CSRD has officially come into play, and it is creating waves due to the significant data demands and resourcing requirements being placed on companies – in particular for mid- and small-cap companies – who are or will fall within its remit.

Having worked with CSRD for a while, we can argue the cons (and frequently do) of how CSRD has been set out and what it requires, including the inherent complexity, implementation costs, and the data availability challenge. But the reality is that CSRD is here to stay. Over the next five years, CSRD will become a business imperative for over 40,000 companies – both public and private. Its reach will spread even further as the data demands will spread through these companies’ value chains.

The question then is: how can you maximise the benefits of CSRD while minimising resource use and costs?

We advise that a company should approach it in two ways:

• Firstly, do not treat CSRD solely as a matter of compliance and reporting. If approached strategically from the beginning, it can provide senior management teams with valid and assured insight and data to drive decision making, business change and competitive advantage. Using the data as a business tool will enable every business to generate a proper return on the investment required to meet CSRD, rather than as a significantly increased reporting cost that many view it as at the moment.
• Secondly, approach it as a journey that is proportionate and reasonable for your business. It does not have to be perfect in the first year. There is already phase-in provisions built into CSRD to enable participants to improve over time, and attempts have been made to adjust the requirements to company size, sectors, and location. With some European governments also having missed the deadline to sign CSRD into their national statutes, we would not be surprised if some of these provisions are expanded or extended as increased flexibility is demanded.

The corporate winners will be those who start their CSRD preparation early and look to weaponize the process and outcomes to strategic benefit. We have long spoken about the importance of embedding ESG considerations in strategy and operations. CSRD compliance will fast track this journey for those companies who use it as a strategic opportunity, and not just another regulatory box to tick.

So, what are some of the lessons learned, and how do you set yourself up for success with CSRD?

1. Get the foundations right.

Double materiality is the foundation of complying with CSRD. It is the first step in identifying which of the hundreds of ESRS disclosure requirements you need to gather information for, and importantly, for understanding where gaps need to be filled. It can be an extremely valuable strategic and reputational tool and can reduce the reporting workload if managed correctly. Taking the time to get the foundations of materiality and compliance right can set companies up for success as they evolve their CSRD reporting and gradually introduce more qualitative and quantitative disclosure requirements. In essence, do not try to meet every requirement in your first go and use the phase-in provisions effectively. Take your time to 1) prioritise the material areas where you will face most pressure from key stakeholders, and which are instrumental for your business to get right strategically, and 2) understand where you will need to spend more time gathering data that you can substantiate in an annual report.

2. It is a team effort that goes beyond the sustainability function.

While the involvement and support from the C-Suite and Board is critical to the success of a “proper” CSRD value creative programme, ownership of CSRD – in our experience – should sit with the sustainability or ESG team, working closely with the finance function. The close involvement of finance is essential from multiple perspectives: understanding of mandatory disclosures, experience with assurance, as well as the link to financial metrics, not to mention getting to grips with the EU Taxonomy. CSRD will require time commitment and co-ordination across the business. Non-financial data will need to be sourced across multiple functions, ranging from operations to legal and compliance, HR, and procurement. At the heart of everything lies stakeholder engagement – from motivating internal stakeholders to finding and gathering data; to the double materiality process which acts as the foundation for compliance; to the users and audience of the sustainability statement which will be the output of CSRD. It will be down to companies how this is managed for a successful outcome.

3. Allowing enough time to prepare is essential and get technology to help.

We cannot deny that CSRD is a significant undertaking. While it may feel like an overly onerous reporting exercise, the thought behind it is to encourage action, not just paperwork. For corporates exposed to CSRD, this means planning ahead and making sure that you have effective, reliable, and scalable internal processes and systems to collect, assess and report on your sustainability data and ambitions. This becomes particularly pertinent given the requirement for limited assurance (which may later evolve to reasonable assurance), which will put more pressure on data accuracy and internal controls. Documenting the data and collection process will be central to this. We strongly recommend the use of a technology platform which can support on CSRD (and EU Taxonomy) compliance; facilitate cross-functional collaboration on gathering data; and identify and fill the data gaps. This will be particularly important in organisations where internal resources may be more constrained.

4. Be ready for climate, and more climate.

While the topical standards under ESRS cover ten areas for corporates to focus on, climate change has been singled out for extra attention. Implied in the legislation is the expectation that climate change will be material for businesses, and, as such, the required level of transparency on this subject will become mandatory for the vast majority. If any company assesses climate change to not be material, CSRD requires you to substantiate this in detail, along with a description of what could make it material in the future. Broadly, it will be hard to avoid making disclosures for this topic and there are many areas to cover. GHG emissions, scenario modelling, and objectives aligned with the Paris Agreement are expected alongside details of corporate governance structures for climate and how climate risks are addressed and managed. Transition plans will need to be understood, with companies also subject to ISSB and TPT being challenged to potentially consider multiple requirements in their disclosures in the future. In short, climate can’t be avoided and will require understanding of other frameworks and legislation.

5. Make sure there is still room for narrative and storytelling.

CSRD will inevitably lead to the structure of the annual report being changed to ensure it aligns with what the ESRS sets out. While numerous data points will be mandatory, storytelling can still enable you to put the stakeholder engagement, in-house expertise, and learning behind the data in focus. It is easy to get lost in compliance, but a compelling narrative to describe the links between sustainability and value creation will be essential to provide the much-needed added context. Equally, with the deeper understanding of materiality and the sustainability issues which have an impact on corporates, it will be harder to run the sustainability element in a silo. Executives should look to further align business strategy and operations with sustainability considerations which will need to be reflected in corporate narrative, inside and outside of the annual report.

Used properly, CSRD can drive positive change.

CSRD, if approached properly, should drive change in how a business approaches sustainability. Boards and senior management will be subject to greater levels of transparency leading to opportunities for benchmarking with peers, better stakeholder engagement and in an ideal world, opportunities for industry collaboration to tackle the big issues.

The hope is that with this transparency comes more action, more purpose and more positive impact. If CSRD is used solely as a factor of “tick box” compliance and reporting, then a significant opportunity to make a difference will be missed. The insights and data generated through CSRD, and ISSB, will soon be viewed on the same basis of quality and oversight as financial reporting. Those with responsibility for sustainability must not miss this opportunity to make an impact, using senior support and high-quality data to embed in decision-making and to drive positive change at a material level.

If you would be interested to know how we can support you with double materiality and CSRD, please don’t hesitate to get in touch.