CSRD has been a headache, but it helps business do better; let’s not lose our hard-won momentum

Two years ago, most people had never heard of the Corporate Sustainability Reporting Directive (CSRD). When they did, the first thing most were struck by was the number 1100. This is the number of data points on which a company within scope of CSRD might have to disclose information – covering everything from incentive schemes for senior leaders to use of microplastics – under the CSRD’s accompanying European Sustainability Reporting Standards (ESRS).

Sustainability managers looked at the standards, looked at their often small and already-stretched teams, and wondered how they were even going to start.

However, companies are adept at managing change projects and at finding the means to meet formal regulatory requirements. Within a few months many had set up inter-departmental working groups to approach CSRD as an organisation-wide project. This formalised cross-functional dialogue on sustainability, bringing together leads of Environmental Management, Finance, Risk, Procurement, People and more – and began to give meaning to the ideal that sustainability, like health and safety, should be everyone’s job.

CEOs and Boards got more involved as they understood that sustainability reporting would now have to be signed off with the same level of oversight and accountability given to financial reporting. Many Sustainability Managers realised they didn’t have to entirely reinvent the wheel, but that existing financial data systems and practices such as Enterprise Risk Management could be adapted in service of CSRD.

As companies have interpreted and applied the Directive, they have begun to see improvement in multiple areas – understanding of risks and opportunities, resilience thinking, understanding of supply chain conditions and development of clearer pathways to reduce carbon emissions and waste.

Signs are that, once through the pain barrier, CSRD will help to integrate sustainability into business planning and decision-making and, by extension, lead to better environmental and social outcomes. With a critical mass of companies in each European country participating in a common framework, there should be coalescence around agreed good practice, development of pooled data sources and common initiatives, and other practices that give the Directive real-world power.

Still, corporate teams have shed blood, sweat and tears to get their first CSRD-compliant reports prepared for this year, comforted by the knowledge that it was never going to be this hard again. With the tracks laid, future iterations would be easier, continuous improvements could be made, CSRD would simply become the new way of doing things.

For some companies in Ireland, it was as they put the finishing touches to their 2024 reports that details emerged of the “Omnibus Proposals”, two European Commission proposals to amend the CSRD and its sister Corporate Sustainability Due Diligence Directive.

A streamlining of requirements had been expected. Undoubtedly the CSRD has been over-engineered and bogged down in excessively jargon-filled guidance. It could also be better aligned with other Directives supporting the EU Green Deal framework.

However, few were expecting the scale of the backtracking proposed by the Omnibus. The proposal to delay implementation of the CSRD to 2028 has already been approved but the others must go through the EU Parliamentary process. If the remaining changes are adopted, 80% of companies that were in scope for the CSRD will fall out. Only those with over 1000 employees would still need to comply – a fraction of business in Ireland.

A core idea behind the CSRD was that compliance would have critical mass, driving up sectoral standards and allowing companies to compete meaningfully on sustainability performance. Under the changes, large companies are potentially disadvantaged – required to make full disclosures and held to a different standard of scrutiny than smaller competitors. It is often larger, better resourced companies that are most willing to support capacity development among their SME suppliers – something that will be disincentivised if the cascade of CSRD-related workstreams now stops.

Several viable options would allow retention of CSRD at its original scale while reducing the burden on companies.

• Focus on the spirit and purpose of the Directive rather than its technical letter. Instead of taking most companies out of scope, options such as a longer phase-in or simplified assurance requirements should be considered instead.
• Develop sector-specific standards. This has mistakenly been perceived as another layer of bureaucracy and would be discarded under the Omnibus proposals. However, accessible sector-specific standards would simplify compliance and make sectoral data far more useful by removing subjectivity and the burden of interpretation.
• Rapidly step up government guidance and advice to business in support of meeting national climate targets. Access to value chain data is a prerequisite for companies to meet European and national carbon reduction targets. Working through cycles of CSRD disclosure will lead to rapid improvements in data availability and quality, and in streamlining requests to SMEs. Government support can help improve alignment of data demands within sectors and create consolidated data platforms.

The speed with which the European Commission has shed its interest in sustainability in favour of a narrow – and unsustainable – focus on short-term competitiveness is alarming. Sustainability is not a distraction, it is the basis of any chance Europe has to thrive; future prosperity will not be achieved by replicating old models.

The transition to truly sustainable business is the most challenging change-management initiative a company will ever implement, and one of the greatest collective challenges of our time. The CSRD is imperfect but it’s here, it’s been heavily invested in already and it can be made to work. If it’s undermined now, Europe – and Ireland – will not easily re-find the momentum, credibility and clear guiderails for long-term strategic planning and action.

Laura Morrison, Senior Adviser.

For more fulsome analysis and critique, read it here.