New EU green reporting rules are coming into force, but are Irish boardrooms ready for them? Bringing increased scrutiny of their sustainability credentials, companies that aren’t doing enough for the planet or those greenwashing, could face being hung out to dry. The Corporate Sustainability Reporting Directive (CSRD) is part of a rapidly building tide of environmental and social governance (ESG) reporting measures. It introduces sustainability reporting standards, a requirement for audit assurance of reported information, and an extension of the regime to include large private companies and listed SMEs. Addressing gaps in the operation of the earlier Non-Financial Reporting Directive (NFRD), data reported under the new directive will enable investors, consumers and employees to assess and compare companies’ focus on sustainability. There are about 11,000 companies in Europe covered by the NFRD. The CSRD will bring about 50,000 companies into scope, says partner at Deloitte, Laura Wadding.
“There are three criteria, and a company needs to meet two of them - they need to have greater than 250 employees, or greater than €40m in turnover or greater than €20m in total assets - if you meet two of those criteria, you will be caught in scope.” The CSRD will have a significant impact in how companies think of their sustainability strategies, says Wadding. “What companies are being asked to disclose initially is the percentage of their turnover or the percentage of capital or the percentage of operational cost that is going on sustainable activity”, says Wadding.
Helpfully, the EU provides a taxonomy specifying what is considered an environmentally sustainable activity. They include things like climate change mitigation, the sustainable use and protection of water, the protection of biodiversity and the transition to the circular economy. A next step from an EU perspective will be the development of a social taxonomy where companies will be asked to capture how they are investing in social objectives too. Diversity and inclusion policies, their contribution to the community in which they do business, their links with education and their philanthropic activity, or lack of all these things, will all come under the microscope.
The requirement for an organisation to disclose its spend on sustainability in financial statements and to indicate how it is going to increase this spend is going to focus corporate minds. Knowing your own figures and being able to look at what competitors or comparable companies are spending on these things will allow for much more informed discussion on strategy. “It is going to allow for far more comparison and benchmarking between companies,” says Wadding. Any companies that have been greenwashing their activities or providing ambiguous data will really have nowhere to hide. The concept of double materiality means that companies will have to hold a mirror up to themselves, too. It is not just climate-related impacts on the company that must be reported but also the impacts of a company on climate or any other dimension of sustainability. There is ample evidence that the information that companies have been reporting to date is not sufficient, the EU says. Reports often omit information that investors and other stakeholders think is important. Reported information has been hard to compare from company to company too, and users of the information were unsure whether they could trust it. The new directive removes ambiguity making it much more difficult for companies to eschew their sustainability responsibilities. Governments, regulators, shareholders, investors, employees, consumers, lobby groups and the media will now have hard numbers from which to draw informed conclusions. “If two companies in the same sector are consistently reporting against the same data and one improves and the other disimproves, maybe it is going to shape the way stakeholders make decisions about those companies,” says Wadding.
GovernanceResponsibility for defining and delivering new CSRD targets is another conundrum that organisations are grappling with. Sustainability and corporate social responsibility activities have often been ill-defined and dispersed across functions from facilities, to manufacturing, HR to marketing and communications. With information now going to be audited and reported in financial statements, an ad hoc approach isn’t going to cut it. “The directive is going to shine a spotlight on sustainability discussions in the boardroom like never before,” says head of sustainability at Grant Thornton, Catherine Duggan. “The requirement for companies to articulate their sustainability strategy and the proposal for these disclosures to be audited will concentrate minds,” says Duggan. One of the key things to establish is who is going to be accountable for delivery. Whether ultimate responsibility falls to a chief sustainability officer, a chief risk officer, a chief operations officer or a chief financial officer, discussions on sustainability and social responsibility are going to have to be elevated from an agenda filler to a boardroom staple. The speed at which new ESG requirements are being introduced however has caught out many of those around the top table. Company directors in Ireland are admitting to being on the backfoot. Some 36 per cent of them said that their board does not feel sufficiently knowledgeable and informed to deal with ESG, according to an Institute of Directors survey published earlier this year. Indeed, almost half of business leaders in Ireland surveyed said that their business found it difficult to set key performance indicators to effectively measure environmental, social, and governance targets. Some 29 per cent of respondents said ESG will be the most desired experience/expertise over the next two years. Only one in ten directors said that these were the main skills that they themselves bring to their board. It is clear that new skills will need to be developed or bought in, and fast.
Follow the moneyFor companies not spending enough on sustainability or those providing incomplete data, there are risks. Mitigating these will shape corporate behaviour around compliance. The fundamental objective of the CSRD is to help improve the flow of money towards sustainable activities, says the EU. It is hoped that the information will enable investors to re-orient investments towards more sustainable technologies and businesses, helping to make Europe climate neutral by 2050. Investors need accurate data to meet their own disclosure requirements under the Sustainable Finance Disclosure Regulation (SFDR). Companies that provide poor data risk alienating investors. “Asset managers have investors that want ESG funds, but comparable data just isn’t there,” says Waystone executive director, Vanora Madigan. “The CSRD will help with the data and drive more sustainable investments. Where we are in two years’ time will be very different,” says Madigan.
Indeed, the elevation of the status of sustainability reporting to that of financial reporting means a likely reprioritisation of traditional boardroom priorities. “Firms need to have ESG and sustainability as a standing agenda item. It needs to be incorporated as part of their strategy,” says Madigan. “What was once niche is now mainstream. Yes, there is absolutely going to be an additional cost to firms, but the world is going this direction in any case. Investors want it and consumers want it.” The Central Bank of Ireland wants it too. In a letter to the CEOs of regulated financial service providers last year, the regulator said it expects firms' boards to demonstrate clear ownership of climate risks, while also promoting an internal culture that prioritises climate and other ESG issues. The letter said it expected transparent disclosures to investors and consumers, not greenwashing. The risks of poor CSRD compliance extend beyond investment. Employees and prospective hires increasingly care about a company’s verifiable green credentials too, says Madigan. “It is difficult to get staff, but if you can show you are a good place to work with good environmental and corporate and social responsibility policies, it makes a difference.” Expect to see companies who fare well on the CSRD playing field to shout about it in their communications with all stakeholders, including prospective employees.
Make or breakThis decade has been described by policy makers as a ‘make-or-break decade’ in terms of tackling the climate emergency. That sustainability reporting is being placed on par with financial reporting signifies the seriousness and urgency with which EU regulators view the challenge. Companies feeling inertia about the CSRD need to grasp its seriousness and prepare for more regulation to come. “There is significant investment of effort required at the outset for organisations that have yet to embrace sustainability reporting, but the information they are reporting on should enable them to drive improvements in all aspects of their business,” says Catherine Duggan. CSRD should be embraced as a foundation from which to improve their business performance, she says. “It is important as they commence this process that regulation doesn’t limit their ambition.” Sustainability is a long game and the CSRD is forcing boards to extend their horizons well beyond financial years. Companies are being asked to take a long view. Strategising for the very planet is no small ask, but businesses that do so will have both right on their side and competitive advantage.