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Corporate Sustainability and Responsibility Disclosure (CSRD): Key Updates and What Companies Should Know

Corporate Sustainability and Responsibility Disclosure (CSRD): Key Updates and What Companies Should Know
Contents

The Corporate Sustainability Reporting Directive (CSRD) was recently adopted by the European Commission in November 2022 and will become an upcoming regulation that will impact nearly 50,000 European Union (EU) companies by setting the standard for reporting their climate and environmental impact. The CSRD will build upon and replace the existing Non-Financial Reporting Directive (NFRD) by introducing more detailed reporting requirements and expanding the number of companies that are required to comply. As the demand for ESG reporting and adherence to ESG frameworks continues to grow, many companies are already taking steps to improve their sustainability initiatives efforts in anticipation of the new regulations.

In this blog post, we will provide an overview of CSRD and discuss the key updates and developments that companies should be aware of. We will delve into the rising demand for ESG reporting and how ESG frameworks, such as TCFD and IIRC, are promoting standardisation efforts globally. Moreover, we will examine recent regulatory developments in various regions and the importance of incorporating ESG topics into a company's overall ESG strategy. Additionally, we will analyse the impact of technology and data analytics on ESG reporting, highlighting the benefits of using technology for reporting and providing examples of companies that are leading the way in this area.

Upon reading this article, organisations will gain a deeper understanding of the current state of corporate governance and sustainability initiatives, and receive practical guidance on staying ahead of the game in these areas.

Why was CSRD adopted?

CSRD was introduced by the European Commission to address the challenges of climate change and environmental degradation. Its goal is to drive a transition to a more sustainable and low-carbon economy by requiring companies to report on their sustainability performance in a more detailed and standardised manner. The CSRD is an essential tool for achieving the EU's ambitious sustainability goals, such as becoming carbon-neutral by 2050.

The CSRD is designed to ensure that companies provide transparent and accurate information about their sustainability performance. This information will enable investors, consumers, and external stakeholders to make informed decisions based on a company's ESG data and performance. By holding companies accountable for their sustainability efforts, the CSRD is expected to drive progress towards a more sustainable and equitable future.

Increasing demand for ESG reporting

As companies become more aware of the importance of sustainability and responsibility, there has been a growing demand for transparency in this area. This has resulted in an increased focus on environmental, social, and governance (ESG) reporting at all levels of organisations. Companies are now expected to provide detailed information about their ESG metrics, including non financial data related to carbon emissions, water usage, waste management, human rights practices, ethical sourcing and supply chain management, responsible investment, corporate governance structures, board diversity and remuneration policies.

"The EU has recognised that the provision of non-financial information, particularly on sustainability and climate change, is essential to enable investors to make informed decisions. The new CSRD requirements will help to facilitate this and ultimately contribute to driving change in companies' approach to sustainability." - Susanne Stormer, Chief Sustainability Officer at Novo Nordisk (source: EY)

A woman with reports on the table

Why is there such an increase of ESG reporting?

The growing demand for businesses to report on their ESG scores is driven by several factors:

Customer and employee demand: Many customers and employees are increasingly looking for companies that align with their values, and sustainability has become a key value for many people. A survey by Nielsen found that:

  • 81% of global respondents felt strongly that companies should help improve the environment.
  • 73% of respondents said they would be willing to pay more for sustainable products.

Investor demand: Investors are increasingly incorporating ESG considerations into their investment decisions. This is driven by a growing recognition that ESG risks can have a material impact on financial performance, and a desire to invest in companies that prioritise sustainability. A study by Morgan Stanley found that:

  • Sustainable investing has grown significantly in recent years, with assets under management in sustainable investments reaching $17.1 trillion in 2020.

Regulatory and legal requirements: Companies in some regions are required by law to report on their ESG scores, and regulations are being introduced in other regions to require companies to submit ESG reports. For example:

  • The European Union's Sustainable Finance Disclosure Regulation (SFDR) requires financial market participants to disclose how they integrate sustainability risks into their investment decisions.

