September 3, 2024 News No Comments

In recent years, sustainability reporting has become increasingly central to companies globally. This phenomenon is fueled by increasing stakeholder awareness of Environmental, Social and Governance (ESG) issues and the need for companies to demonstrate a concrete commitment to sustainable development.

The ESG Framework a first step towards sustainability

Historically, the ESG (Environmental, Social, and Governance) framework has been the main reference point for sustainability reporting. It is based on three fundamental pillars:

  • Environmental: This includes the management of natural resources, reducing pollution, combating climate change and protecting biodiversity. Companies are evaluated on their ability to adopt environmental sustainability practices, such as the use of renewable energy, energy efficiency and reduction of carbon emissions.
  • Social: Covers company practices related to human rights, working conditions, diversity and inclusion, and relations with local communities. Companies are incentivized to improve working conditions, promote gender equality and contribute positively to the communities in which they operate.
  • Governance: This refers to corporate management structure, transparency, ethics and internal control practices. Companies are evaluated on their transparency in governance practices, management of conflicts of interest and adoption of ethical and compliance practices.

While the adoption of the ESG framework represented a significant step towards corporate sustainability, it also showed some limitations, including the lack of specificity and consistency in the information provided by companies. To address the critical issues of the ESG framework, the European Union adopted the Corporate Sustainability Reporting Directive (CSRD) in 2022.

This directive introduces new reporting requirements for large companies and companies listed on European regulated markets, with the aim of improving the transparency and comparability of corporate sustainability reporting.

Main Innovations of CSRD

  1. Standardisation and Mandatory: CSRD establishes mandatory and standardized reporting requirements for companies, ensuring greater consistency and comparability of information. Unlike the ESG framework, which is often voluntary and variable, CSRD imposes a clear and binding framework.
  2. Broadened Scope: CSRD broadens the scope of application compared to ESG to include listed small and medium-sized enterprises (SMEs). This increase in the number of companies subject to reporting requirements reflects a more inclusive and comprehensive approach to corporate sustainability.
  3. Integration of Financial and Non-Financial Information: CSRD promotes a close integration of financial and non-financial information, allowing investors and stakeholders to gain a more holistic view of company performance. This integrated approach facilitates a more complete and accurate assessment of companies’ sustainability capabilities.
  4. Focus on Concrete and Measurable Data: CSRD requires companies to provide concrete and measurable data on their environmental, social and governance impacts. This data-driven approach facilitates a more objective and transparent assessment of sustainability performance.

Motivations for the Transition to CSRD

The transition from the ESG framework to the Corporate Sustainability Reporting Directive (CSRD) is driven by several strategic motivations.

CSRD aims to ensure greater transparency and trust in sustainability reporting through standardisation that improves clarity of information for investors and stakeholders. This new approach also allows for better comparability of sustainability performance across companies and sectors, helping investors to make more informed choices.

In addition, CSRD supports more effective management of sustainability related risks and opportunities, providing companies with tools to improve their resilience. Finally, through clear and binding requirements, CSRD ensures compliance with European regulations, avoiding sanctions and enhancing corporate reputation.

Challenges of CSRD Implementation

The implementation of CSRD requires a significant commitment from companies, both in terms of resources and skills. The main challenges include:

  1. Data Collection and Management: companies must be able to identify and collect reliable and accurate ESG data and integrate it into a structured and transparent reporting process.
  2. Technical and Organizational Capabilities: CSRD implementation requires advanced technical skills and strong organizational capacity, including staff training and the adoption of new data management technologies.
  3. Stakeholder Engagement: It is essential to involve internal and external stakeholders in the reporting process, ensuring that their expectations and concerns are adequately considered and addressed.

Companies that comply with CSRD will not only improve their reputation and attractiveness to investors 💼📈 but will also be better prepared to face challenges 🌍 and seize opportunities 🌟 related to sustainability. However, the successful implementation of CSRD will depend on companies’ ability to take a proactive and integrated 🌱🔄 approach to sustainability management, investing in the resources and skills needed to meet new 🏆📚 regulatory requirements.

This change not only benefits investors and stakeholders 🤝 but also contributes to a more sustainable and resilient 🌿💪 economy.

Alessia Biondo

Circular Team

References

·  Corporate Sustainability Reporting Directive (CSRD)

·  Environmental, social, and governance (ESG)

Written by Giuseppe Montalbano