Corporate Sustainability Reporting Directive (CSRD)
Money is flowing into companies and funds that cloak themselves in a sustainability mantle. Anyone looking for capital might be incentivized to align themselves with this hot trend, which means how firms and funds talk about their sustainability activities and how they measure impact is very important. Transparent, measurable, comparable and verified data are the only way to relate how one company performs versus another. The European Union has recognized that moving companies’ financial statements and nonfinancial disclosures to a consistent and analogous basis is critical for assessing sustainability impact across markets, sectors and entities. As a result the EU is proposing the Corporate Sustainability Reporting Directive (CSRD)
The fact that the EU is working in collaboration with national and international accounting and sustainability standards boards, as well as international regulatory organizations, means that the EU taxonomies and standards not only have a high likelihood of becoming the foundation for global approaches, but they are also unlikely to rolled back in any given country due to political changes. Transparency and comparability also promote and enable companies to better manage various aspects of their business, (e.g., supply chains) in alignment with sustainability, social and governance goals to drive to better outcomes.
What the Corporate Sustainability Reporting Directive (CSRD) does
The proposed Corporate Sustainability Reporting Directive amends existing reporting standards for non-financial disclosures on:
- environmental matters
- social matters and treatment of employees
- respect for human rights
- anti-corruption and bribery
- diversity on company boards (in terms of age, gender, educational and professional background)
The CSRD goes further than prior requirement by extending compulsory disclosures to all large companies and all companies listed on regulated markets (except listed micro-enterprises). All companies must report in accordance with mandatory standards and independent auditors must provide assurances of these disclosures. The Commission will require companies to digitally ‘tag’ the reported information, so it is machine readable and feeds into a European single access point. Investors will be able to freely query and compare disclosures. Importantly, the Corporate Sustainability Reporting Directive will require consistent data and disclosures be reported for historical years, so investors can develop a historical perspective of a company’s sustainability path and impact.
The Devil is in the Details
The CSRD establishes a double materiality reporting requirement. Companies must report how sustainability issues affect their business, including financially, and how their business impacts people and the environment. The standards will require three layers of reporting across three reporting areas covering three topics.
Not all entities have the same sustainability risk and impact profile; therefore, the sector agnostic layer of standards will define disclosures necessary to allow comparability across sectors. Sustainability topics’ relevance and materiality differ across sectors; therefore, additional disclosures for a given sector will allow better transparency and comparability for that sector. Each reporting entity has unique value creation factors along with specific risks and opportunities, as well as impact. Consequently, when conducting the double materiality assessment, each firm should provide entity-specific disclosures that best depicts its unique situation.
Towards Global Standardization
While the CSRD applies only in the EU, the standards are being developed in coordination with international and national standards boards, as well as international associations of regulatory agencies, such as the International Organization of Securities Commissions (IOSCO). This synchronous development means that the EU’s standards and approach are likely to have significant influence over what is adopted in different countries and internationally. IOSCO’s involvement and consultation gives further weight to local regulatory agencies adopting the EU approach. Once taxonomy is harmonized globally and standards are agreed, deviating from the established practice will be difficult for a particular standards board because companies will have incentives to remain aligned with sector peers to attract capital.
Impact on Industry Sustainability Consortiums
Several industry groups, such as the Consumer Goods Forum, have evolved to collectively promote sustainability initiatives, as well as tackle endemic industry-wide challenges. The Consumer Goods Forum, for example, brings together the world’s retailers and consumer goods manufacturers to promote consumer trust and drive positive change. Leveraging the members’ global reach, CEO leadership and retailer-manufacturer collaboration; they are trying to address key industry challenges, including: environmental and social sustainability, health, food safety and product data accuracy. One aspect of their work requires managing these issues across their supply chains. With more consistent and comparable global measures and disclosures, these firms can build databases and better manage issues such as deforestation or human trafficking across their supply chains.
Conclusion
The proposed CRSD along with the global collaborative approach to implementation is a potentially very significant game changer for sustainability initiatives and measuring success. Reporting based on verified, comparable, measurable, transparent information will be very difficult to change, because companies will have strong incentives to report and be competitive. Additionally, industry groups will have significantly better information on which to base decisions and manage difficult to tackle issues, such as human trafficking and de-forestation.
