Expert Insight

Challenges and Opportunities of the CSRD

By NordESG

Oct. 24, 2023

As the new mandatory reporting requirements loom closer, it’s time to equip yourself with the knowledge and strategies needed to thrive in this evolving landscape. NordESG discusses how companies can prepare themselves for the upcoming changes. Keep your eye out for a special offer too!

Introduction
As the new Corporate Sustainability Reporting Directive (CSRD) is approaching, eevie’s communications team wants to shed some light on the many questions that have been raised since its adoption by the European Commission in November 2022. Built on the Non-Financial Reporting Directive (NFRD), the new directive will gradually come into effect from January 2024 onwards. Once fully rolled out — which is set to happen by 2026 — the mandatory reporting requirements will affect around 50,000 EU companies and 10,000 international companies with a  presence in the EU. The directive aims to improve the sustainability information disclosure. The idea is that this step will support investors and consumers in making more informed decisions when it comes to investments and purchases.

As eevie's clients will be impacted by this new regulation very soon, it’s clear that readers might find it more engaging to hear about our first-hand experiences working with companies which are in the process of aligning with the CSRD, rather than simply focusing on compliance details like the timeline for CSRD application. This article will cover the two main challenges that companies are currently facing, as well as offer an overview of the steps companies need to take. We will also discuss how companies can  navigate short-term and strategic goals.

In your experience working with companies on aligning with the CSRD, what are the main challenges companies have to overcome?

There are two major choke points that companies face during their initial alignment to the CSRD: one is performing a Double Materiality Assessment (DMA), and the other is setting goals and defining KPIs. 
The DMA is a concept that considers an inward and outward perspective. It helps companies identify and assess the impact sustainability issues will have on the company. The financial materiality is the inward perspective and is well established. It checks if external sustainability events now and in the future will affect the company’s financial health (financial ‘materiality’). The impact materiality, on the other hand, takes the outward perspective and assesses the impact the company’s operations have on all Environment, Social, and Governance topics, also called ‘externalities’. The CSRD and the European Sustainability Reporting Standards ('ESRS' hereafter) follow the principle of ‘double materiality’ in which both financial materiality and impact materiality are equally considered.

Performing a DMA is an important step when disclosing your company's sustainability performance under the CSRD using the ESRS. This step is critical because the DMA's results will inform the scope of your reporting. It is worth noting that the assessment may also affect the sustainability strategy development and deployment process. Indeed, this could have an influence upon a business' goals and KPIs as the DMA provides a holistic view on the risks and opportunities of the particular company.

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Can you give us an overview of the steps companies need to take to perform a DMA?

There are plenty of elaborate articles already written about “how to conduct a double materiality assessment”. Given the scope of this contribution, we want to focus on the core steps involved:

1. Identify potentially ‘material’ topics.
   There are two pathways to identify what could potentially be material to a company. One is a bottom-up approach when building the inventory of potentially material topics. Under this approach, the company itself is the nucleus for all considerations. The other option is a top-down approach, which starts with a collection of information based on global trends, industry or sector-specific material issues derived from publicly available sources or based on industry reports and peers. It is possible to combine both approaches to arrive at a comprehensive list of potentially material topics. One last recommendation is to use every opportunity to check whether the list of topics is complete – by involving internal and external stakeholders along the process. 

2. Make it more accessible.
   During the collection process, duplications of topics are inevitable. Therefore, we highly recommend sorting the long list of potentially material topics — e.g. raw material sourcing, climate transition risks, DEI, or workers in the value chain — into the separate E, S, and G categories. This can help to condense the information further. 

3. Check-in with your financial department on financial materiality, and then conduct a severity assessment.
   The financial department plays an important role when it comes to financial materiality. Key indicators identified under GRC (Governance, Risk and Compliance) can most likely be used with the double materiality assessment. During the severity assessment, each topic that is potentially material will be assessed according to three factors: scale, scope and irremediability. The assessments can also be used to identify those topics that are material from both the financial and the impact perspectives.

4. Getting stakeholders involved.
   Involving stakeholders is another essential aspect of a DMA. We recommend conducting one-on-one interviews with key stakeholders to leverage their domain knowledge, while at the same time conducting an online survey to ensure you gather diverse insights from a broader audience. As pointed out above, stakeholder engagement is another opportunity to check whether the list of material issues is complete. Keeping key stakeholders like employees engaged and attached to the process is crucial and can be achieved by leveraging technological solutions like eevie where employees can educate themselves on strategically relevant sustainability topics, actively contribute towards the process and be instrumental in reaching the strategic as well as short-term goals.

5. Combining the results and prioritizing topics.
   The last step of the DMA is to combine the results and to prioritize topics. While the final decision authority on materiality lies with the board, prioritizing shouldn’t be misunderstood as “filtering out” certain issues. Prioritization is needed to focus on a subset of topics that can realistically be dealt with (i.e.  when developing or updating sustainability strategies, setting goals and defining KPIs).

““Under the CSRD and the ESRS, companies will not only have to report on their past performance, but forward-looking information and disclosures on policies, goals, and KPIs will be required.””

— NordESG

How should companies set the right strategic goals to tackle ESG matters?

Under the CSRD and the ESRS, companies will not only have to report on their past performance, but forward-looking information and disclosures on policies, goals, and KPIs will be required. A good starting point is to reflect on topics that have been identified as ‘material’ and how they have been prioritized.  Furthermore, goals and KPIs can often be broken down to the timeframe required to achieve them. 

1. Strategic goals: Unlike “quick wins”, strategic goals are often more complex, require more time, effort, and resources – but also lead to significantly more impact. Examples of such long-term goals may include changes to the company board, narrowing the gender pay gap, or achieving net-zero. 

2. Quick wins: As the term suggests, goals from this category require less time and resources. In some cases, quick wins can contribute to strategic goals. In other cases, they can be considered to be stand-alone goals. An example where a “quick win” can contribute towards a strategic goal could be switching to a green energy source to reduce Scope 2 emissions – a goal that will also contribute to the overarching goal of becoming net-zero in the future. 

While mapping out your company’s ESG strategy, it is beneficial to have a mix of both strategic and “quick win”-goals across the E, S, and G domains. Achieving “quick wins” can boost the sustainability process since results become visible in a much shorter timeframe. This leads to a better recognition of the overall sustainability process. Meanwhile achieving strategic goals leads to higher leverage and benefits compared to those from the “quick wins”.

Conclusion and a Special Offer
While this article only aims to offer an overview, we hope that the information shared will help you get started with your sustainability journey. In case you may have any unanswered questions, this is where our “special offer” comes in. All readers of the eevie newsletter are invited to book a free and non-binding discovery call with NordESG. Click on the button below to discuss your questions on double materiality and other topics related to the CSRD or the ESRS. We're excited to take the conversation further (we speak English and German).