Business success: Companies are increasingly acknowledging that their ESG score, which is based on their adherence to ESG criteria, is crucial for achieving long-term business success. Companies that prioritise embedding sustainability may be better positioned to attract and retain customers, employees, and investors.

"The CSRD is a game-changer for the future of sustainability reporting. It will increase the quality, transparency and comparability of sustainability reporting and provide the financial sector and investors with the information they need to better manage sustainability risks and opportunities." - Nathalie Berger, Head of Unit for Corporate Reporting, Audit and Credit Rating Agencies at the European Commission (source: Euractiv)

ESG symbols on the computer

Benefits of providing transparent and accurate information about sustainability performance

To encourage companies to prioritise transparent reporting, it's important to communicate the specific benefits that transparent reporting can bring to their business. While it's true that companies may only invest in transparent reporting if they see a clear benefit, there are numerous benefits to transparent reporting that may not be immediately apparent to them. By highlighting these benefits, companies can be motivated to prioritise transparent reporting even if they haven't previously seen the value in doing so.

Improved reputation and brand image

One of the primary benefits of providing transparent and accurate information about sustainability performance is improved reputation and brand image. Customers and stakeholders are increasingly concerned about the environmental and social impact of the businesses they interact with, and are more likely to engage with and support companies that prioritise sustainability. By supplying transparent and precise data on sustainability performance, companies can demonstrate their commitment to responsible business strategy and build trust with their stakeholders.

Better risk management

Another benefit of providing transparent and accurate information about sustainability performance is better risk management. Environmental and social risks can have a significant impact on business operations and financial performance, and companies that prioritise sustainability are better positioned to manage these risks. By providing transparent and accurate information about sustainability performance, companies can identify and address potential risks, and develop strategies to mitigate them.

Improved financial performance

Providing transparent and accurate information about sustainability performance can also have a positive impact on financial performance. Studies have shown that companies that prioritise sustainability tend to perform better financially over the long term, and that investors are increasingly incorporating ESG information into their investment decisions. By divulging reliable and precise information about sustainability operations, companies can demonstrate their commitment to sustainability and attract investors who value responsible business practices.

Improved innovation and efficiency

Ultimately, delivering transparency and precise details regarding sustainability performance can foster enhanced innovation and productivity. By identifying areas where environmental and social performance can be improved, companies can develop new products and processes that are more sustainable and efficient. This can lead to cost savings, improved competitiveness, and increased innovation.

"The CSRD will create more transparency for investors and stakeholders about a company's sustainability strategy and the potential impact of climate risks and opportunities on its future financial performance. It is a key component in the European Green Deal." - Frans Timmermans, Executive Vice President of the European Commission for the European Green Deal (source: EU Commission Press Release)

Happy employees

Who does the CSRD apply to?

The Corporate Sustainability Reporting Directive (CSRD) applies to nearly 50,000 companies in the European Union (EU) that meet certain size and reporting criteria. Here's a breakdown of who is affected:

Large Companies

Large companies meeting at least two of the following criteria will need to comply with the CSRD:

  • €40 million in net turnover
  • €20 million in assets
  • 250 or more employees

This includes companies based both inside and outside of the EU. Non-EU companies with a turnover of over €150 million in the EU will also be required to comply.

Small and Medium Enterprises (SMEs)

The CSRD places fewer reporting requirements on SMEs, particularly those that are not publicly listed. Here's how SMEs are affected:

  • SMEs with securities listed on regulated markets will need to comply with the CSRD, but they can report using simplified standards.
  • Non-listed SMEs are largely exempt from the new reporting requirements, but the European Commission has proposed developing separate, voluntary standards for these companies.
  • The proposed SME standards would be tailored to fit the capabilities of smaller companies and make it easier for them to report information to banks, clients, and investors.

