CSRD IS NUDGING US TO A MORE TRANSPARENT FUTURE
The EU’s new ESG legislation strives to make way for the sexy companies.
Am I the only one out there who is actually excited about the new CSRD non-financial reporting requirements? I am a broken record, talking about CSRD everywhere I go, (though usually met with yawns or blank stares). True, ESG legislation isn’t exactly a sexy topic. But regulation, reporting and red tape are not what I see. I have been looking beyond the drudge toward a future where everyone will share the same facts. Where we will all see things through the same lens. Where easy-to-read color-coded charts from identical templates clearly separate the good guys from the bad guys to answer the question: “What are the best companies to work for?”.
Let me offer a simplified overview of CSRD and how I think this will rock our world in the not-too-distant future.
The Corporate Sustainability Reporting Directive (CSRD) was announced as part of the European Green Deal. It establishes reporting requirements for companies doing business in the EU.
The CSRD requires that companies disclose sustainability issues from a "double materiality" perspective. This means that they are obliged to audit and calculate not only the harm they buy (carbon footprint of their suppliers), but also the harm they produce (their own impact on the world). All actions will be recorded, calculated, priced and audited. It’s a massive undertaking (tons of red tape – the Americans will hate it).
CSRD accomplishes two things: it introduces more detailed reporting requirements around ESG metrics, and it specifies the format for the reported information. All reports will be harmonized and will be easy to navigate because the EU is requiring digital tags on the data. These reports will be issued annually with the companies’ annual reports, and they will feed into a single access point. Thanks to this harmonized format, we mere mortals will be able to compare companies across multiple metrics.
What are those metrics? Well, the CSRD covers ESG broadly, including topics like climate, biodiversity, social, workforce, human rights, D&I. Here is an overview of what is to be measured and reported:
Environmental factors ranging from climate change adaptation and mitigation plans (including the three scopes of greenhouse gas emission) to pollution, biodiversity and ecosystem, water and marine resources, and resource use and the circular economy.
Social and human rights factors, including gender equality, diversity and inclusion, work-life balance and respect for human rights.
Governance factors, including business ethics and corporate culture, internal control and risk management system, and lobby activities
And remember, double materiality means the actions of company suppliers as well as their own. Figure 1 from watershed consulting provides a general overview.
And lest you believe this is only an EU phenomenon, global companies will also be subject to this reporting requirement as of a certain size and if they do business in the EU.
What is the percentage of female managers at Blackrock? We will know.
How polluting are Google’s servers? We will know.
What are Meta's customer demographics? We will know.
What is the precise carbon footprint from Amazon’s shipping?
Tesla’s lithium batteries and their impact on biodiversity?
Nutella’s consumption of palm oil and subsequent impact on the rainforest?
We. Will. Finally. Know.
This new reporting requirement will be applied to over 50,000 companies—many of which will be required to report their full carbon emissions for the first time. The new regulations also cover an estimated 10,000 non-EU companies with significant operations in Europe. As stated by GreenBiz.com: “the CSRD is becoming the de facto sustainability disclosure regulation for large global companies; as companies with significant business in Europe will have to adhere to the rules Europe sets down.”
The CSRD became law on 5 January 2023 and its application will be rolled out in four stages from 2024 annual reports through 2027, rolling out to companies based on size and presence. For most firms, it will be the first time they have had to divulge any of their workforce information in such a precise manner. And most companies will be measuring their climate impact for the very first time.
The Impact – Nudging some off the dance floor
My hope is that this legislation will be used not only for financial investments, but also by the population in general. For the first time we will all be able to compare company performance across multiple areas of ESG using the same tools and judging the same KPI's.
If you are a new graduate looking for a great place to work, just pull up the digital chart to create your top 20 list.
Feeling insecure about your gender identity or LGBTQ status, consult the dashboard to see which companies are most inclusive.
As a consumer of personal care products wanting to make smart choices for your family, compare brands before buying.
We may even know precisely how much petroleum Zara used in that one dress, how many acres of rainforest were destroyed to produce our favorite body lotion, and the percentage of pesticides per Monsanto soy seed.
UN ministers and World Bank executives will see clearly who the demons are in terms of pollution, inequality, human rights and climate impact.
There will be apps created that allow you to consult these metrics easily, from employee, consumer and investor standpoint.
Companies that report poor scores will have the chance to demonstrate clearly their initiatives in improvements. Other companies will no doubt minimize their scorecard and not rise to the occasion. This is where the nudge theory of behavioral science will slowly take hold, pushing the “bad guys” off the dance floor to leave us with only the sexy people.
Some helpful links:
disclaimer: This is a non-sponsored post, companies listed are from own personal research. Love for salt-n-pepa from own personal GenX experience (trying to make CSRD sound sexy and the dance floor image kept creeping back into my mind). I did ask AI to help draft the post but was not impressed with the results. For now, this is 100% human-generated.