Today, as transparency and accountability become increasingly important, the European Union’s Corporate Sustainability Reporting Directive (CSRD) represents a significant step forward in the way companies disclose their sustainability practices. As the focus on environmental, social, and governance (ESG) factors intensifies, the CSRD sets out to transform sustainability reporting, requiring companies to provide reliable, comparable, and comprehensive information on their environmental and social impacts.
In the Gartner® report entitled “CSRD Requires CIOs to Strengthen ESG Data Management Strategies” Gartner says “The focus of this regulation signifies a new era of financial disclosure maturity for improved and holistic insights on company performance, risks, and opportunities. Consistent, accurate, and comprehensive company reporting leads to verifiable benchmarks that attract capital and investors by minimizing risk-to-return ratios.”1
In this post, I will outline the key aspects of the CSRD, its relationship to ESG and sustainability, and how logical data management is emerging as a powerful tool in “double materiality reporting,” a key aspect of the CSRD, helping companies to navigate the complexities of this new regulatory landscape.
What is the CSRD?
The CSRD, which is aimed at enhancing and standardizing sustainability reporting across the European Union, replaces the Non-Financial Reporting Directive (NFRD), which had been criticized for its lack of clarity, consistency, and enforceability. Like the EU’s General Data Protection Regulation (GDPR), it affects all countries that do business with the EU.
Key Features of the CSRD
Broadened Scope: The CSRD applies to a wider range of companies than its predecessor, including all large companies and listed small to medium-sized enterprises (SMEs). This means that many more companies across the EU will be subject to its requirements, compared to under the NFRD.
Detailed Reporting Requirements: With the CSRD, companies must report on a wide array of sustainability factors, including environmental impact, social and employee-related issues, human rights, and anti-corruption measures. This also includes information about how companies plan to manage these factors in the future.
Mandatory Audits: To increase the reliability of sustainability reports, the CSRD mandates external assurance of reported data.
Digital Tagging: The CSRD requires companies to digitally tag their reported data so that it is machine-readable and facilitates data collection, comparison, and analysis at an EU level.
CSRD and ESG: A Strong Interconnection
The CSRD is intrinsically linked to the broader concept of ESG. ESG has become a critical framework for assessing the sustainability and ethical impact of an investment in a company. The CSRD aims to strengthen this framework by mandating more comprehensive, standardized ESG reporting.
How CSRD Enhances ESG Reporting
Consistency and Comparability: The CSRD requires that companies across the EU report on ESG factors in a consistent manner, so stakeholders can more easily compare the performance of different companies.
Increased Transparency: By requiring detailed disclosure on a wide range of ESG factors, the CSRD increases transparency, helping investors and other stakeholders to understand how companies are managing their sustainability risks and opportunities.
Integration with Financial Reporting: The CSRD encourages the integration of ESG factors into financial reporting, highlighting the interconnection between financial performance and sustainability. This approach reflects the growing recognition that, in addition to drawing attention to the environment and our myriad societies, ESG issues can have significant financial implications.
The Role of Sustainability in the CSRD
Sustainability lies at the heart of the CSRD. The directive is not just about reporting on past performance but also about encouraging companies to think strategically about their future sustainability efforts. The CSRD aligns with the European Green Deal, which aims to make the EU climate-neutral by 2050, and other key EU initiatives focused on sustainable finance.
Sustainability Reporting under the CSRD
Environmental Impact: Companies must provide detailed information on their impact on the environment, including greenhouse gas emissions, resource consumption, and biodiversity. This includes both their direct operations and their value chains.
Social Responsibility: The CSRD requires companies to report on their social impact, including labor practices, community engagement, and human rights. This aligns with the growing expectation that companies should contribute positively to society.
Governance: Governance factors, such as board diversity, executive compensation, and anti-corruption measures, are also a key part of CSRD reporting. Good governance is seen as essential to achieving sustainability goals.
