of the European Green Deal, which aims to create a sustainable and climate-neutral economy in Europe by 2050. The CSRD seeks to increase transparency and accountability in corporate sustainability reporting, in order to enable investors and stakeholders to make more informed decisions and promote sustainable investment. To this end, the European Commission is expected to adopt the first set of European Sustainability Reporting Standards (ESRS) as draft delegated acts on 30 June 2023, which will then be reviewed by the European Parliament and the EU Council.

The importance of strategic-level engagement with sustainability matters in response to the CSRD should not be underestimated. This requires a shift in mindset from simply complying with regulations to actively considering sustainability as a key business issue.

1. More than just reporting

Notwithstanding the large amount of disclosure requirements that are contained in the ESRS, the CSRD is in fact more than merely a reporting directive. The EU lawmaker, but also investors and society at large, expect companies to go beyond mere reporting on the abovementioned ESG topics and to actively adapt their strategies and policies in order to establish sustainable business operations, as well as sustainable business models. This has consequences for companies on both a strategic and a practical level.

2. Strategic implications

It is imperative for management boards of companies that fall within scope of the CSRD to address sustainability matters and to consider the consequences of the extensive new rules on sustainability reporting for their business operations. This requires embedding ESG in the decision-making by, and considerations of, the management board and supervisory board. Companies should integrate sustainability issues into their long-term business plans and strategies, and ensure that their operations align with their sustainability goals. This may involve making changes to the company's supply chain, product design, marketing, and other areas to reduce environmental impact and promote social responsibility, since these are all subjects that companies are expected to report on in their sustainability report.

3. Practical implications

At a practical level, to be able to report in accordance with the CSRD, organizational changes are required. The days when certain non-committal sustainability claims could be made on a voluntary basis are over. Reporting on the basis of the CSRD requires robust reporting lines and integration of the financial functions with those within the organization responsible for sustainability information, including gathering the data that is needed to comply with the disclosure requirements. Companies, particularly those operating in an international group, must anticipate challenges when gathering data required for their singular and – in some cases – consolidated reporting, e.g. when calculating the gross scope 3 greenhouse gas emissions and determining the potential financial effects from climate-related risks. Ultimately, this too will become the responsibility of, among others, the CFO and audit committee.

4. No one-size-fits-all approach

There is no "silver bullet" solution regarding how these new challenges may best be approached by the management board, the supervisory board and the supervisory board committees. To the fullest extent permitted under applicable laws and regulations, each company will be able to choose its own most efficient working method that suites its own unique organizational structure. While there is no one-size-fits-all approach, it is highly recommended to initiate action, learn by experience, and draw inspiration from first movers.

5. No time to lose

In light of the challenges set out above, there is no time to lose to start working on the implementation of the CSRD within in-scope organisations and to follow relevant legal and technical developments in that respect. The CSRD will notably apply to some listed companies from the start of financial year 2024 (with first reports to be published in 2025), thus allowing only limited time not only to prepare for compliance with an extensive set of disclosure requirements, but also to consider the necessary strategic and organizational adjustments that are needed to make the business the most sustainable.

The content of this article is intended to provide a general overview of the subject matter. Please do not hesitate to contact us should you require any further information.

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