By providing clearer and more straightforward reporting frameworks for all companies, the CSRD seeks to help drive the transition to a more sustainable economy.

Recommended resources:

• Article: ESG: What is Environmental, Social and Governance?
• Article: What Is Corporate Sustainability and How to Achieve It
• Article: How Businesses Have Begun Taking Action Towards Achieving Net Zero Goals
• Article:
10 Responsible Companies With Net Zero Targets and Pledges
• Article:
Decarbonization: How to Set Goals and Sustainability Targets

Examples of companies that have successfully leveraged CSRD

Businesses all over the world are recognising the potential of Corporate Social Responsibility (CSR) as an integral part of their strategies. Here are some leading companies that have successfully incorporated CSR to improve their operations:

Unilever:

  • Sustainable Living Brands: Unilever has identified a portfolio of brands that are committed to sustainable living and have integrated this commitment into their business strategies. These brands, including Dove, Lipton, and Ben & Jerry's, accounted for 70% of Unilever's growth in 2020.
  • Sustainable sourcing: Unilever has committed to sourcing 100% of its agricultural raw materials sustainably by 2023, and has already achieved this goal for several key crops including palm oil, soy, and tea.
  • Plastic waste reduction: Unilever has committed to halving its use of virgin plastic by 2025 and has made significant progress towards this goal. In 2020, the company eliminated over 100,000 tonnes of plastic packaging and introduced reusable packaging for some of its products.
  • Social initiatives: Unilever has launched several initiatives to address social issues, including a program to provide safe drinking water to communities in water-stressed areas, and a partnership with the World Economic Forum to help smallholder farmers improve their lives.

Microsoft:

  • Environmental sustainability: Microsoft has set ambitious targets to reduce its carbon footprint, including becoming carbon negative by 2030 and removing all of the carbon it has emitted since its founding in 1975 by 2050. The company has also committed to using 100% renewable energy by 2025.
  • Diversity and inclusion: Microsoft has made significant investments in diversity and inclusion initiatives, including a $150 million investment in its Diversity and Inclusion initiative in 2020. The company has also set goals to increase representation of underrepresented groups in its workforce and leadership.
  • Accessibility: Microsoft has committed to ensuring that its products and services are accessible to everyone, including people with disabilities. The company has launched several initiatives to achieve this goal, including a $25 million investment in its AI for Accessibility program, which develops AI-powered technologies for people with disabilities.
  • Human rights: Microsoft has committed to respecting human rights in all of its operations and has developed a human rights policy to guide its approach. The company also publishes annual reports to cover that issue.

Patagonia:

  • Sustainable products: Patagonia is a leader in sustainable clothing and outdoor gear. The company uses recycled materials in many of its products, including polyester made from recycled plastic bottles, and has launched several initiatives to reduce the environmental impact of its products.
  • Environmental activism: Patagonia has been a vocal advocate for environmental causes, using its platform to raise awareness about issues such as corporate responsibility, public lands protection, and sustainable agriculture. The company has donated millions of dollars to grassroots environmental organisations.
  • Fair labor practices: Patagonia is committed to fair labor practices and has implemented several initiatives to ensure that its workers are treated ethically and paid fairly. The company was the first outdoor clothing brand to join the Fair Labor Association, and has implemented programs to improve working conditions and wages for workers in its supply chain.

These companies are just a few examples of how CSR can be successfully integrated into a business model.

Recent regulatory developments

Regulatory developments refer to the changes and updates made to laws and regulations that govern various industries. These developments are important for businesses to keep up with as they can have significant implications for how they operate.

The necessity for ESG reporting has been augmented by numerous regulatory changes in different regions.

Regulatory

Here is an overview of recent regulatory developments in different regions:

Europe:

In addition to the proposed CSRD, the EU has also recently introduced the Sustainable Finance Disclosure Regulation (SFDR), which requires financial institutions to disclose how their investments align with environmental and social objectives. The EU has also introduced a taxonomy of sustainable economic activities, which provides a framework for identifying environmentally sustainable economic activities.

