The new CSRD (Corporate Sustainability Reporting Directive) is beginning to spread among European companies. Whether or not they are reluctant to apply it, it is clear that a European directive has never devoted so much attention to extra-financial matters. Could this be the first step in a revolution in CSR policies? It is truly on the way there.
This is not a revelation: the acceleration of climate change-related disasters has increased. But this phenomenon is not limited to its intensity alone: it is also manifested by the recurrence of these disasters, going from events described as “black swans” to periodic events, considered “normal” at certain times of the year. These events are no longer so distant: they affect us daily in minor occurrences, of course, but which have equally serious consequences, on a human and material level. Environmental issues have never been so pressing and it is certain, like the regulations, that all activities, new or old, will be linked to or even conditioned by the new extra-financial prerogatives.
Extra-financial at the same level as financial
In just a few years, Europe has integrated as many regulatory texts governing extra-financial matters as it has worked on in 150 years of financial regulation. This acceleration is reflected in the implementation of fairly extensive regulatory texts, in a short time frame between drafting work and publication for application. In this body of texts, we find the Environmental Taxonomy, the Sustainable Finance Disclosure Regulation (SFDR), the Non-Financial Reporting Directive (NFRD) or Extra-Financial Performance Declaration (DPEF), the PACTE law, the framework for ESG and CSR reports, the regulation of ESG data and data providers, etc. In this unprecedented context, the CSRD intends to more strongly regulate the extra-financial performance of a growing number of European companies, 50,000 to be precise, in order to initiate and accelerate their transition. Transparency is one of the priorities of this directive and must force companies to control their value chain, working little by little only with partners (suppliers and customers) who will respect equal or equivalent ESG principles.
Obviously, one of the objectives is to avoid as much as possible the phenomenon of “greenwashing”, which is still too widespread. Through rigorous reporting, the CSRD will impose a very precise questionnaire on more than 1,100 data, thus making it easier to detect shortcomings and/or abuses. This sustainability reporting goes well beyond the simple exercise of regulatory communication, it makes extra-financial information more reliable and provides, as a priority, clarity on regulations that are sometimes too evasive. This standardization should also make it possible to give more meaning to the ESG score. Indeed, until now, depending on the methodologies used by data providers, and depending on the information taken into account, we could end up with ratings varying from single to double, making the scoring and the confidence of the actors in it unreliable.
Double materiality, the major challenge of the CSRD
This directive pushes companies’ commitment even further by introducing the concept of double materiality, which highlights the impact of a company’s activities on the environment and society, as well as the impact of societal and environmental issues on a company’s economic performance. As you can see, the analysis is expanding considerably and with it the volume of data required to carry it out. Because, beyond the data collected internally, it will also be necessary to collect data from suppliers and customers.
Here again, the repercussions on the structure of its business and its partners can be very significant if ESG criteria have been little or not prioritized. Without being punitive, the CSRD publicly reveals the level of investment of companies in terms of sustainability. If we were not sure, it seems clear that the next step will be to assign a score to companies according to their ESG performance and to condition their capacity to be subsidized. A first. This new performance indicator will therefore be a key to doing analysis in the same way as a credit analysis, generating a multitude of possible applications, ranging from borrowing capacity, to investment attractiveness to regulatory financial sanction in the event of a poor rating.
Reluctance but no turning back
The impact of such a directive does not leave one indifferent and many companies already see it as yet another means intended to hinder growth. And it is difficult to prove them wrong as its non-compliance can, beyond financial sanctions, have repercussions on the image conveyed by a company to its customers and the general public.
Above all, by acting in this way, Europe is sending a strong message: accelerating the fight against climate change will require more regulation because only legislative authorities have the power to move these lines. In fact, the CSRD seems to be the first step in supporting businesses but also consumers towards a more sustainable functioning of our society. A society where companies that concentrate their production on the old continent are truly rewarded. It is still necessary for European authorities to stop opening markets to the United States and China and protect the European internal market, in which case a directive like the CSRD will ultimately have little interest.