David Duffy is CEO and co-founder of the Corporate Governance Institute
The EU’s Corporate Sustainability Reporting Directive (CSRD) policy will soon come into effect – and it will revolutionise corporate responsibility. By enforcing the publication of a business’s environmental impact alongside their yearly financial data, the European Union has fixed a broken ESG (environmental, social and corporate governance) industry.
Last November, the European Parliament voted to pass the Corporate Sustainability Reporting Directive (CSRD). This new policy framework combines financial data, ESG information and assurance for the first time. The vote was a landslide, with 525 members voting in favour, with only 60 against and 28 abstaining. It will replace the Non-Financial Reporting Directive (NFRD).
In summary:
• ESG will become part of companies' annual reporting process;
• Sustainability will sit alongside finances;
• Far more data will need to be collected and analysed;
• All of this, including sustainability, will be audited.
Commissioner McGuinness said in his opening remarks of the European Parliament: “For the first time… we are putting sustainability reporting on an equal footing with financial reporting... We need accurate and reliable information to ensure that investments are being made towards a more sustainable future. Companies need the information to plan their transition paths. And investors need the information to have clarity about what they're investing in and to combat greenwashing.”
This will be one of the biggest shakeups of corporate responsibility and financial auditing in decades – and will, for the first time, enforce a standardised, holistic approach to Environment Social Governance. This will have far-reaching consequences for all companies and subsidiaries operating inside the EU as well as the investors and portfolios that look to put their money into businesses that are good for people and the planet.
The impact on ESG
Environmental, social and corporate governance is broken. Despite the vast sums of investments and businesses apparently high-scoring on ESG, many are not as holy as they seem. Portfolios can greenwash investments into coal mines with a small investment into carbon capture, and businesses can hide or simply lie about their impact on the environment. Together, this means a vast amount of money has found its way into funds and businesses that show little real ESG credibility.
A lack of holistic, sound and standardised policies allows this to happen, and businesses and fund managers have exploited this 'wild west' for profit and to mask insufficient reform. There has been no single definition of ESG, no body to judge or analyse data, and no government enforcement to punish those that have bent the truth. That is, until now.
With the introduction of CSRD, around 50,000 organisations will need to comply with the policy in a phased rollout.
• From financial year 2024, all organisations already within the scope of the NFRD (currently around 11,700) will need to comply.
• From financial year 2025, all 'large' organisations with a net turnover of €40 million or more, at least €20 million in assets, and 250-plus employees must comply.
• And from 1 January 2026, it will apply to listed small and medium-sized enterprises (SMEs).
This law’s ambition is only matched by its necessity. Businesses can no longer 'greenwash' in which they hide insufficient climate action behind misreporting, or ‘greenhush’, in which they do the same by not reporting action or impact at all. There will no longer be any ambiguity – and this should have an incredible impact on corporate sustainability.
A key issue for companies and boards, and one that I would argue has been a major cause of insufficient corporate sustainability, is a lack of education and engagement at the top. Many board members are not educated on the topics that matter, such as digital transformation, cybersecurity and the environment, and many are simply not engaged – they are members only because of who they are, and not what they know.
Although the EU is finally taking steps to better enforce climate action, this type of policy is still non-existent throughout most of the world. In its place, educating businesses is a second-best. This would ensure that company boards and directors understand the impact of the climate crisis and exhibit better governance when confronting it.