Why the new CSRD is breaking down the walls between ESG and finance
Financial reporting has historically been an arduous and time-consuming task, due to the many different factors involved. Companies must be able to provide stakeholders with an accurate depiction of finances, including revenues, expenses, profits, capital, and cash flow.
It’s not surprising that proposed changes in regulations will have an impact on internal processes. The new proposals for the Corporate Sustainability Reporting Directive (CSRD) builds on the existing Non-Financial Reporting Directive (NFRD) and will apply to all large companies and all listed companies in the EU. This means an increase from 11,000 who were subject to existing requirements, to nearly 50,000 that will need to follow detailed EU sustainability reporting standards.
As these changes come into play, sustainability is moving to the top of investors’ priority lists and regulation is directing investors to care, or at least make sure that the sustainability of a fund is disclosed. In addition, they must ensure that the information and funds are assessed against a common set of criteria (for example, EU sustainable finance, in particular the EU Taxonomy and associated SFDR).
As a result, how a company performs against environmental, social and corporate governance (ESG) factors now has a direct effect on whether funding can be secured. Companies who fail to get this right may face challenges accessing capital.
Taking a closer look at CRSD
Social movements and increasing concerns around climate change have driven much introspection within the investor community. More emphasis has been placed on individual responsibility, and investors want to be sure that their investment is aligned with their morals. In fact, in a recent survey conducted by Workiva, 66% of all respondents in France wanted to know whether a company lived up to their social and moral beliefs before investing.
As the needs of investors have changed, it’s evident that the existing NFRD was no longer sufficient. Following three years of consultations, market pressure and political discourse, the CRSD has been proposed to enhance and strengthen the measures already in place. The new directive seeks to emphasise that the term ‘non-financial’ is technically incorrect. Sustainability factors have a financial impact on the business. As such, both sustainability and financial factors will be considered together as part of the organisation’s Annual Financial Report.
There are also practical changes to the way the information is prepared. Companies will now be required to digitally tag reported information (powered by Inline XBRL) to ensure that it is machine-readable, standardised and comparable. This also has the benefit of speeding the data to the users. In addition, there is an assurance obligation with respect to the sustainability disclosures, ensuring that audit professionals will be required to confirm the validity and accuracy of reviewed information.
A challenge arises
Historically the production of the financial statement has sat in the office of the CFO, but ESG data encompasses a wide range of factors which may reside across different departments outside of finance. As a result, this information doesn’t sit as part of a repository, but is a critical part of the management of sustainability operations. More information from across the company will be required, both to align operations with a sustainability strategy and to fulfil disclosure requirements in areas such as carbon footprint and employee demographics.
Organisations need to come up with a clear approach to ensure that their reporting processes are well-managed end-to-end and produce the right format to remain compliant. This will be beneficial with the rising investor demand for good quality ESG data due to the recent Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy coming into force.
Breaking down the internal siloes to achieve success
The first step towards compliance is performing a frank assessment of what is in place and what areas need attention. Alignment with the existing finance processes will give companies the opportunity to use the experience they already have to help bring the ESG data and controls up to speed.
This approach will result in shared oversight of all operations and joint reporting will break down the walls between finance and sustainability, which will ultimately help streamline operations.
This is where technology can be implemented to support the organisation’s intentions. Automation can be used to accurately and efficiently collect and integrate data from different departments across the business. From this, the data can be analysed to determine the materiality, before being collated into the right easily-audited format.
A future-proofed solution
Interest in environmental, social and governance (ESG) issues will only continue to intensify. Investors want to be sure that the companies they invest in are genuinely committed to sustainable practices, and unlikely to have a detrimental impact on the planet and society. Large investors already see the importance of valuing a company based on a broader set of standards, as these are inextricably linked to current and future performance.
The new regulations will force organisations to be more transparent with their reporting, enabling would-be investors to have a clear understanding of their practices and intentions. Additionally, this will allow them to compare and contrast with other companies within industries. It’s critical for organisations to get their houses in order, by streamlining processes now to prevent losing out on future investments.
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