CSRD creates new era in sustainability reporting
06/12/22
Impactful changes by EU directive
PwC recently hosted a number of webinars on the Corporate Sustainability Reporting Directive (CSRD). The interest was huge: hundreds of participants wanted to learn more about the content and impact of this new EU directive. We asked two of our CSRD experts, both also webinar presenters, Alexander Spek and Kees-Jan de Vries, what changes are coming towards companies and how well prepared they actually are. 'Strictly speaking, the CSRD is about reporting, but its impact is much, much broader.'
From your practical experience and after hosting the webinars, what is your impression of how companies are dealing with the CSRD?
Kees-Jan de Vries: ‘I fear that there is a large group of companies that does not want to pay attention to this for the time being or that are still in the denial phase, given statements like "This is so extensive, this can't be true." On the other hand: the interest in the webinars was much greater than we expected. That does make it clear that there is a growing awareness of how vast and urgent this subject is, and that there is a huge need for information about it. What strikes me is that companies that are already working on it, it is mainly the level below the top that realizes what is coming. In conversations with them I hear that they still have difficulty getting the board to take notice.
Alexander Spek
How do you explain that?
Kees-Jan de Vries: 'Lack of time is undoubtedly a reason, because in order to understand how extensive and demanding the CSRD is, you really have to dive into the content. In addition, there is probably still the idea at the top that this is primarily a compliance exercise for which the specialists in finance or the sustainability department are responsible. But that completely ignores the strategic importance of the directive and the change in behavior implicitly demanded by the European Commission with this regulation'.
Alexander Spek: ‘The latter is relevant to emphasize. What is very special about the CSRD is that it is not just about reporting on current performance, as companies are used to for their financial statements. Although they do have to say something about prospects within their financial reporting, that can all be done in relatively general, qualitative terms. Under the CSRD, for each of the ESG topics, a company also needs to explain what its strategy is, what its concrete objectives, action plans and available resources are, what measurement method has been chosen, and so on.
Recently at PwC we had the sustainability director of a large Dutch company as a guest speaker on this topic. It is impressive when you hear what impact CSRD has on companies, on reward systems, on management information, on dealing with clients who set all kinds of goals, on employees and suppliers, and so on. The change processes such a company has to manage are ‘mind-boggling’! Strictly speaking, the CSRD is about reporting, but its impact is much, much broader.'
Can you already say that many companies will not be ready in time for the implementation of the CSRD?
Kees-Jan de Vries: 'Nobody will assume everything will already be perfectly implemented from 2024. But with many regulations of this kind, the 'best effort' principle is important. That means that you at least start with the most material things and can explain how you are going to improve. So you will have to be well on your way. What is important here is that the information that will soon be published has an audit opinion from an external auditor. Currently, the auditor only has to establish that what is in the annual report does not contradict with what he has learned from the annual audit. So that is going to be very different; soon he is going to have to determine that what is in the report is really correct. That's really going to cause a change of playing field.'
What Is the main hurdle on the road to CSRD compliance?
Alexander Spek: ‘To many companies, that will undoubtedly be the availability of information. In general, more than seventy percent of the information on the topics they have to start reporting on is still missing. This is true even for companies that already voluntarily report on ESG themes that are important to them and feel they are already doing well. We investigated this for a client with circularity as a strategic priority and have been working on it for years. Then it turns out that this client has less than 20 percent of the information needed. This kind of analysis really scares customers, and only then do their eyes open. There is also a lot of criticism about the amount of data requested. That remains enormous, even if companies only have to report on standards that are important to them.'
Do you share this criticism?
Alexander Spek: 'PwC has advocated a phased introduction: start with the introduction of the CSRD standards for climate, then leave it for two years and then move on. The risk of rapidly introducing new rules is that they are not robust, not well thought out. As a result you get - and we see this, for example, in the application of the EU Taxonomy by banks that Kees-Jan has researched - information from companies becoming incomparable and barely interpretable. This is ultimately necessary to create transparency about who is doing well and who isn’t, and that is an important success factor for achieving the ultimate goal.
To draw a comparison: the last major change in financial reporting was the introduction of IFRS 16, the new standard for lease accounting. After releasing the first consultation document, it took eight years before the final standard was in place. Also because there was enormous lobbying against it. But the process has been very thorough. Of course you can ask how thorough the process has been for the CSRD.'
How can start-up companies get started?
Alexander Spek: ‘A good starting point is a gap analysis of what is already in place around sustainability in terms of strategy, initiatives, reporting and what should soon be under the CSRD. This is not just a technical question about what exactly needs to be reported and what information is already available for that purpose. It is also, for example, about the resources needed and the extent to which processes and systems are in place. This does not necessarily have to be very detailed; you can make a rough analysis in a few weeks to determine what your starting point is. To do so, you have to look at the whole company. The advantage is that you can make different sections of the organization aware of what is coming at them and involve them in the changes in advance. What can also help is if you translate ESG into opportunities, and pull it away from the compliance angle where things only cost money. Creating opportunities creates a completely different energy. Then things start to flow naturally, whether you are intrinsically motivated to improve the world or not.'
What about your own motivation regarding working on the CSRD?
Kees-Jan de Vries: 'I think in general we all feel that we are already well engaged with ESG. However: are we really already taking the difficult decisions? Are we really siding with the planet when making investment decisions? According to Morningstar (independent investment researcher, ed.), about 50 percent of mutual funds are currently light green,’ but the big question is what has really changed underneath. I'm afraid that not that much has actually changed and that it mainly indicates that the classification 'light green' is actually so vague it could imply lots of things. I find that worrisome. Gradually we do have to start making those difficult decisions: we stop flying certain products, we stop flying, we stop working with certain customers. I do hope that we are almost at the point of making those difficult decisions, and I think that good reporting can help provide the insight to eventually get there.'
Alexander Spek: ‘Changes are indeed not happening fast enough. You can criticize the diligence around the CSRD, but ultimately it is governments and policy makers who determine through laws and regulations how quickly we can create a sustainable economy. An issue as important as this, speed outweighs diligence. If we were to argue about the directive for years to come, we simply would not achieve the climate objectives for 2050.
To draw a comparison with IFRS again: its introduction was also widely criticized, no one actually wanted it and the bill was passed on to individual companies. But the higher goal was to realize a stronger and more competitive European economy. Scientific research shows this goal has been achieved because IFRS has reduced the cost of capital for European companies.
The mechanism with the CSRD is similar. The European Union aims to become the world's first climate-neutral economic power in the belief that it will greatly benefit us. I do understand that a company in the midst of CSRD implementation and an ESG transformation may not have that bigger picture in mind. But I find the idea that by working to improve ESG reporting you can serve a higher purpose very inspiring and motivating.’
Kees-Jan de Vries
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