January 10, 2024

Part Two: CSRD: Challenges, Risks & Pitfalls

Introduction

This is the second article in our series about CSRD. In our first article, we provided an introduction to CSRD, setting the context for the directive, its objectives and how it is evolving. You can read our Introduction to CSRD here. In this article, we look at the CSRD challenges, risks and pitfalls that businesses are discovering as they adopt this new reporting directive.

CSRD Challenges

By understanding the expansive nature of CSRD, it immediately becomes obvious that to report against it will require significant work. Even businesses with the most advanced approaches to sustainability are challenged to meet the requirements. From our experience of working with clients, the challenges fall into three major areas.

Information

The standards defined in CSRD, ESRS, are incredibly comprehensive. They are also written by policy makers and are designed to cover all sector-agnostic scenarios and therefore can be quite esoteric. They span over 1100 data points and range from yes/no answers to expectations of detailed narratives of the transition plan for the business. What we are finding is that many businesses have reasonable information about topics such as emissions, or for sectors where pollution is a recognised issue, their information is typically well managed. For many other topics, the data either doesn’t exist, or is fragmented across the business.

Management of information is a common challenge. In contrast to financial related data, sustainability related data is typically inconsistent, incomplete and in some cases inaccurate with limited policies and processes in place to manage it. The intent of CSRD is to press businesses to improve the management and governance of this information. This is a daunting task for many businesses given their current approach.

Collaboration

As a result of the breadth of information required to comply with CSRD, there is a need for collaboration across the business to support the work. As we will discuss in the pitfalls section, many businesses rely on the sustainability team to collect and collate all the information. Whilst this may result in the production of a report, it is unsustainable as a practice and will ultimately result in more challenges. What is needed from the start is a collaborative approach across the entire business.The need to engage stakeholders across the value chain is also a challenge which requires collaborative effort across the business. Those who own a relationship with a stakeholder need to carry the responsibility for engaging them in relation to CSRD and feeding their inputs into the process.

Ownership

To successfully adopt and integrate CSRD into the business requires somebody to own the responsibility. The obvious choice is for the Chief Sustainability Officer, where they exist, to be the owner. That can work, but if the business intends to follow the intent of CSRD, then it can make more sense to hand this to a head of strategy or compliance. Whilst the CSO is no doubt the subject matter expert, they may not always be the right person to own the coordination of the work required to meet CSRD requirements.Regardless of who is given ownership, the support they need from the board and executive team is substantial. Attempting to adopt and integrate CSRD into the business without full support results in continued fragmentation of approach and risks compliance failures and will almost certainly be flagged as an audit action.Our experience has been that businesses who quickly identify the relevant senior business owner and fully empowers them and supports them, discover much less friction through implementation.

Risks

As with any regulation, there is a cost of compliance and there is a cost of non-compliance. Both present risks to the business and CSRD is no exception to this. Here we review some of the typical risks that businesses face when adopting CSRD.

Compliance Risk

It is unlikely that any business will choose to not comply with CSRD, given the legal obligations on the business and its executives. There are already clear signals from governments that non-compliance will not be tolerated. The risk of non-compliance is most likely to be as a result of lack of available information.Given the infancy of the directive, we can expect that regulators will be reasonably satisfied with best efforts from reporters in the first reporting periods as the market matures. That patience is likely to be short lived however and organisations should expect to work continuously and adopt the spirit of the policy to avoid compliance risks and its associated legal and financial implications.There is also a compliance risk associated with not fully preparing for CSRD. It is a significant program of work for most businesses and leaving it too late, may result in compliance issues.

Reputation Risk

The comparability which CSRD enables through standardisation and digitisation of reports will enable stakeholders such as investors to make better informed decisions about their risk exposure in allocating resources to the business. However, comparability will present an opportunity for others, such as consumers, journalists and competitors to gain greater insights into the performance, or perceived lack of improvements in environmental and social impacts and consequently create reputational and competitive risks.

Litigation Risk

The transparency from CSRD will likely shine lights in corners of the business which companies have previously not shared. This presents opportunities for actors who pursue climate related litigation to initiate increasing volumes of climate litigation.In the past 5 years, there has been a doubling of climate related litigation as stakeholders become increasingly frustrated by the perceived lack of action of businesses to address their material concerns. In some ways, CSRD should alleviate this, but mandating businesses to disclose their material topics and describe their plans for addressing them. However, resource constraints will mean that no business will be able to resolve all of their challenges immediately, leaving space for further litigation.

Personal Risk

The legal requirements related to CSRD for directors and officers of the business are related to their existing obligations under their relevant companies act and articles of association. These include exercising reasonable care, skill and diligence in their duties in managing the business. This presents a potential personal risk for directors and officers of companies if due care and attention are not directed towards complying with CSRD.

Pitfalls

With everything we’ve covered so far in this series, it should come as no surprise that there are a range of potential pitfalls which businesses fall into as their approach CSRD.

Solve every problem

As businesses start to perform a gap analysis to compare their existing inventory of information against ESRS, it’s easy to believe that you must resolve every gap you discover. Many of the data points requested within CSRD relate to asking the extent to which the business is managing a given topic. It is reasonable for a company to disclose that they are not currently managing something, but to then describe their plans to build the capability to do so over a period of time. (Almost) Nobody is expecting perfection from every business, CSRD is really about ensuring businesses make progress.

Solve No Problems

Whilst no company should attempt to solve all of their problems at once, equally, doing nothing is not advisable. The process of double materiality assessment should serve to help to prioritise the topics across the business which need attention. From this process, it is possible to build a narrative to include in disclosure which describes where the limited resources of the business are being focused to have the most immediate impact.

Interview every stakeholder

The double materiality assessment is a necessary activity for every company subject to CSRD. The intent of the assessment is to ensure that businesses are taking into account stakeholder considerations and not missing blind-spots in their business relating to sustainability.

The guidance for double materiality created by EFRAG describe that the assessment must be informed at every step by relevant subject matter experts. That might lead a business to believe they have to directly connect, one-to-one with every stakeholder, which isn’t the case.

Most businesses subject to CSRD operate in incredibly complex global value chains, partnering with potentially thousands of stakeholders. Engaging all stakeholders directly is impractical. It is reasonable to expect to engage stakeholders using a range of methods, ranging from direct conversations and interviews, through to using reasonable proxies to understand their concerns related to your business.

Leave it too late

The clients we have been working with have realised very early on that to approach CSRD for the first time is likely to take over a year of preparation. Even with that considerable runway to disclosure, there are challenges to preparing adequately given the breadth and depth of CSRD requirements across the business.

Our approach, which we describe in a later article, is based on an approach which spans across a typical three year program of work. The first year is spent in preparing to adopt and integrate CSRD into the business. The second year is spent resolving the immediate gaps in systems, processes and information to be capable of generating a CSRD compliant report, and the third year is a year of focused action to address material topics across the business to be capable of demonstrating progress.

How we can help?

There are many CSRD challenges, risks and pitfalls which companies will encounter in adopting and integrating the directive into their business. Our experience from working with the first businesses subject to CSRD means we have discovered many of these challenges and incorporated the most optimal approach into our Jordisk CSRD Program.

Our program provides clients with the assurance that they are approaching CSRD with a proven methodology which avoids the challenges, risks and pitfalls this complex directive presents. Contact us today if you’d like to talk to one of our CSRD experts to learn how we can help your business.