Two and a half reasons why the CSRD risks missing its target
5 MINUTE READ | WORDS BY NIGEL SALTER | 23.05.2024
Our research paper published last week (download here) is a call for some common sense to be applied to the implementation of the CSRD. Practitioners in Europe, the UK and the US told us that they are overwhelmed and frustrated by the sheer scale, complexity and lack of clarity of the new requirements.
Underneath all the frustration there are two points that I think are fundamentally undermining the credibility and likely the impact of the CSRD. Then, there’s a half point about what it is called which has sent all the wrong signals.
1) It was actually supposed to be about strategy
The intent of the CSRD was actually supposed to be about improving strategic decision-making and embedding sustainability deep into the business processes. Now, when the data sets are built and are starting to get used effectively in the future then this may be the case. Instead, what we’ve seen in the short term – and what we’ve heard from our discussions with practitioners – is that it is impossible to worry about this future strategic nirvana when the scale of the immediate task of just processing the requirements is so all-consuming.
Alongside this, while it is in theory a big positive that the legal, risk and finance functions need to be fully engaged in this process, the reality is that this is leading companies to view this exercise almost entirely as a risk, compliance and disclosure exercise. And the focus is actually on what can be done to limit risk and limit exposure through disclosure – outcomes that have absolutely nothing to do with strategic decision-making or a focus on value creation.
Time and again in our interviews we heard that ‘all we can cope with – and all the leadership can understand at this point – is to work out what it takes to get to compliance. Any other considerations are just not on the table.’
And once companies have processed this in their operations as a risk, compliance and disclosure exercise, it’s going to take a huge amount of effort to shift the conversations around CSRD to a more strategic level. So, well-intentioned or not, the CSRD will be stuck, I fear, in the reporting corner. And honestly no-one actually needed more reporting.
2) It’s so big that nothing else will get done
The second fundamental problem is that because even just trying to comply with the CSRD is such a huge undertaking, it’s going to stop companies from doing great work, making an impoact and driving progress on real sustainability issues in the meantime.
The amount of resource that has to be allocated to the CSRD process is just so big that only the companies with the very deepest pockets, or possibly the handful of (mostly private) companies whose leadership is looking at the agenda very long term, will have enough people, time and money to do CSRD and strategy/impact work. We’ve already seen many companies re-deploy their teams to focus solely on CSRD until further notice.
So again, it may not have been the intention, but what we’re going to see for the foreseeable future is more reporting and disclosure and less strategy and action to make business more sustainable.
2.5) The name is a clue to the problem
The name tells us a lot about where things started going wrong. Corporate Sustainability Reporting Directive.
Problem 1 - it’s not supposed to be about reporting.
Problem 2 – it’s not actually about sustainability either – it would be more accurate to describe this as an extension of financial accounting and reporting standards than a broadening and deepening of sustainability reporting standards.
What next?
As many of the practitioners we have spoken to agreed, the intent behind the CSRD was basically sound. But the reality risks being very different.
The heavy emphasis on legal disclosure means that all bar a few companies will drive this process through a risk and compliance lens. And to be honest many will aim to disclose as little as possible and to aim for the lowest possible level of compliance – so even better disclosure is not guaranteed.
Because CSRD will then be so deeply entrenched into businesses as a disclosure framework, the focus on strategic decision-making risks being lost forever.
And in the next few years most companies will only have the bandwidth to keep their heads above the CSRD water-line – meaning strategic activity and impact will be put on hold.
I hope to be proved wrong – and we can all work to help avoid this outcome – but most of the practitioners we spoke to seem to be thinking the same thing.
We’re calling for a more common sense approach to the roll out of the CSRD, to address the risk of it being just a very big, expensive and potentially ineffective reporting exercise. It would be a shame. The original intent to inform better strategic decision-making is one we can all support. We need to make the case and try to focus the effort to this end. But the early signs are not good – and I’m not sure companies can currently see anything but a wall of compliance problems on the horizon.
We’re calling on EFRAG (the European Financial Reporting Advisory Group) to listen to the voice of practitioners and address the concernes raised in our research. One of our proposals is the formation of a Practitioner Advisory Group to provide feedback and more practical insight to EFRAG – if you’re interested plase join us in this dialogue process.
For info: To learn more about our outreach to EFRAG, or if you’re working through CSRD in your workplace and want to join the conversation, please contact nigel.salter@sbandco.com.
Nigel Salter
Nigel has over 25 years’ experience advising global corporations on sustainability strategy and communications. His experience covers many sectors and all regions. He also chairs, leads or sits on multiple sustainability advisory boards and panels and is retained strategic counsel to several senior management teams.
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