Top tips for getting ready for new sustainability regulations

The corporate sustainability reporting directive (CSRD) will come into force for listed companies in January 2024, followed by large companies in January 2025, listed SMEs in January 2026 and EU-based subsidiaries by January 2028.

The new directive will require companies to disclose information across their value chains to ensure holistic, transparent and accurate sustainability reporting.

According to AIB’s chief sustainability and corporate affairs officer, Mary Whitelaw, almost every business will be directly or indirectly affected by the directive, because up to 90 per cent of a large company’s environmental footprint can arise from carbon emissions coming from its smaller suppliers.

Companies that fall into scope for the CSRD are those already in scope for the non-financial reporting directive (NFRD). The NFRD is part of the EU’s strategy to encourage corporate social responsibility. In addition to the usual annual management report from businesses, it requires public disclosure documents on non-financial information such as environmental matters and social issues.

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It will apply to companies with net turnover of more than €40 million, more than €20 million in assets and more than 250 employees. It will also apply to all listed companies regardless of size.

“In reality, even companies that do not meet the above criteria will still be impacted by CSRD, if they are a supplier to any of the companies that do fall directly into scope,” Whitelaw points out.

CSRD will specifically require companies to report on how sustainability issues, such as climate change, impact their business and how their operations in turn affect people and the planet – a unique principle called double materiality.

An issue is considered material when it meets defined thresholds for impact materiality or financial materiality or both. Impact materiality considers how the entity affects people and the environment over short, medium, and long-term time horizons. Financial materiality considers how sustainability matters affect the entity’s performance and cash flow over the same horizons.

Get started now, and don’t be afraid to ask for help

“CSRD is a critical part of the transition to a low-carbon economy, and it will measure how climate change is impacting businesses and how businesses are impacting climate change, both directly and across their supply chain,” says Whitelaw.

“While larger companies are first in scope for the directive, those companies will be turning to their suppliers for additional information so it’s important for all businesses, big and small, to be prepared. There are benefits for businesses too, as CSRD may become increasingly influential in an already competitive commercial marketplace. It’s likely to facilitate new levels of comparability and transparency.”

In the move to a low-carbon economy, it may inform and influence competitive advantage and positions within supply chains, procurement processes and access to capital, Whitelaw adds. “New directives can seem challenging at first, but tackling climate change is the greatest challenge of our generation and the time to act is now,” she says.

Whitelaw has some tips on how all businesses can prepare for CSRD.

• The first is to be informed. “Develop an understanding of how CSRD fits together with other EU green deal legislation,” she advises. “There are significant overlaps with other European Union initiatives such as the corporate sustainability due diligence directive, the circular economy action plan and gender pay gap legislation.”
• Put resources in place: “Bring a cross-functional team together and establish a companywide environmental social and governance (ESG) structure. This is about getting all parts of the business involved, not just the sustainability experts. Representation from the finance function is particularly important.”
• Prepare a plan: “Review what are you currently doing, what you are already reporting and how you might address any gaps. Map your stakeholders to help understand the impacts of the directive. Consider your most significant risks and impacts. Remember, data is key in particular utility bills, HR and supply chain data. The sources and methodology for collection and calculation should be ready for audit. Software may help with that. Increase your focus on the impact of procurement – are the products that you are supplying sustainable? Are the materials or ingredients used in your production process sustainable? Should you have a closer look at your key suppliers?”

New directives can seem challenging at first, but tackling climate change is the greatest challenge of our generation and the time to act is now

• Start now: “Don’t let perfection be the enemy of progress, and don’t wait until you think you have all the answers. Some of the requirements are still under development. Get started now, and don’t be afraid to ask for help.”
• Keep your eyes on the prize: “We all need to take action now to protect our planet and our people if we are to continue to ensure our future prosperity. The CSRD aims to reduce risk, prevent greenwashing, drive consistency of reporting and help build a common understanding of what good environmental, social and governance practice means.”