'Sustainability disclosure only going to become more prevalent'

From January 1 2024 the framework will mandate around 50,000 businesses to report more comprehensive and detailed information on sustainability, placing the spotlight on availability of data for organisations and investors alike. 

With the aim of harmonising Europe-wide reporting on environmental, social and governance issues, the CSRD looks to promote comparability between players, including the structuring of non-financial reporting.

However, a flurry of new regulation has thrown the authority of the CSRD into question, namely the need for multiple frameworks and whether introducing another one marks a positive move for the industry. 

While the past few years has seen an influx of sustainability-related guidance – in what has been coined an ‘alphabet soup’ of acronyms – the CSRD must not be seen as just another restrictive and cumbersome form of reporting. 

By ensuring alignment with other EU sustainable finance initiatives, in particular the sustainable finance disclosure regulation and the EU taxonomy, the CSRD reduces the complexity and duplication of reporting requirements and ensures that companies disclose the information needed by investors and other financial market participants subject to the SFDR.

All companies subject to the CSRD must start collecting the data required to ensure they are on track once the regulation takes effect. 

The CSRD also looks to instil more confidence between companies and investors, given its ability to assess and integrate both short and long-term ESG risks into global strategy, reinforcing business sustainability and streamlining investor relations – a welcome shift that will help reduce incidents of inaccuracy for regulators.

Gearing up for the CSRD, the wider market is also revisiting regulation to tackle instances of greenwashing.

Notably, the Financial Conduct Authority recently announced its plans to impose a clampdown on references to sustainability made by asset managers, removing the free hand they currently have with labels to market their funds.

Taking effect from December 2024, the update will coincide with the first roster of businesses subject to the CSRD reporting guidelines and prompt a market shakeup.

What the industry does not need is another box-ticking exercise; it needs initiatives that prioritise global alignment, giving investors and stakeholders complete clarity of what they are dealing with.

If companies leverage the CSRD in a pragmatic way, they will gain a thorough understanding of their ESG impact and how this shapes business performance, meaning they can prioritise resources accordingly. 

The reliability and quality of the information businesses provide in their reporting is essential, given that it will be taken up by an ecosystem of downstream players, from portfolio management companies to insurers and banks. 

To ensure accuracy ahead of engaging with the CSRD, businesses should establish a comprehensive internal data reporting system with quality assurance processes, which will allow organisations to disclose transparently about the prioritisation of ESG topics, plans to minimise risks, and capture opportunities.

All companies subject to the CSRD must start collecting the data required to ensure they are on track once the regulation takes effect. 

While UK firms that meet the CSRD criteria likely already have experience in sustainability reporting given their size, the CSRD will also include the concept of double materiality, which assesses the impact of sustainability factors and reporting from a financial perspective, as well as the organisation’s impact on society and the environment.

In turn, this allows for the sufficient incorporation of ESG risks and opportunities into decision-making processes. 

Companies that have proactively established a robust ESG strategy using a double materiality assessment are gaining competitive advantages against their peers who are being reactive to changes in regulation and reporting requirements.

The demand for sustainability-related information will only continue to be an upward trend.

Regulators must also address ESG issues that seem less relevant to a company's valuation in the short term but are important to asset owners' long-term decision-making.

It is also important to note that the CSRD is a directive, meaning member states have leeway in defining sanctions for companies, but they must ensure that these are sufficiently effective and dissuasive to ensure real compliance.

A variety of sanctions can be imposed on businesses, depending on the severity of non-compliance, including financial penalties, administrative sanctions such as corrective orders, warnings and bans on certain activities, and legal proceedings which may result in criminal convictions.

Final thoughts

As reporting requirements become more stringent, the demand for sustainability-related information will only continue to be an upward trend.

Currently, only UK firms whose headquarters are outside of the EU will be required to report if a subsidiary firm is listed on an EU-regulated market. However, all firms, including the UK parent company and the subsidiary, will be required to report from 2030. 

UK firms that meet the CSRD criteria therefore tend to be large, listed companies, and likely have experience in sustainability reporting, meaning CSRD compliance does not present an expensive investment for them. The more significant challenge will be compliance with the double materiality requirement. 

Whether required to engage with the CSRD for 2024 or preparing for compliance in the coming years, businesses should first consider its fundamental purpose: to improve the way they disclose sustainability information to investors and the wider market.

It’s not a short-term consideration, but helps improve disclosures for the long term, which should encourage organisations to get ahead of the curve now. 

Tom Lawton is associate director at Longevity Partners