David Duffy is CEO and Co-Founder of the Corporate Governance Institute
The European Union’s Corporate Sustainability Reporting Directive (CSRD) policy is coming into force – and it will revolutionize corporate responsibility. By mandating the disclosure of companies’ environmental impact and their annual financial figures, the EU has repaired a broken ESG (environmental, social and governance) industry.
Last November, European Parliament votes on corporate sustainability reporting directive (CSRD). For the first time, this new policy framework combines financial data, ESG information and assurances. The vote was overwhelming, with 525 members voting in favour, only 60 against and 28 abstentions. It will replace the Non-Financial Reporting Directive (NFRD).
• ESG will be part of the company’s annual reporting process;
• Sustainability will go hand in hand with finance;
• More data needs to be collected and analyzed;
• All of this, including sustainability, will be audited.
In his opening address to the European Parliament, Commissioner McGuinness said: “For the first time…we are putting sustainability reporting on the same footing as financial reporting…we need accurate and reliable information to ensure that investments are directed towards a more sustainable the future. Companies need this information to plan their transition paths. Investors need this information to know where they invest and combat greenwashing.”
It would be one of the biggest shakeups to corporate responsibility and financial auditing in decades – and for the first time implement a standardized, comprehensive approach to environmental and social governance. This will have far-reaching implications for all companies and subsidiaries operating within the EU, as well as for investors and investment portfolios looking to put money into businesses that do good for people and the planet.
Impact on ESG
Environmental, social and corporate governance is broken. While plenty of investments and companies clearly score high on ESG, many are not as sacred as they seem. Portfolios can launder their investment in coal mines with small investments in carbon capture, and companies can conceal or simply misreport their environmental impact. Taken together, this means that a lot of money has flowed into funds and companies with little real ESG credibility.
The lack of comprehensive, sound and standardized policies has allowed this to happen, with corporates and fund managers exploiting this “wild west” to profit and cover up the lack of reform. There is no single definition of ESG, no agency to judge or analyze the data, and no government enforcement to punish those who distort the facts. That is, until now.
As CSRD rolls out, approximately 50,000 organizations will need to implement the policy in phases.
• Beginning in FY2024, all organizations already in scope of the NFRD (currently approximately 11,700) are required to comply.
• From FY2025, all “large” organizations with a net turnover of EUR 40 million or more, assets of at least EUR 20 million and more than 250 employees must comply.
• From 1 January 2026, it will apply to listed small and medium enterprises (SMEs).
The law’s ambition is matched by its necessity. Companies can no longer “greenwash”, where they hide inadequate climate action behind false reporting, or “cover up”, where they do the same by not reporting actions or impacts at all. There will no longer be any ambiguity – which should have an incredible impact on the sustainability of the business.
A key problem for companies and boards, and what I believe to be one of the main reasons for the lack of corporate sustainability, is the lack of education and engagement at the top. Many board members are not educated on important topics such as digital transformation, cybersecurity, and the environment, and many are simply not involved—they are members because of who they are, not what they know.
While the EU has finally taken steps to better enforce climate action, such policies remain absent in much of the world. Instead, educational enterprise is secondary. This will ensure that corporate boards and directors understand the impact of the climate crisis and demonstrate better governance in response to it.