Double Materiality: A Key Concept in the CSRD
One of the most important aspects of the CSRD is its emphasis on “double materiality.” As Gartner says in the report, “The new regulations mandate that materiality be assessed through a “double materiality” lens, considering both financial and impact materiality.”1 This concept recognizes that companies must not only consider how sustainability issues affect their financial performance (financial materiality) but also how their operations impact the environment and society (impact materiality).
Understanding Double Materiality
Financial Materiality: This aspect focuses on how ESG issues can impact a company’s financial position. For example, a company that fails to address climate change may face increased costs or reduced revenues.
Impact Materiality: This considers the broader impact of a company’s operations on the environment and society. For instance, a company’s greenhouse gas emissions contribute to climate change, which in turn affects ecosystems and communities.
The double materiality approach under the CSRD requires companies to adopt a holistic view of their sustainability performance, addressing both their internal risks and their external impacts.
CSRD: Driving Global Sustainability Beyond EU Borders
The Corporate Sustainability Reporting Directive (CSRD), while directly applying to companies within the European Union, has far-reaching implications for businesses globally. Non-EU companies with significant operations in the EU, as well as those in the supply chains of EU firms, will be impacted by the CSRD’s stringent sustainability reporting requirements. This directive sets a new global benchmark for transparency and accountability in corporate sustainability, pushing companies worldwide to align their ESG practices with the high standards set by the EU, regardless of their geographic location. As a result, the CSRD is catalyzing a shift towards more comprehensive and consistent sustainability reporting on a global scale.
The Role of Logical Data Management in Double Materiality Reporting
As companies grapple with the complexities of double materiality reporting under the CSRD, the need for robust data management solutions becomes increasingly apparent. This is where logical data management comes into play.
What is Logical Data Management?
Unified Data Access: Logical data management enables companies to access and analyze data from multiple sources as if it were in a single location, without the need for data replication. This enables real-time access to data, streamlining the reporting process.
Seamless Integration: Companies often store ESG data in a variety of systems across different departments and geographies. Logical data management platforms enable seamless integration of these disparate data sources, providing a unified view of the company’s sustainability performance.
Enhanced Data Quality: By providing a consistent, up-to-date view of data, logical data management increases the accuracy and reliability of sustainability reports. This is particularly important given the CSRD’s requirement for external assurance of reported data.
Logical Data Management and Double Materiality
Comprehensive Reporting: Logical data management platforms enable companies to combine financial and non-financial data from multiple sources, facilitating the comprehensive reporting required under the double materiality framework. For example, a company can integrate data on its carbon emissions with financial data on energy costs, to understand both the financial and environmental implications of its energy use.
Real-Time Insights: With logical data management, companies can access real-time data, enabling them to continuously monitor their sustainability performance. This is crucial for identifying emerging risks and opportunities related to ESG factors.
Scalability: As companies grow and their data needs become more complex, logical data management provides the scalability needed to efficiently manage large volumes of data. This is especially important for multinational corporations that must report on sustainability across multiple regions and jurisdictions.
A Sustainable Future
The CSRD marks a significant shift in the way companies approach ESG and sustainability reporting. By mandating comprehensive, consistent, and comparable disclosures, the CSRD aims to enhance transparency and accountability, aligning corporate reporting with the EU’s broader sustainability goals. While the focus of the CSRD is the EU, it is setting a global standard for sustainability reporting, impacting companies worldwide to align their ESG practices with EU benchmarks, especially where companies trade globally or have global supply chains.
As companies navigate the complexities of double materiality reporting, logical data management is emerging as a powerful approach, enabling them to integrate and analyze data from multiple sources, so their sustainability reports are both comprehensive and reliable. In this new era of corporate sustainability, those that embrace innovative data management solutions will be better positioned to meet regulatory requirements and drive long-term value for their stakeholders.
Ultimately, companies will not only be able to comply with regulations but also to demonstrate their commitment to sustainability, enhancing their reputation and competitiveness in the market.
1Gartner, CSRD Requires CIOs to Strengthen ESG Data Management Strategies, By Lillian Oyen-Ustad, Melanie O’Brien, Janel Everly, Shanna Grafeld, 22 November 2023.
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