ESG in 2023: CSRD to put new pressures on EU businesses

European regulators have been increasingly vocal about the need for companies to not only act more sustainably but to report their actions and progress toward environmental, social, and governance (ESG) goals more meaningfully and transparently.

Last month, the European Union agreed to pass legislation to do just that.

The Corporate Sustainability Reporting Directive (CSRD) introduces more detailed reporting requirements for large and listed companies on nonfinancial areas such as environmental impacts, social rights, human rights, and corporate governance.

The directive ensures sustainability information will sit alongside financial information and be audited. As such, the initial compliance cost for companies could be significant as the amount of data that needs to be collected will likely increase, along with the number of people involved in the integrated reporting process.

The CSRD will apply to large companies already covered by the EU’s nonfinancial reporting directive from 2025 and other companies incrementally year-on-year through 2029, depending on their size and/or revenues. For the 2025 financial year, companies with a net turnover of 40 million euros (U.S. $42.5 million) or more, at least €20 million (U.S. $21.2 million) in assets, and 250-plus employees will need to report.

In total, around 50,000 organizations either based in the European Union or with EU-based subsidiaries will need to comply.

In a Nov. 9 speech, Mairead McGuinness, European commissioner for financial stability, financial services, and the capital markets union, said, “For the first time … we are putting sustainability reporting on an equal footing with financial reporting.”

She added the final text of the CSRD provides a good basis for alignment with the EU’s proposed Corporate Sustainability Due Diligence Directive, which is currently being negotiated between the European Commission, European Parliament, and the European Council and aims to further improve long-term corporate governance.

On Nov. 23, the European Financial Reporting Advisory Group, which provides technical advice to the European Commission, submitted its first draft CSRD standards, which the commission must review/amend before making them available for public consultation in the spring. Under the 12 standards, companies would be required to publish comprehensive and comparable information about their sustainability on everything from their environmental impact regarding pollution, climate change, and biodiversity to workers’ rights, communities affected by their operations, and the impact on customers.

“It is important for companies to not look at this as a burdensome compliance exercise but to embrace the core spirit of the standards and use this as an opportunity to assess the ESG risks to their own operations.”

Stuart Brown, ESG Spokesperson, Kreston Global

Sylvie Gallage-Alwis, partner at law firm Signature Litigation, said the directive “creates a great burden” on corporations because people still expect more information than companies are mandated to supply under the required standards. She warned even those companies that want to report as transparently as possible could be hit with litigation from nongovernmental organizations and campaign groups “because of alleged misrepresentation, greenwashing, or lack of transparency.”

Stuart Brown, ESG spokesperson at accounting network Kreston Global, said, “It is important for companies to not look at this as a burdensome compliance exercise but to embrace the core spirit of the standards and use this as an opportunity to assess the ESG risks to their own operations.”

Jane Cumisky, managing consultant for the United Kingdom and Ireland at consultancy Simply Sustainable, also said companies should look at the upside of the legislation.

“Preparing for CSRD compliance will force companies to revisit their strategies” and “may well identify important topics that have previously been overlooked in corporate strategy and risk management,” she said, adding, “Businesses can only make progress if they know where they stand and where they can improve.”

For example, she said, target setting, as prescribed by the regulation, “often kicks off a process of redesigning performance management, defining new key performance indicators, and setting up new systems and processes for measuring and monitoring progress.”

Cumisky warned, “Getting all the required elements in place will be a significant exercise for many companies.”

While many elements of the CSRD build on existing standards, including the Global Reporting Initiative framework and the Task Force on Climate-Related Financial Disclosures recommendations, much of the detail is still to be defined, noted Cumisky.

Experience suggests general, cross-industry standards need industry-specific guidance to account for sectoral differences, she said.

“Assessing the impacts of business activity will also be very different in sectors where assets are mostly intangible than in an industry that has substantial tangible assets,” she added. “There is also a steep learning curve in creating standards for linking sustainability performance metrics to accounting metrics like capital expenditure, operating expenditure, and turnover.”

Olga Rivas, sustainability specialist at corporate assurance provider LRQA, said one way for businesses to prepare for the changes is by completing a risk assessment to understand the readiness of existing processes.

“Businesses should ask themselves if they are prepared for the new directive, identifying gaps in policy, corporate governance, and business culture,” said Rivas. “If any major deficiencies are highlighted in the management system, a period of consolidation and maturity is vital. All team members must be engaged to enable successful collection, reporting, and verification of data.”