Beyond compliance: Leveraging CSRD's delay for sustainable business evolution
The two-year delay of CSRD reporting for specific sectors provides an opportunity for authentic sustainability transformation.
Members of the European Parliament have recently endorsed a two-year postponement for developing sustainability reporting requirements in specific sectors[1] under the Corporate Sustainability Reporting Directive (CSRD). This directive will force European companies to elevate their sustainable and responsible business value-creation efforts. At first glance, this delay might appear significant and potentially detrimental, but in reality, it could be the catalyst for a faster and more profound impact on a grand scale within prioritised sectors.
I think we should begin by setting the record straight. The first European Sustainability Reporting Standards (ESRS)[2] batch has already been approved and implemented. This delay does not affect these standards, which apply to companies meeting two conditions: €50 million in net turnover, €25 million in assets, or 250 employees. The first wave of companies must comply with these standards as early as the 2024 reporting period. The delay addresses the creation of predefined sets of qualitative and quantitative disclosures tailored to specific sectors. The sectors initially affected by this delay include oil and gas, mining, road transport, food, automotive, agriculture, energy production, and textiles. It's important to note that this delay does not exempt these sectors from sustainability reporting obligations under the CSRD; it simply means that comparability on specific sustainability topics may be temporarily hindered until the European Financial Reporting Advisory Group (EFRAG) catches up and releases sector-specific standards with the two-year delay.
The first set of standards that remains in force for CSRD-affected companies requires them to disclose their business strategy, business model, stakeholder perspectives, and a comprehensive view of their value chain and ecosystem. They must also conduct a thorough materiality assessment, considering the impacts of their business model, operations, processes, relationships, and associated business risks and opportunities. Additionally, companies must articulate scientifically supported goals and targets while providing transparency on how they plan to achieve them and evidence of actions leading to measurable performance improvements over time.
Now, let's revisit why this delay is a good move. Compliance exercises have traditionally been associated with high costs, but transforming businesses into purpose-driven, sustainable models that create value responsibly is not merely a compliance exercise. Companies adopting this approach will fast witness their profit shrink, cost for capital skyrocket, their social license to operate diminish, and their talent pool dwindle.
I firmly believe that this delay allows businesses to rebuild their foundations. It allows them to foster a genuine sense of purpose and connect with their employees, creating meaningful work environments essential for effective transformation. Encouraging active participation and sustainability engagement at all levels of the organisation, from the Board of Directors and executives to managers, teams, and individuals in all corners, will be crucial. Activating employees and external stakeholders will also provide a compelling business case for sustainable transformation, demonstrating that stakeholder theory outperforms short-termism.
While the delay may temporarily impede benchmarking and comparison within sectors, it offers the chance to embark on an authentic sustainability journey from the outset rather than rushing into extensive sets of quantifiable metrics and data. It advocates against applying a continuous improvement model to something lacking the conditions for true sustainability.
It's high time that companies take sustainability seriously and embed it at the core of their operations. They must present a compelling business case to investors and Boards of Directors while empowering their workforce to achieve meaningful and lasting impact on a large scale and at an accelerated pace. By adopting this approach, the CSRD will cease to be a mere compliance exercise and be seen as a powerful catalyst for effective transformation. It will pave the way for business value creation that benefits all stakeholders and safeguards the rights and resources future generations will require.
Resources
[1] Amending Directive 2013/34/EU as regards the time limits for the adoption of sustainability reporting standards for certain sectors and for certain third-country undertakings, Committee on Legal Affairs, European Parliament, 15 December 2023
[2] The first set of ESRS: The journey from PTF to delegated act, EFRAG, 31 July 2023
