How future winners are created in the new sustainability economy
The EU’s new sustainability reporting directive brings disruptive changes to companies’ annual reporting. Although the EU is now backing away from some requirements, it will be crucial to manage these adjustments properly. How companies approach sustainability reporting in the future will determine whether it becomes a regulatory burden or a business opportunity.
This discussion post was first published on Realtid and is signed by Katarina Sivander, CEO Xplir, Lisa Isakson, Sustainability Manager Greenfood and Erik Bukowski, Senior Advisor Financial Communication and Sustainability, Gullers Grupp.
The EU has a set target for Europe to become climate neutral by 2050. The EU Corporate Sustainability Reporting Directive (CSRD) is one of the tools to achieve this.
The CSRD aims to improve the transparency and comparability of sustainability information so that the environmental and social impacts of activities can be assessed in a consistent manner.
Ultimately, it is about giving financial markets the tools to identify low sustainability risk businesses and thus direct capital flows towards sustainable investments.
Lowering ambitions
The European Commission has presented its first so-called omnibus proposal. The proposal contains a number of reductions in ambition both in terms of scope and requirements for the data requested. However, the so-called double materiality analysis in the CSRD will be retained.
Big changes – after all
The CSRD, despite its lowered ambitions, means big changes.
This is because, going forward, the companies concerned will need to report on how their operations affect and are affected by their environment in terms of sustainability, with the same rigor and transparency as for their financial performance.
The sustainability statement shall be included in the annual report of the Board of Directors and thus has the same status as the financial reporting.
The target groups
A main target group is investors. With access to verifiable sustainability data, investors can make more informed decisions and align their portfolios with their sustainability goals and values.
Investors will pay extra attention to how companies analyze and report their sustainability-related financial risks and opportunities.
Another target group is businesses. The directive improves the ability to attract capital and forces companies to identify qualitative sustainability data, which creates a better basis for decision-making on sustainability risks and opportunities.
Get it right from the start
Another target group is businesses. The directive improves the ability to attract capital and forces companies to identify qualitative sustainability data, which creates a better basis for decision-making on sustainability risks and opportunities.
Affected companies need to invest both time and resources to build the organization, systems and procedures around the work of collecting, consolidating and approving large amounts of data.
This is why it is particularly important to get it right from the start.
Sustainability is business-critical
The introduction of CSRD means that all companies concerned have the opportunity to build up a deep database of sustainability data.
A key factor will be the extent to which there is a realization that sustainability data is a business-critical basis for decision-making.
Those who recognize that sustainability is an integral part of business strategy and decision-making will have a big advantage going forward.
Digitalization makes it more efficient
Digital reporting of sustainability information is mandatory for all companies covered by the Directive. It enables stakeholders, including investors, to compare and analyze data points and disclosures from annual reports.
The requirement to report digitally presents an opportunity to streamline and automate the reporting process all the way, from data collection to production of the designed report, review and tagging.
Companies that embrace it will see many benefits, such as higher data quality, traceability, and smoother and safer compliance.
Used correctly, the digital approach leads to reports that are fully machine-readable, which also secures the company’s communication channel to the financial market.
Build the right organisation
To meet the requirements of CSRD, many companies will need to adapt their organisation. An important consequence of the CSRD is that the board of directors has a greater responsibility to ensure accurate and transparent sustainability reporting.
This requires increased knowledge and engagement on sustainability issues, as inaccurate or incomplete information can lead to serious legal and financial consequences.
The organization needs to ensure its financial competence in relation to sustainability data and responsibilities will need to be distributed across different departments.
Not just reporting
A key factor will be that the sustainability department, the IR function and the finance function work closely together to ensure an integrated sustainability strategy.
CSRD is not just a reporting issue – it is a business-critical change.
The ability to manage CSRD will separate the winners from the losers, with those who adapt quickly and effectively gaining clear competitive advantages. Those who don’t take the issue seriously will inevitably be left behind.