From Compliance to Strategy

The European Union (EU) has been a trailblazer in the realm of corporate sustainability, first introducing the Non-Financial Reporting Directive (NFRD) in 2014 to foster transparency and accountability among companies. However, the NFRD had its limitations, including a lack of comparability, reliability, and relevance of sustainability information, and not focusing on a company’s effect on, change, and benefit to the economy, society, and the environment.

To address these shortcomings, in 2023, the EU introduced the Corporate Sustainability Reporting Directive (CSRD), a more comprehensive and rigorous framework to strengthen the rules concerning the disclosure of impacts, risks, and opportunities associated with environmental, social, and governmental sustainability matters. The CSRD expands the scope from approximately 11,000 companies under the NFRD to more than 50,000, including large corporations, listed small and medium-sized enterprises (SMEs), and non-EU companies with a significant EU presence. The CSRD also introduces the European Sustainability Reporting Standards (ESRS), which details the extensive disclosure requirements, and reporting architecture to ensure EU regulators, investors, and other stakeholders have consistent, comparable, and robust data to assess the performance and value of businesses.

The CSRD may seem daunting, with its stringent rules and requirements. However, it presents a unique opportunity for companies to shift from a siloed approach to managing sustainability risks to a structure where effective governance can create full visibility and provide a solid framework for decision-making and strategic business direction, understanding the organization’s sustainability impacts, risks, and opportunities.

The CSRD entrenches the concept of “double materiality,” requiring companies to report on how sustainability issues affect their business and how their business impacts people and the environment. This approach will drive greater transparency in sustainability reporting, recognizing that an organization can both affect, and be affected by, environmental, social, and governance topics. The directive also makes it mandatory for reported sustainability information to be assured.

Early preparation is critical. Aside from assessing the impact on an organization in light of its group structure and the respective reporting obligations and exceptions, here are a few steps organizations can take to cultivate compliance and create and preserve value:

Define a roadmap to automate and link data processes — Manual data collection is time-consuming, error-prone, and inadequate for integrated decision-making. Automation ensures data collection and analysis necessary for due diligence, reporting, and compliance are aligned, consistent, and transparent.

Establish a strong sustainability governance framework — This ensures that policies are implemented and controlled effectively, influencing business decisions. A robust framework is particularly crucial for managing supply chains that present a significant source of risk.

Incorporate risks into Enterprise Risk Management (ERM) — Risks identified through a double materiality assessment should be incorporated into a company’s ERM system, making them a strategic imperative requiring C-suite level and holistic decision-making.

Implement operational change management — This absorbs sustainability and social responsibility within the corporate culture, anchoring leadership commitment throughout the organization. The benefits include new collaborative processes with opportunities for innovation, improvement, and growth.

Engage stakeholders effectively — Clear guidelines on data requirements and expectations, as well as open conversations regarding materiality issues, are essential for effective, real-world sustainability work. In addition, implementing programs such as Supplier Leadership on Climate Transition¹ can educate suppliers and measure improvement in their climate journey.

Starting 1 January 2024, many EU companies will need to start collecting material information to report under the CSRD in 2025. A gap analysis is required to identify not only gaps in disclosure requirements, but also in the processes, policies, and actions required to achieve a holistic approach to compliance. Failure to prepare for CSRD will impact compliance in the short term and inevitably affect an organization’s strategic resilience in the long term.

While the CSRD may seem like a compliance burden, it is also an enabler of growth and value creation. By leveraging the directive, companies can build resilience, ensure continuity, and enable dynamic capabilities to adapt to changing environmental and societal needs, ultimately delivering better outcomes to both stakeholders and shareholders.

This article is authored by Ravi Kantamaneni and Leo van der Westhuijzen.

¹“Supplier LOCT.” n.d. Supplier LOCT. https://supplierloct.com/.