The CSRD, a turning point for sustainability communication?

The main goal of business is to make money, the saying goes. But the times are changing quickly. With the rise of the sustainability goals, motivations of entrepreneurs are shifting from mere profit-making. In this insight, we dive into sustainability communication through facts and data, placing it in the context of CSRD, the new Corporate Sustainability Reporting Directive. In brief:

• the demand for communication on sustainability is on the rise, and the topic is currently kindling great interest with investors, government, institutions and individual consumers;
• in the context of often ambiguous or missing information, the EU is preparing a new set of corporate sustainability reporting standards in order to regulate the disclosures in a more precise way;
• companies communicating in line with the standards will benefit from additional credibility and accuracy of sustainability communication.

In its general definition, “sustainable development” is an ethical concept which assumes that no form of economic growth should endanger our future. An increasing number of economies, with the European Union seen a global leader on the topic, are focused on improving the well-being of citizens, making the economy climate-neutral, as well as protecting, conserving and enhancing the biodiversity.

No doubt, achieving these goals requires that the markets shift to more sustainable models of growth. To monitor and evaluate how such change is progressing, different tools are being developed. Those tools are made to measure and communicate which organizations are contributing the most to a greener world.

The market is becoming increasingly well adapted to this approach. Many actors are interested in concrete facts and in the data communicated by the companies about their sustainability. Customers, communities, investors and even banks, insurance or asset management companies are on the receiving end of enterprise disclosures. Those stakeholders are looking to analyze how the business interacts with society and the environment, knowing that positive impact in this regard can create a genuine added value in the enterprise’s operations.

Stakeholders are looking to analyze how the business interacts with society and the environment, knowing that positive impact in this regard can create a genuine added value in the enterprise’s operations.

Providing comprehensive information that reaches beyond the profitability is often referred to as releasing the non-financial disclosures. This aspect of sustainability communication becomes an increasingly important factor in green economy, allowing to manage the economy transition, build trust in the market, encourage responsible investments and anticipate the risks and impacts related to business operation.

At the same time, communicating the efforts in the sustainability field is a complex matter that needs a factual and structured approach. Realizing this, the governments, including the European Commission, are working to introduce new regulations which set frameworks on how to inform about the outcomes in this matter. These emerging regulations are meant to encourage investment and trust towards the sustainable businesses and will create new challenges and opportunities for the market.

Photos: Hugo Jehanne, Andrew Neel; recomposed by Vadviam

While the demand for communicating actions around the sustainability is rising fast, the information contained in official sustainability reports are considered increasingly important for investors, governments and societal stakeholders.

However, even though the sustainability communication practices have already been around for some time, many analyses prove that the data released by the companies do not always meet the needs of the readers. The sustainability disclosures are often seen as not sufficiently specific, comparable, structured, or easy to understand. At the same time, a relatively small number of entities around the world reports the information in a structured way.

The lack of common, universal standard of sustainability reporting in the industry has been a challenge – the new legislation initiatives such as CSRD are trying to address it.

To help in these efforts, many frameworks have been developed around measuring and reporting sustainability, such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC), or the Climate Disclosure Standards Board (CDSB). However, all the developed standards present different methodologies. The lack of one, universal standard in the industry has been a pain for the companies willing to communicate their efforts, as well as for the readers of their disclosures, who would like to be in a position to relevantly compare the reports with one another. In Europe, the lack of specificity of the existing Non-Financial Reporting Directive (NFRD) has contributed to a rise of criticisms around the very concept of sustainability communication.

That disagreement has become one of the reasons for CSRD, the European Commission’s new legislation initiative, which is made to ensure that all information disclosed are relevant, comparable, reliable and easy to access and use. Introducing new rules to corporate sustainability communication is expected to improve the coherence in the market and accelerate the efforts around corporate social responsibility.

Corporate Sustainability Reporting Directive (CSRD) is a project of legislation proposed by the European Commission, meant to ensure a better, clearer and more comparable set of sustainability standards in businesses. It is a new directive, the provisions of which are expected to come into force in 2023. The project will revise the earlier Non-Financial Reporting Directive (NFRD), which only concerned the so-called “public interest entities”.

