New EU sustainability reporting requirement offers significant opportunities

A new corporate sustainability reporting directive (CSRD) will enter into force for the 2024 fiscal reporting year. The strengthened and broadened reporting expectation for businesses operating in the EU may be weighing on the to-do lists for 2023, but CSRD should be far more than just an intense tick-box exercise.

What is CSRD?
From 2024, CSRD replaces and deepens the Non-Financial Reporting Directive. More companies will be required to disclose more on their environment, social and governance (ESG) situation, from business model, strategies and targets to policies, risks, and due diligence.

EU Minister for Industry and Trade Jozef Síkela said the directive “will make more businesses accountable for their impact on society.” It seeks to do that by increasing transparency and comparability across and within industries, through preventing divergent sustainability reporting standards.

Double Materiality Assessment
Double materiality is at the heart of CSRD: an aligned assessment of social and/or environmental and financial materiality, both actual and potential impact.

This assessment goes beyond the operations, products, and services of the reporting company; it extends to both the upstream and downstream value chain, with potentially far-reaching consequences.

But CSRD offers more than just a greater series of boxes to be ticked. Instead, there is a chance to fully reflect on existing ESG and financial strategies. Are the right, financially material ESG topics being prioritised? Are values and business operations serving internal and external stakeholders? What is the opportunity for incremental value creation, leveraging data and analytics developed for CSRD compliance?

This might be a chance to re-confirm and double down on an ESG strategy that’s fit for the future, or an opportunity to push the reset button.

Driving value from ESG
Whether CSRD assessment leads to a strategic overhaul or not, there is a growing potential to create value across four key areas:

1. Get ahead of consumers
In a 2020 UK survey, 79% of consumers said they were changing purchasing preferences based on ESG impact and 59% were willing to spend more for a sustainable product. Over 75% of the emerging generation of consumers, aged 10-25, choose sustainability over brand.

Changing purchasing attitudes extends to B2B buyers. Another 2022 global survey focusing on B2B revealed that 67% of procurement leaders consider improving diversity, equality, and inclusion (DEI) as a priority and 62% prioritise environmental sustainability.

Evolving consumer and buyer behaviour supports the opportunity in CSRD to align ESG with the actual and potential impact on stakeholders, with its broadest definition.

2. Create shared value with suppliers
Under CSRD, company compliance goes beyond owned output and operations into the supply chain, presenting an opportunity to see where shared value can be fostered with key suppliers.

Scope 3 emissions average 70% of a company’s total carbon footprint, but can run as high as 98-99%, with supply chain emissions the overwhelmingly largest Scope 3 factor in all industries (an exception being automotive OEMs where vehicle use dominates Scope 3, followed by supply chain emissions). Working with suppliers to reduce these emissions is the only way to achieve net zero and must be a key business priority from the CSRD perspective. In many cases, this requires companies to consider a shift in gear in reporting and tackling Scope 3 emissions.

The value opportunity comes from closer partnerships that enhance forecasts, risk management and resilience; that also accelerates new product development to better meet financial, social, and environmental goals, while delivering operational efficiency and cost reduction.

3. Strengthen the financial position
Shareholders and investors are increasingly rewarding ESG action. CSRD should give more confidence to financing stakeholders where transparency of assessment and actions are well-defined.

In a review of 1,000+ corporate studies between 2015-2020, 58% had a positive ESG-financial performance relationship. Benefits included improved operational efficiencies, stock performance, risk management, and innovation.

According to Morningstar, the top 50 US-listed companies returned 33.3% on an ESG score in 2021 vs the 25% returned by the broader market. Furthermore, companies in both developed and emerging markets with high ESG scores enjoyed cheaper capital according to an MSCI four-year study.

4. Attract and retain talent whilst improving productivity 
There is growing evidence to support the idea that attracting and retaining the most motivated staff improves productivity and performance. On financial performance, for example, companies that made Fortune’s ‘100 Best Companies to Work For’ list generated 2.3-3.8% higher stock returns per year than their peers between 1981 to 2011.

How does ESG play into this talent strategy? Rather than passing by with the initial fallout from the pandemic, the “Great Resignation” persists. A robust ESG strategy can reverse the declining workforce engagement trend. The real sense of purpose instilled by strong ESG action can enhance employee motivation and productivity. Indeed, a 2021 US Survey shows that 93% of employees who strongly believe their company is making a positive impact were likely to stay in their current role.

This is also true for attracting new recruits. Global recruitment firm Randstad’s 2022 Workmonitor report highlighted that 41% of respondents wouldn’t accept a job with an employer who was unwilling to make efforts to improve their diversity and equity record, while over 50% surveyed would refuse to join an organisation whose environmental values don’t align with their own.

It’s a talent strategy factor that business leaders are starting to accept; in the same report, 28% said it was one of the main benefits of building ESG into corporate strategy. That will only grow as the generations born since 1980 (Millennials) and around 2000 (Gen Z) – who are even more interested in environmental and social impact – become the majority in global workforces.

Finding the value in CSRD
The roll-out of CSRD towards the 2024 reporting window offers opportunities to closely align ESG with corporate strategy and realise the value that can be created across an organisation’s activities, from meeting emerging consumer and employee needs to strategic supply chain collaboration and strengthened financing.

At a time when short-term survival and careful navigation of the macroeconomic headwinds are taking an understandably large share of leadership focus, CSRD will provide a valuable impetus for companies to keep ESG high on the boardroom agenda and ultimately reap the diverse benefits that strong performance in this area will bring for many years to come.