United States:

The US Securities and Exchange Commission (SEC) has recently proposed rules that would require public companies to disclose climate-related risks and opportunities in their filings. Additionally, the US Department of Labor has proposed rules that would require retirement plan fiduciaries to consider ESG factors in their investment decisions.

Asia:

China has recently introduced guidelines for ESG disclosure by listed companies, which require companies to disclose their ESG risks and opportunities, as well as their management practices. Additionally, Japan has introduced a stewardship code, which encourages institutional investors to engage with the companies they invest in on ESG issues.

Implications for companies and how to stay ahead of regulatory developments

In today's business environment, companies need to adapt to new regulations to avoid penalties, investor mistrust, and reputational damage. To attract investors, companies must prioritise aligning their operations with ESG objectives and publicise their progress towards sustainability.

To stay ahead, companies should keep up with regulatory developments and align their sustainability strategies and reporting practices with international standards like GRI and TCFD. Engaging with key stakeholders such as investors, customers, and employees is crucial to understanding their expectations and concerns around sustainability. This ensures that businesses remain competitive and well-positioned for success in the evolving landscape of sustainability regulations.

Standardisation Efforts

ESG reporting frameworks and standards explained

Companies have many options when it comes to reporting their environmental, social, and governance (ESG) performance through frameworks and standards. Some of the most widely recognised frameworks include the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the International Integrated Reporting Council (IIRC). Each framework has its own set of reporting requirements and indicators, but they all share a common goal of improving the consistency and comparability of ESG reporting across companies and industries.

The GRI is one of the oldest and most widely used ESG reporting frameworks. It provides guidelines for reporting on a range of sustainability issues, such as climate change, labor practices, and supply chain management. The SASB, on the other hand, focuses on identifying and reporting on financially material sustainability issues that are relevant to a company's industry. Finally, the IIRC promotes integrated reporting, which combines financial and non-financial information in a single report to provide a more comprehensive view of a company's performance.

Challenges of inconsistent reporting: the need for standardisation

One of the main challenges facing ESG reporting is the lack of consistency and comparability across companies and industries. Without a standardised approach to reporting, it can be difficult for investors, regulators, and other stakeholders to assess the ESG performance of different companies and make informed decisions. Inconsistencies in reporting can also lead to confusion and mistrust among stakeholders, as companies may use different reporting metrics and methods that make it difficult to compare their performance.

To address these challenges, there is a growing need for standardisation in ESG reporting. Standardisation can help ensure that companies report on the same ESG issues using consistent metrics and methods, making it easier for stakeholders to compare and assess their performance. Establishing standards can also help to promote transparency and ensure accountability, since all organisations must adhere to the same set of reporting criteria.

Team reporting

Overview of key standardisation efforts, such as TCFD and IIRC

Several key standardisation efforts have emerged in recent years to address the challenges of inconsistency in ESG reporting. One of the most notable is the Task Force on Climate-related Financial Disclosures (TCFD), which was established by the Financial Stability Board in 2015. The TCFD provides a set of voluntary recommendations for companies to disclose information on the risks and opportunities associated with climate change. The TCFD's recommendations have been widely adopted by companies and investors as a best practice for climate-related reporting.

Another notable standardisation effort is the International Integrated Reporting Framework, developed by the International Integrated Reporting Council (IIRC). The framework provides guidance on how companies can report on their strategy, governance, performance, and prospects in a way that integrates financial and non-financial information. The IIRC's framework has been adopted by a growing number of companies around the world as a way to enhance the quality and comparability of their reporting.

All in all, ESG reporting impacts companies in terms of transparency and accountability. By adopting ESG frameworks like TCFD and IIRC, companies can streamline their reporting and enable ESG score comparisons with other companies in the industry. This promotes greater ESG transparency through enhanced ESG disclosures, which in turn boosts the company's credibility with socially responsible investors who value ESG compliance.

