The Corporate Sustainability Reporting Directive (CSRD) was introduced in Europe at the beginning of the year. It replaced the Non-Financial Reporting Directive (NFRD) and bolstered the scope of reporting, with the aim of enhancing transparency and comparability of ESG data across the EU so stakeholders can easily evaluate the sustainability performance of companies.
One of the biggest introductions to the regulation was a selection of new reporting standards and requirements. These include double materiality, requiring firms to assess both the impact materiality and financial materiality of operations, and the European Sustainability Reporting Standards (ESRS), which sets out standards for ESG data.
CSRD is a complex regulation that requires firms to report their sustainability data that spans more than 1,000 metrics. With the initial deadline set for the start of 2025, firms have been racing to get their systems ready for the first set of requirements. This has led to an explosion of guides and new products that are designed to help firms navigate the regulation. However, reaching compliance with CSRD is not simple and there are many pitfalls that can pose issues for firms. Olivia Babuty, Head of Advisory at ESG reporting platform Greenomy, highlighted some of the biggest mistakes firms should be on the lookout for.
The common pitfalls
Babuty highlighted a number of common pitfalls firms are making in relation to CSRD. One of the biggest is excluding the c-level/board members from the process. She noted that having active support from the board or management will be critical to the success of implementation.
“Without their clear engagement, it is likely that some issues addressed will be deprioritised across the organisation. Given the specific timeframe required to complete tasks related to the CSRD, securing such support is crucial for driving progress.” As such, Babuty recommends management and the board are regularly updated across the various stages of the process. This will enhance internal engagement and facilitate data gathering.
Another major stumbling block in CSRD compliance efforts is the failure to start with a clear plan. Firms should start their CSRD compliance effort by identifying the correct stakeholders and training them as required, Babuty explained. Not only will this help to ensure a successful implementation of CSRD, but can help divide the burden of work. “This approach serves to reduce the risks of delays and frustrations that can occur when data is solicited from inappropriate stakeholders.”
Tying into this is the final major mistake firms make, lacking a monthly plan. Babuty explained, “For many assigned to the task, CSRD is not their primary responsibility. Therefore, it is crucial to plan and schedule time in advance for gathering the data needed. By doing so, they can set monthly goals for data collection, ensuring the project progresses smoothly and efficiently, and data is available and of quality by the time of reporting.”
Challenges down the horizon
Getting workflows in place and compliant with CSRD is only the beginning. Firms will likely face several challenges down the line, whether it is updates to the regulation, a change in operation or the integration of new technology.
Keeping up with evolving regulations at both the EU and global levels will be one of the biggest challenges firms face in the coming years, Babuty said. To manage this, firms will need continuous monitoring and adaptation. “This can be achieved by hiring experts or building the knowledge of multiple employees across the organisation, such as HR managers focusing on social topics, setting up targets and managing them. This creates ownership amongst the teams. Providing periodic training to internal teams can ensure they remain current with these changes. Overall, businesses must recognise that sustainability is now an integral part of their operations and should thus put the means in place to ease the process for their employees.”
Another notable hurdle firms will need to navigate is the rising costs of compliance. Whenever further ESG data will be required from companies, it will impose some time and resources to reach and maintain compliance. This is especially the case for smaller companies or those with less mature sustainability practices, she said. As such, firms need to find a robust tool that can streamline the process which, in turn, reduces the need for revisions or additional costs down the line. If firms organise their resources and technologies from the start, the future will be much smoother.
Babuty highlighted two more significant challenges firms will face long-term planning and adoption of new technologies. For the former, she stated that balancing short-term financial performance and long-term sustainability goals will be difficult for companies that do not assess and seize the opportunities arising from ESG. Firms will need to implement strategies that can align business needs with sustainability objectives. This will be a key differentiator on the market in the years to come and companies who do not integrate ESG will pay hire costs and reputational damages in the long run. As for adopting new technologies, finding the right tools that fit the business system will be vital for the successful implementation of these new processes and will significantly reduce the burden on employees. .
On a concluding note, Babuty offered some advice for firms looking to avoid the pitfalls and challenges presented by CSRD. She said, “Embracing sustainability and adopting the right technologies to gather and manage ESG data and KPIs. As a CEO, you should recognise that sustainability is here to stay and needs to be embedded into the core of your business strategy. This mindset will help drive all subsequent actions and initiatives and will attract talents to your company. Investing in technology to enhance data collection, analysis, and reporting processes from the start of your process will help your employees in understanding and taking ownership of this work.
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