Corporate Sustainability Reporting Directive (“CSRD”) is a project of legislation in Europe, meant to ensure a better, clearer and more comparable set of sustainability standards in businesses.

The proposed Corporate Sustainability Reporting Directive is also intended to touch a much larger count of companies than the previous regulation in place. In the communication of the European Commission in 2021, we read that “The new reporting requirements would apply to all large and all listed companies, including listed small and medium-sized enterprises (SMEs). The Commission will develop proportionate standards for SMEs. The latter will set a reference for information that companies that are within the scope of the CSRD could reasonably request from SME suppliers and clients in their value chains.”

The number of companies involved in this specific, tangible measure of sustainability communication is therefore considerably increasing. The prepared CSRD is expected to apply to around 49,000 companies in Europe, which is a significant count of enterprises compared to the previously concerned number of around 11,600 companies. The new regulation also opens the path for an even wider group of enterprises, who would be willing to communicate their sustainability reports on a voluntary basis. The small and medium enterprises, which are a major part of economy, are often requested to communicate their sustainability activities to their partners obliged under the Directive. To facilitate this work, the European Commission is developing a set of voluntary standards dedicated to the SME and micro-enterprises.

Photos: Kelly Sikkema; recomposed by Vadviam

To ensure that all the sustainability communication carried in reports is not only based on facts and figures, but also comparable and relevant, the works are introducing a specific structure behind the disclosures. Reporting standards under CSRD are envisaging to have three different layers:

• Sector-agnostic layer, relating to standards which are universal and easily compared across all the business activity sectors;
• Sector-specific layer, relating to the communicated disclosures which are relevant to a specific sector (classified based on NACE system);
• Entity-specific layer, that refers to each business unique constrains and opportunities, which typically would reach beyond the mandatory part of communication.

Next to the reporting layers, the new standards are anticipating three specific areas meant to communicate the process of achieving corporate sustainability goals in an organized way:

• Strategy area, which will cover the planning and business model aspects, methods of assessment of important sustainability factors, and measures of its monitoring;
• Implementation area, that will explain the practical actions of business towards realizing their sustainability plans;
• Performance measurement area, which will include the disclosures that quantify the results of enterprises in selected fields, taking in consideration the past and anticipated future performance.

Lastly, the architecture proposed in CSRD considers three key sustainability topics, which follow the well-known approach of environmental, social and governance aspects of business (ESG):

• Environment topic, which will include all the factors related to the planet, natural resources and climate impacts;
• Social topic, intended to include the impact on the people, considering all factors related to workforce, value chain workers, communities, consumers and end users;
• Governance topics, related to the wide palette of communication related to enterprise governance, business and ethics, quality of relationships with stakeholders, organization and innovation, reputation and brand management.

The development of the reporting principles is advancing fast. At the time of the writing of this Insight, the European Commission aims to adopt a first set of sustainability standards in October 2022.

Reporting standards under CSRD are envisaging to have specific architecture to ensure that all the sustainability communication is comparable and relevant.

With so many activities in the field, we see that the right frameworks for exchanging information about sustainability are essential for successful communication. The Corporate Sustainability Reporting Directive marks a significant and positive change in the methods of conveying non-financial results and in the sustainability communication. Its mission is to structure the fields which often faced accusations and blame in the past, including the ones of “greenwashing”, or providing too vague and confusing communications.

Given the importance and timeline of the new directive, the companies are already beginning to prepare for the CSRD implementation. Businesses who wish to stay ahead will continue keeping up closely with any new developments on the CSRD subject, so they can have an early visibility on the final framework that are likely to be applied.

Businesses who wish to stay ahead are keeping up closely with any new developments on the CSRD subject, so they can have an early visibility on the regulations that are likely to be applied.

At Vadviam, we specialize in sustainability communication as well as sustainable projects. The company was founded by Anna Grochowska, an engineer hailing from the sector of green technologies, and François Dauteuil, an expert in film and narrative art.

Drawing on our experience in the technical industry, combined with the art of storytelling, we communicate on the impact of corporate activities, while at the same time keeping their specifics and unique features at heart. Thanks to this, we help purpose-driven enterprises to improve their market presence as well as their social and environmental impact.