Technology and Data Analytics

How technology and data analytics are leveraging ESG factors and transforming ESG reporting

Technology and data analytics are transforming the manner in which companies analyse ESG factors and share their sustainability performance, revolutionising traditional reporting strategies. With the increasing focus on ESG issues, companies are under pressure to collect and report data on their environmental, social, and governance (ESG) performance. This data can be complex and difficult to manage, but technology and data analytics can help companies to streamline their reporting processes and improve the accuracy and reliability of their ESG data.

One example of technology that is changing the landscape of ESG reporting is Net0, a carbon management platform that helps businesses to measure emissions and take care of the E in the ESG. Net0 uses machine learning and artificial intelligence to collect, organise, and analyse data on a company's carbon footprint, energy usage, and other sustainability metrics. The platform provides real-time insights into a company's operations and helps large businesses and public companies to identify principal risks and data points where they can reduce their carbon emissions.

Net0 Dashboard

Another technology that is changing the way companies report on their sustainability performance is Discloser, a software platform that helps businesses to collect, analyse, and report progress on the S and G in the ESG. Discloser helps keep track a company's progress on social and governance issues such as diversity, human rights, and ethical business practices. The platform provides real-time insights into a company's social and governance performance and helps businesses to identify areas where they can improve.

ESG data, artificial intelligence and automation

Technology and data analytics are revolutionising the way companies approach Corporate Sustainability and Responsibility Reporting (CSRD). In particular, platforms such as Net0 and Discloser are playing a significant role in transforming the reporting process.

One of the most significant benefits of using technology for ESG reporting is automation, which streamlines and simplifies the process. The utilisation of AI and machine learning algorithms can facilitate the automation of ESG disclosures, including tasks such as data collection, analysis, and reporting. This approach can result in a considerable reduction of time and resources required to produce ESG reports, while also improving accuracy and increasing the frequency of reports.

Moreover, automation helps companies save costs, as it reduces the need for manual labor, thereby making ESG reporting more cost-efficient. Additionally, automation and AI-powered tools can help businesses stay up-to-date with changing regulations and reporting standards, ensuring compliance with different reporting requirements in multiple jurisdictions.

How Net0 can help with ESG reporting

At the forefront of utilising technology to reduce environmental damage, Net0 is a trusted solution for executives, operations managers, and sustainability directors. Net0's carbon management platform automates the process of measuring and reporting carbon emissions, using machine learning algorithms to collect data from various sources. The platform calculates a company's carbon footprint and provides recommendations for reducing emissions, enabling businesses and governments to save time and resources while ensuring the accuracy and completeness of their carbon reporting.

Recommended resources:

• White paper: How Net0 Brings Businesses Towards Carbon Neutrality in 5 Steps
• Article: 11 Reasons Net0 Is the Best Carbon Accounting Platform
• Downloadables:
Checklists and Infographics

Similarly, Discloser is an AI-powered tool that helps companies collect, analyse and report progress on their ESG strategy.

Conclusion

In conclusion, the world of corporate sustainability reporting and disclosure (CSRD) is evolving rapidly, with new regulations, frameworks, and standards being introduced to promote transparency and accountability.

As companies seek to meet the increasing demand for sustainable practices, it is important to provide transparent and accurate information about their sustainability performance. By doing so, they can build trust with stakeholders, attract socially responsible investors, and gain a competitive advantage.

To achieve this, companies should prioritise CSRD in their sustainability efforts and leverage technology and data analytics tools, such as Net0, to streamline their reporting processes and ensure accurate, timely, and cost-effective reporting.

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This article has been brought to you by Sofia Fominova, a co-founder of Net0. For daily updates, news and industry insights, please follow Net0's business page on LinkedIn.

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