Introduction
As businesses begin to align their sustainability disclosures to the EU CSRD, a question we are often asked is where is the best place to begin. In this article, we look at the first phase in our CSRD program; Prepare and Assess. This phase of activity explains how every business should start their work in adopting and integrating CSRD into their business. This is the fourth article in our series explaining CSRD.
Navigating CSRD
As organisations begin to adopt CSRD, a common experience is to feel overwhelmed by the expansiveness of the European directive. For even the most advanced businesses, CSRD presents a significant increase in ESG disclosure requirements. You can learn more about CSRD in the first article in this series which takes a look at what is CSRD and the intent behind it from policy makers.
With such a complex array of requirements, it can be challenging to know where to begin. We developed our Jordisk CSRD Program to help organisations to navigate through the complexity. We continually update the program based on our experiences working with the first businesses to adopt CSRD.
Before any physical work beings on CSRD, our first activity with clients is to work with them to ensure the right ownership and leadership is in place. Many businesses automatically assume that given the sustainability related nature of CSRD, that the head of sustainability is the right person to take the lead. This may prove to be appropriate, however, who leads the work should reflect how much work needs to be done related to CSRD.
Many businesses are finding that to align to CSRD requires significant work to expand sustainability into systems, processes, policies and data management. Whilst the head of sustainability is certainly a subject matter expert, they may not be the best person to lead this type of work.
The relationships between CSRD, compliance and strategy should also be considered. At face value, CSRD looks like a reporting mandate. The reality is that CSRD is pushing businesses to integrate sustainability fully into their business and operating model. That’s a task that may be more suited to others in the senior leadership team.
With the right ownership identified, the next task is to establish the absolute support of the executive team and board. CSRD will drive changes across the business and aligning the understanding of all senior leaders is imperative to achieve success. With an owner identified and executive support in place, it’s time for the team assigned to CSRD to begin their work.
Prepare for CSRD
Business Model Mapping
It is common for organisations to start their CSRD adoption with a double materiality assessment, but we feel there is work to do before anyone gets to that activity. We start our work with clients by establishing the context of their business. Where it doesn’t exist, we help the business to document their business model, value chain and their stakeholders. These three things can seem an arbitrary step, but our experience shows that by having these in place, subsequent activities will execute far more easily. CSRD is also predicated on the basis that the business knows its business and can articulate it to the world. It is surprising how few companies can actually do this, especially as their business grows and diversifies.
We follow research produced by FRC on documenting business models. Many businesses already do this well in their annual reports, but for others it is a new requirement. CSRD expects businesses to document what their business does, how it generates value, the value chain it operates in and its position in that value chain. Key risks and dependencies are also required to be document. By helping businesses to document their model, the stage is set to report against it for CSRD, but they also have a clear, documented definition of their business which helps in many contexts.
Stakeholder Mapping
With the business model and value chain documented, the task can begin to map stakeholders against it.
Every business has a complex map of stakeholders which interact with the business in many ways. Obvious stakeholders include suppliers, partners, employees and customers. There are many others though and a great number are often frequently overlooked in business scenarios. Nature as a stakeholder is one which is typically overlooked with disastrous consequences. Communities related to the value chain of the business are also frequently taken for granted. CSRD is designed to press businesses to take stakeholder considerations into account, both in determining material topics for reporting, but also in factoring in stakeholder considerations in future business decisions.
Building a stakeholder map across the value chain of the business helps to establish the foundational basis for CSRD preparation. Similar to the business model, by mapping stakeholders, other activities in the business may also benefit. We frequently find with clients that by building a stakeholder map, key overlaps are identified which had previously been overlooked.
One of the most important elements of the stakeholder map is the internal stakeholders of the business. In the first stages of CSRD adoption, there will be significant work required from a range of internal stakeholders. Mapping these and establishing key points of contact to work on CSRD is critical. Supporting this mapping with education and awareness of CSRD is also advised.
With a business model documented and stakeholders mapped internally and externally, it’s now time to start to assess the readiness of the business for CSRD.
CSRD Assessment
With the foundations in place to prepare for CSRD, attention now turns to achieving two key objectives.
- Identifying the topics the organisation needs to report on.
- In respect to those topics, what does the business already have and what do they need to work on to comply with CSRD.
Double Materiality Assessment
Anyone researching CSRD quickly realises that double materiality is a key concept to understand. It’s important firstly to recognise what CSRD is attempting to achieve when thinking about double materiality. We cover this in our Introduction to CSRD. To summarise, CSRD is trying to make businesses take into account two things. Firstly, the impacts it has on things outside of its business, such as degrading biodiversity, or negative social impacts in its value chain. Secondly, CSRD is pressing businesses to recognise the risks it is exposed to due to external factors, such as climate change.
Double Materiality helps to identify the topics of information which need to be considered by a business. These topics may have an impact on things outside of the business, or things outside the business which may have an impact on the success of the company.
To determine what these topics are, companies are expected to perform a double materiality assessment (DMA). This activity can and will take many forms, but in general it involves engaging stakeholders to understand their considerations related to the business. The scope of those considerations is aligned to ESRS which you can learn more about here.
We cover our approach to double materiality assessments in this article.
ESRS Gap Analysis
With the material topics the business must report on identified, the work now focuses on a gap analysis between what is expected by ESRS and what the business already has.
The gap analysis starts with disaggregating the extensive standards embedded within CSRD. For each topic within ESRS, they break down to two further levels of detail. For each level, the business is expected to report a range of information:
Strategy & Business Model: Does the business have a strategy relating to the topic? How is this strategy related to the business model?
Targets & KPI’s: Does the business have targets set for the topic? If so, what are they? Does the business have KPI’s which monitor progress towards those targets?
Impacts, Risks & Opportunities: What are the material IRO’s related to the topic in the context of the business?
Policies: Does the business have policies in place which align behaviours in the organisation to the strategy?
Actions: What actions are being taken by the business to address the IRO’s identified?
The gap analysis looks at each of these across the business, per topic, to determine where the company is already executing and has information which is expected to be reported.
This requires significant internal stakeholder engagement and benefits from clear executive support to participate in the work. In completing the analysis, a catalogue of information is formed, often for the first time, which defines where the business is integrating sustainability into its model and where there is work to be done.
The output from this activity defines the work plan the business needs to execute to comply with CSRD. We also find that the output of the gap analysis highlights where a business needs to take more action to address material topics, irrespective of CSRD requirements.
General Observations
Executive Education
To successfully adopt CSRD will require the whole organisation to understand how sustainability applies to the business. Perhaps most importantly, it requires the executive team to understand and align behind the program of work required to adapt the business.
Leaving executive education until the end of this first phase of work can lead to challenging conversations as leaders simultaneously wrestle with the concepts and intent of CSRD and the findings of the DMA and ESRS gap analysis.
Establishing a consistent level of understanding for executives at the start of the work, means that when the gap prepare and assess phase of work is complete, they can focus on what actions are required to be performed to move the business forward.
Education also needs to be provided to the board. Their role involves integrating sustainability into the governance of the company and it is critical that they recognise the need for them to extend their skills and knowledge into this potentially new dimension of governance.
How we can help
Preparing an organisation to adopt CSRD takes considerable effort and requires a structured approach to bring a wide group of stakeholders together. Our experts work with businesses around the globe who are already integrating CSRD into their operating model.
We can help you to build and execute a clear approach to CSRD. From the initial business model definition to working through the fine details of ESRS in a gap analysis. Our CSRD program is designed to give you a clear execution plan to successfully adopt this new EU directive. Get in touch with us today to speak with one of our experts.
