As the first group of companies start to get through ‘peak CSRD’, we’ve been speaking to practitioners about how they are navigating CSRD within their businesses. Top of mind has been how to most effectively leverage the regulation to make sure sustainability is taken seriously across the business, whilst avoiding the topic being pushed back into the compliance corner.
The early hopes were that CSRD could set a company up to respond to its strategic priorities. This goal can still be realised. But in the near-term, the realities of the complexity of the CSRD process have led many companies to become focused solely on the outcomes for disclosure.
1. Risk is dominating double materiality analyses, but where opportunity does come through it can lead to fruitful conversations
Whilst the spirit of double materiality suggests that the positives and negatives of impacts, risks and opportunities should be treated equally (whether for impact or financial materiality), the reality is that the standards and guidance just haven’t been set up that way.
We heard that the double materiality assessment and the subsequent outcomes are almost entirely risk-focused, with companies identifying far more negatives than opportunities.
Education is key throughout engagement to ensure that stakeholders understand what the CSRD process is requiring the business to do, as well as the implications of the decisions made. We’ve heard some examples of a double materiality assessment having to be re-completed when a CFO realised the implications on assurance costs, or a General Counsel engaged recognises the potential legal exposure that disclosure could create.
It is important that governance structures are well mapped and stress-tested and that frequent education sessions occur throughout the CSRD process, to ensure stakeholders - and especially executives - are engaged at each stage.
2. Climate transition planning provides an early model for using disclosure requirements to drive strategic shifts
While many practitioners have been pessimistic about the ability to move beyond CSRD disclosure into strategy, a few have started to point toward light at the end of the tunnel.
The most tangible examples come from those that raised the parallel processes around climate - first with TCFD, and more recently through climate transition planning (a requirement under CSRD, as well as multiple other regulatory regimes).
Practitioners emphasised the value in these processes, compared to CSRD, came from the fact they started with building a plan, rather than developing disclosures. This distinction, we heard, means that the starting point for working across the business is very different – engaging teams to work through how something can be achieved, rather than chasing teams for data in a way that feels disconnected from their role and solely a burden.
Adopting and applying this model to engagement with the business on CSRD can create a more positive response from internal stakeholders, shaping the discussion around how action on sustainability can contribute to their roles and their own priorities. This was the next big step for many of the leading businesses we’ve been speaking to.
3. Getting the governance process right is vital to achieve success
As practitioners come out the other side of CSRD, what we heard loud and clear is that this can’t continue to be solely a job for sustainability functions. Companies need to put thought into what a new governance structure should look like, and where responsibilities should lie for data collection, setting actions plans and targets, and managing the implementation of these.
Whilst many companies are turning to the finance function to integrate effective processes to collect and manage auditable data, there is much more variation in how companies are dividing roles to deliver on sustainability plans between core sustainability teams and other functions. Increasingly, we’re seeing companies opt for a more decentralised approach, where target-setting and accountability is led from within the business – albeit with sustainability teams continuing to play a key role.
All this adds up to more sustainability focus across the business than there ever has been before, but it needs setting up right to avoid sustainability becoming a compliance issue.
The challenges we’ve been hearing on CSRD still aren’t going away. But as leading practitioners are getting through the initial burden of CSRD, there are positive notes on how it can be leveraged to guide and deliver on your strategic priorities.
We’re constantly working with our clients on exactly these challenges and are always glad to be challenged or hear new perspectives.
Written in partnership with SB+CO.